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

*Operating Special Items, Net*

|                                                                    |                              |                              |
| ------------------------------------------------------------------ | ---------------------------- | ---------------------------- |
|                                                                    | **Year Ended December 31,**  | **Year Ended December 31,**  |
|                                                                    | **2017**                     | **2016**                     |
|                                                                    | **(In millions)**            | **(In millions)**            |
| Merger integration expenses  ^(1)^                                 | $273                         | $514                         |
| Fleet restructuring expenses  ^(2)^                                | 232                          | 177                          |
| Employee 2017 Tax Act bonus expense  ^(3)^                         | 123                          | —                            |
| Labor contract expenses                                            | 46                           | —                            |
| Mark\-to\-market adjustments on bankruptcy obligations, net  ^(4)^ | 27                           | 25                           |
| Other operating charges (credits), net                             | 11                           | (7)                          |
| Total mainline operating special items, net                        | 712                          | 709                          |
| Regional operating special items, net                              | 22                           | 14                           |
| Total operating special items, net                                 | $734                         | $723                         |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(1)^ | Merger integration expenses included costs related to information technology, professional fees, re\-branding of aircraft and airport facilities and training, and in 2016, also included costs related to alignment of labor union contracts and the launch of re\-branded uniforms, both of which drove the $241 million year\-over\-year decrease in these expenses\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Fleet restructuring expenses principally included accelerated depreciation and remaining lease payments for aircraft and related equipment grounded or expected to be grounded earlier than planned\. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | Employee bonus expense included costs related to the $1,000 cash bonus and associated payroll taxes granted to mainline employees as of December 31, 2017 in recognition of the 2017 Tax Act\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------- |
| ^(4)^ | Bankruptcy obligations that will be settled in shares of our common stock are marked\-to\-market based on our stock price\. |

*Nonoperating Results*

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

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

**Increase**

**(Decrease)** |
|                                 | **2017**                                     | **2016**                                     | **Increase**

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

**Increase**

**(Decrease)** |
|                                 | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Interest income                 | $94                                          | $63                                          | $31                                          | 47\.8                                                 |
| Interest expense, net           | (1,053)                                      | (991)                                        | (62)                                         | 6\.2                                                  |
| Other income, net               | 123                                          | 20                                           | 103                                          | nm                                                    |
| Total nonoperating expense, net | $(836)                                       | $(908)                                       | $72                                          | (7\.9)                                                |

Our short\-term investments in each period consisted of highly liquid investments that provided nominal returns\. Interest income increased $31 million, or 47\.8%, principally due to a 50 basis point increase in average yields in 2017 as compared to 2016\.

Interest expense, net increased $62 million in 2017 primarily due to higher outstanding debt as a result of aircraft financings associated with our fleet renewal program\.

Other nonoperating income, net in 2017 and 2016, principally included $138 million and $77 million, respectively, of non\-service related pension and other postretirement benefit plan income, which reflects an increase in the expected return on pension plan assets in 2017 as compared to 2016\. In 2017 and 2016, this income was offset in part by $22 million and $49 million, respectively, of net special charges associated with debt refinancings and extinguishments\.

58


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

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

UNITED AIRLINES, INC\.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

|                                                                                |                     |                     |
| --------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------------------- |
|                                                                                | **At December 31,** | **At December 31,** |
| **LIABILITIES AND STOCKHOLDER'S EQUITY**                                                                                | **2019**            | **2018 (a)**        |
| Current liabilities:                                                                                |                     |                     |
| Advance ticket sales                                                                                | $4,819              | $4,381              |
| Accounts payable                                                                                | 2,703               | 2,363               |
| Frequent flyer deferred revenue                                                                                | 2,440               | 2,286               |
| Accrued salaries and benefits                                                                                | 2,271               | 2,184               |
| Current maturities of long\-term debt                                                                                | 1,407               | 1,230               |
| Current maturities of finance leases                                                                                | 46                  | 123                 |
| Current maturities of operating leases                                                                                | 686                 | 719                 |
| Other                                                                                | 571                 | 558                 |
| Total current liabilities                                                                                | 14,943              | 13,844              |
| Long\-term debt                                                                                | 13,145              | 12,215              |
| Long\-term obligations under finance leases                                                                                | 220                 | 224                 |
| Long\-term obligations under operating leases                                                                                | 4,946               | 5,276               |
| Other liabilities and deferred credits:                                                                                |                     |                     |
| Frequent flyer deferred revenue                                                                                | 2,836               | 2,719               |
| Postretirement benefit liability                                                                                | 789                 | 1,295               |
| Pension liability                                                                                | 1,446               | 1,576               |
| Deferred income taxes                                                                                | 1,763               | 855                 |
| Other                                                                                | 1,025               | 1,010               |
| Total other liabilities and deferred credits                                                                                | 7,859               | 7,455               |
| Commitments and contingencies                                                                                |
              |
              |
| Stockholder's equity:                                                                                |                     |                     |
| Common stock at par, $0\.01 par value; authorized 1,000 shares; issued and outstanding 1,000 shares at December 31, 2019 and 2018 | —                   | —                   |
| Additional capital invested                                                                                | —                   | 598                 |
| Retained earnings                                                                                | 12,353              | 10,319              |
| Accumulated other comprehensive loss                                                                                | (718

)       | (803

)       |
| Receivable from related parties                                                                                | (143

)       | (110

)       |
| Total stockholder's equity                                                                                | 11,492              | 10,004              |
| Total liabilities and stockholder's equity                                                                                | $52,605             | $49,018             |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2016\-02,  Leases (Topic 842) \. See Note 1 to the financial statements contained in Part II, Item 8 of this report for additional information\.

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements\.

52


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

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

**6\. Income Taxes**

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

|                                          |                             |                             |                             |
| ---------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                          | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                          | **2017**                    | **2016**                    | **2015**                    |
| Current income tax provision:            |                             |                             |                             |
| Federal                                  | $—                          | $—                          | $—                          |
| State and Local                          | 24                          | 12                          | 20                          |
| Current income tax provision             | 24                          | 12                          | 20                          |
| Deferred income tax provision (benefit): |                             |                             |                             |
| Federal                                  | 1,085                       | 1,508                       | (2,884)                     |
| State and Local                          | 56                          | 103                         | (130)                       |
| Deferred income tax provision (benefit)  | 1,141                       | 1,611                       | (3,014)                     |
| Total income tax provision (benefit)     | $1,165                      | $1,623                      | $(2,994)                    |

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

|                                                       |                             |                             |                             |
| ----------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                       | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                       | **2017**                    | **2016**                    | **2015**                    |
| Statutory income tax provision                        | $1,079                      | $1,505                      | $1,616                      |
| State income tax provision, net of federal tax effect | 61                          | 63                          | 72                          |
| Book expenses not deductible for tax purposes         | 33                          | 34                          | 57                          |
| Bankruptcy administration expenses                    | 1                           | 1                           | 3                           |
| 2017 Tax Act                                          | (7)                         | —                           | —                           |
| Change in valuation allowance                         | (3)                         | 7                           | (4,742)                     |
| Other, net                                            | 1                           | 13                          | —                           |
| Income tax provision (benefit)                        | $1,165                      | $1,623                      | $(2,994)                    |

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

In connection with the preparation of our financial statements at the end of 2015, we determined that after considering all positive and negative evidence, including the completion of certain critical Merger integration milestones as well as our financial performance, it was more likely than not that substantially all of our deferred income tax assets, which include our NOLs, would be realized\. Accordingly, during the year ended December 31, 2015, we reversed $3\.0 billion of the valuation allowance, which resulted in a special non\-cash tax benefit recorded in the consolidated statement of operations\.

In addition to the changes in the valuation allowance from operations described above, the valuation allowance was also impacted by the changes in the components of accumulated other comprehensive income (loss), described in Note 10\. The total increase to the valuation allowance was $7 million in 2017, $10 million of which is included in the 2017 Tax Act amount in the table above\. In 2016, the total increase to the valuation allowance was $7 million and in 2015, the total decrease to the valuation allowance was $4\.8 billion\.

102


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

***Recent U\.S\. tax legislation may adversely affect our financial condition, results of operations and cash flows\.***

Recently enacted U\.S\. tax legislation has significantly changed the U\.S\. federal income taxation of U\.S\. corporations, including by reducing the U\.S\. corporate income tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures, adopting elements of a territorial tax system, revising the rules governing net operating losses (NOLs) and the rules governing foreign tax credits and introducing new anti\-base erosion provisions\. Many of these changes became effective immediately, without any transition periods or grandfathering for existing transactions\. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementation regulations by the Treasury and Internal Revenue Service, any of which could materially affect the impacts of the legislation\. In addition, it is unclear how these U\.S\. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities\. While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis\.

See Note 7 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 5 to American’s Consolidated Financial Statements in Part II, Item 8B for additional information on income taxes\.

***Changes to our business model that are designed to increase revenues may not be successful and may cause operational difficulties or decreased demand\.***

We have recently instituted, and intend to institute in the future, changes to our business model designed to increase revenues and offset costs\. These measures include further segmentation of the classes of services we offer, such as Premium Economy service and Basic Economy service, enhancements to our AAdvantage loyalty program, charging separately for services that had previously been included within the price of a ticket, increasing other pre\-existing fees, reconfiguration of our aircraft cabins, and efforts to optimize our network including by focusing growth on a limited number of large hubs\. We may introduce additional initiatives in the future; however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives\. We cannot assure you that these measures or any future initiatives will be successful in increasing our revenues\. Additionally, the implementation of these initiatives may create logistical challenges that could harm the operational performance of our airline or result in decreased demand\. Also, our implementation of any new or increased fees might reduce the demand for air travel on our airline or across the industry in general, particularly if weakened economic conditions make our customers more sensitive to increased travel costs or provide a significant competitive advantage to other carriers that determine not to institute similar charges\.

***The loss of key personnel upon whom we depend to operate our business or the inability to attract additional qualified personnel could adversely affect our business\.***

We believe that our future success will depend in large part on our ability to retain or attract highly qualified management, technical and other personnel\. We may not be successful in retaining key personnel or in attracting other highly qualified personnel\. Any inability to retain or attract significant numbers of qualified management and other personnel would have a material adverse effect on our business, results of operations and financial condition\.

***We may be adversely affected by conflicts overseas or terrorist attacks; the travel industry continues to face ongoing security concerns\.***

Acts of terrorism or fear of such attacks, including elevated national threat warnings, wars or other military conflicts, may depress air travel, particularly on international routes, and cause declines in revenues and increases in costs\. The attacks of September 11, 2001 and continuing terrorist threats, attacks and attempted attacks materially impacted and continue to impact air travel\. Increased security procedures introduced at airports since the attacks of September 11, 2001 and any other such measures that may be introduced in the future generate higher operating costs for airlines\. The Aviation and Transportation Security Act mandated improved flight deck security, deployment of federal air marshals on board flights, improved airport perimeter access security, airline crew security training, enhanced security screening of passengers, baggage, cargo, mail, employees and vendors, enhanced training and qualifications of security screening personnel, additional provision of passenger data to the U\.S\. Customs and Border Protection Agency and enhanced background checks\. A concurrent increase in airport security charges and procedures, such as restrictions on carry\-on baggage, has also had and may continue to have a disproportionate impact on short\-haul travel, which constitutes a significant portion of our flying and revenue\. Implementation of and compliance with increasingly\-complex security and customs requirements will continue to result in increased costs for us and our passengers, and have caused and likely will continue to cause periodic service disruptions and delays\. We have at times found it necessary or desirable to make significant expenditures to comply with security\-related requirements while seeking to reduce their impact on our customers, such as expenditures for automated security screening lines at airports\. As a result of competitive pressure, and the need to improve security screening throughput

26


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

by the airline industry and manufacturers, would apply to new type aircraft certified beginning in 2020, and would be phased in for newly manufactured existing aircraft type designs starting in 2023\.

In addition, several states have adopted or are considering initiatives to regulate emissions of GHGs, primarily through the planned development of GHG emissions inventories and/or regional GHG cap and trade programs\. Depending on the scope of such regulation, certain of our facilities and operations, or the operations of our suppliers, may be subject to additional operating and other permit requirements, likely resulting in increased operating costs\.

These regulatory efforts, both internationally and in the U\.S\. at the federal and state levels, are still developing, and we cannot yet determine what the final regulatory programs or their impact will be in the U\.S\., the EU or in other areas in which we do business\. However, such climate change\-related regulatory activity in the future may adversely affect our business and financial results by requiring us to reduce our emissions, purchase allowances or otherwise pay for our emissions\. Such activity may also impact us indirectly by increasing our operating costs, including fuel costs\.

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

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

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

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

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

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

27


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

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

As of December 31, 2017 and 2016, the liability for outstanding mileage credits accounted for under the incremental cost method was $677 million and $669 million, respectively, and is included on the consolidated balance sheets within loyalty program liability\.

We also sell loyalty program mileage credits to participating airline partners and non\-airline business partners, such as the Citi and Barclaycard US co\-branded credit cards\. Sales of mileage credits to non\-airline business partners is comprised of two components, transportation and marketing\. We account for mileage sales under our agreements with non\-airline business partners in accordance with ASU 2009\-13, “Revenue Recognition (Topic 605) – Multiple\-Deliverable Revenue Arrangements\.” In accordance with ASU 2009\-13, we allocate the consideration received from the sale of mileage credits based on the relative selling price of each product or service delivered\.

As a result of our co\-branded credit card program agreements with Citi and Barclaycard US that we entered into in 2016, we identified the following revenue elements in these co\-branded credit card agreements: the transportation component; and the use of the American brand including access to loyalty program member lists, advertising and other travel related benefits (collectively, the marketing component)\.

The transportation component represents the estimated selling price of future travel awards and is determined using historical transaction information, including information related to customer redemption patterns\. The transportation component is deferred based on its relative selling price and is amortized into passenger revenue on a straight\-line basis over the period in which the mileage credits are expected to be redeemed for travel\. As of December 31, 2017 and 2016, we had $2\.1 billion in deferred revenue from the sale of mileage credits recorded within loyalty program liability on our consolidated balance sheets\.

The services under the marketing component are provided periodically, but no less than monthly\. Accordingly, the marketing component is considered earned and recognized in other revenues in the period of the mileage sale\. For the years ended December 31, 2017, 2016 and 2015, the marketing component of mileage sales and other marketing related payments included in other revenues was approximately $2\.2 billion, $1\.9 billion and $1\.7 billion, respectively\.

Effective January 1, 2018, we are adopting ASU 2014\-09: Revenue from Contracts with Customers (Topic 606)\. See Recent Accounting Pronouncements in Note 1(r) below for further discussion\.

***(j) Revenue***

*Passenger Revenue*

Passenger revenue is recognized when transportation is provided\. Ticket sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on the consolidated balance sheets\. The air traffic liability represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates\. The balance in the air traffic liability fluctuates throughout the year based on seasonal travel patterns\. Our air traffic liability was $4\.0 billion and $3\.9 billion as of December 31, 2017 and 2016, respectively\.

The majority of tickets sold are nonrefundable\. A small percentage of tickets, some of which are partially used tickets, expire unused\. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in passenger revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized\. These estimates are generally based on the analysis of our historical data\. We and other airline industry participants have consistently applied this accounting method to estimate revenue from forfeited tickets at the date of travel\. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of our estimates\. Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed\.

Regional carriers provide scheduled air transportation under the brand name American Eagle\. We classify revenues generated from transportation on these carriers as regional passenger revenues\. Liabilities related to tickets sold by us for travel on these air carriers is also included in our air traffic liability and are subsequently recognized as revenue in the same manner as described above\.

89


Annual Report of Southwest Airlines Co\. for year 2019

12 \. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting, unrealized gains and losses on certain investments, and actuarial gains/losses arising from the Company’s postretirement benefit obligation\. A rollforward of the amounts included in AOCI, net of taxes, is shown below for  2019  and  2018 :

|                                                    |                        |                               |                                |             |                         |                                                        |
| -------------------------------------------------- | ---------------------- | ----------------------------- | ------------------------------ | ----------- | ----------------------- | ------------------------------------------------------ |
| **(in millions)**                                  | **Fuel derivatives**   | **Interest rate derivatives** | **Defined benefit plan items** | **Other**   | **Deferred tax impact** | **Accumulated other
comprehensive income (loss)** |
| Balance at December 31, 2017                       | $3                     | $

(7

)          | $

(9

)           | $33         | $

(8

)    | $12                                                    |
| ASU 2017\-12 adoption adjustment (a)               | (26

)           | —                             | —                              | —           | 6                       | (20

)                                           |
| ASU 2018\-02 stranded AOCI adoption adjustment (b) | —                      | —                             | —                              | —           | 2                       | 2                                                      |
| Changes in fair value                              | —                      | 1                             | 67                             | (8

) | (14

)            | 46                                                     |
| Reclassification to earnings                       | (33

)           | 6                             | —                              | —           | 7                       | (20

)                                           |
| Balance at December 31, 2018                       | $

(56

)  | $—                            | $58                            | $25         | $

(7

)    | $20                                                    |
| Changes in fair value                              | (117

)          | (38

)                  | (38

)                   | 34          | 37                      | (122

)                                          |
| Reclassification to earnings                       | 48                     | 5                             | —                              | —           | (12

)            | 41                                                     |
| Balance at December 31, 2019                       | $

(125

) | $

(33

)         | $20                            | $59         | $18                     | $

(61

)                                  |

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

(b) The Company adopted the Reclassification of Certain Tax Effects from AOCI as of January 1, 2018, which allowed the Company to reclassify to Retained earnings any tax effects stranded in AOCI as a result of the Tax Cuts and Jobs Act enacted in December 2017\.

The following table illustrates the significant amounts reclassified out of each component of AOCI for the  year ended  December 31, 2019 :

|                                                         |                                     |                                                                              |
| ------------------------------------------------------- | ----------------------------------- | ---------------------------------------------------------------------------- |
| **Year ended December 31, 2019**                        | **Year ended December 31, 2019**    | **Year ended December 31, 2019**                                             |
| **(in millions)**                                       | **Amounts reclassified from AOCI**  | **Affected line item in the Consolidated Statement of Comprehensive Income** |
| **AOCI components**                                     | **Amounts reclassified from AOCI**  | **Affected line item in the Consolidated Statement of Comprehensive Income** |
| Unrealized loss on fuel derivative instruments          | $48                                 | Fuel and oil expense                                                         |
|                                                         | 11                                  | Less: Tax expense                                                            |
|                                                         | $37                                 | Net of tax                                                                   |
| Unrealized loss on interest rate derivative instruments | $5                                  | Interest expense                                                             |
|                                                         | 1                                   | Less: Tax expense                                                            |
|                                                         | $4                                  | Net of tax                                                                   |
| Total reclassifications for the period                  | $41                                 | Net of tax                                                                   |

13 \. EMPLOYEE RETIREMENT PLANS

Defined Contribution Plans

Southwest has defined contribution plans covering substantially all of its Employees\. Contributions under all defined contribution plans are primarily based on Employee compensation and performance of the Company\. The Company sponsors Employee savings plans under section 401(k) of the Internal Revenue Code of 1986, as amended\. The Southwest Airlines Co\. 401(k) Plan includes Company matching contributions and the Southwest Airlines Pilots Retirement Saving Plan has non\-elective Company contributions\. In addition, the Southwest Airlines Co\. ProfitSharing

103


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

AMERICAN AIRLINES GROUP INC\.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In millions, except share amounts)

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

**Stock** | **Additional**

**Paid\-in**

**Capital** | **Accumulated**

**Other**

**Comprehensive**

**Loss** | **Retained**

**Earnings**

**(Deficit)** | **Total**              |
| **Balance at December 31, 2016**                                                                                | $5                          | $7,223                                                | $

(5,083

)                                                  | $

(2,429

)                              | $

(284

) |
| Net income                                                                                | —                           | —                                                     | —                                                                         | 1,282                                                 | 1,282                  |
| Other comprehensive loss, net                                                                                | —                           | —                                                     | (71

)                                                              | —                                                     | (71

)           |
| Issuance of 2,166,861 shares of AAG common stock pursuant to

employee stock plans net of shares withheld for cash taxes | —                           | (51

)                                          | —                                                                         | —                                                     | (51

)           |
| Purchase and retirement of 33,953,127 shares of AAG common stock                                                               | —                           | (1,563

)                                       | —                                                                         | —                                                     | (1,563

)        |
| Dividends declared on AAG common stock ($0\.40 per share)                                                                      | —                           | —                                                     | —                                                                         | (198

)                                         | (198

)          |
| Settlement of single\-dip unsecured claims held in Disputed Claims

Reserve                                              | —                           | 15                                                    | —                                                                         | —                                                     | 15                     |
| Share\-based compensation expense                                                                                | —                           | 90                                                    | —                                                                         | —                                                     | 90                     |
| Impact of adoption of Accounting Standards Update (ASU) 2018\-02

related to comprehensive income (See Note 1(b))        | —                           | —                                                     | (622

)                                                             | 622                                                   | —                      |
| **Balance at December 31, 2017**                                                                                | 5                           | 5,714                                                 | (5,776

)                                                           | (723

)                                         | (780

)          |
| Net income                                                                                | —                           | —                                                     | —                                                                         | 1,412                                                 | 1,412                  |
| Other comprehensive loss, net                                                                                | —                           | —                                                     | (120

)                                                             | —                                                     | (120

)          |
| Issuance of 1,709,140 shares of AAG common stock pursuant to

employee stock plans net of shares withheld for cash taxes | —                           | (37

)                                          | —                                                                         | —                                                     | (37

)           |
| Purchase and retirement of 16,606,157 shares of AAG common stock                                                               | —                           | (799

)                                         | —                                                                         | —                                                     | (799

)          |
| Dividends declared on AAG common stock ($0\.40 per share)                                                                      | —                           | —                                                     | —                                                                         | (188

)                                         | (188

)          |
| Share\-based compensation expense                                                                                | —                           | 86                                                    | —                                                                         | —                                                     | 86                     |
| Impact of adoption of ASU 2016\-01 related to financial instruments                                                            | —                           | —                                                     | —                                                                         | 60                                                    | 60                     |
| Impact of adoption of ASU 2016\-02 related to leases                                                                           | —                           | —                                                     | —                                                                         | 197                                                   | 197                    |
| **Balance at December 31, 2018**                                                                                | 5                           | 4,964                                                 | (5,896

)                                                           | 758                                                   | (169

)          |
| Net income                                                                                | —                           | —                                                     | —                                                                         | 1,686                                                 | 1,686                  |
| Other comprehensive loss, net                                                                                | —                           | —                                                     | (435

)                                                             | —                                                     | (435

)          |
| Issuance of 1,682,202 shares of AAG common stock pursuant to

employee stock plans net of shares withheld for cash taxes | —                           | (25

)                                          | —                                                                         | —                                                     | (25

)           |
| Purchase and retirement of 34,090,566 shares of AAG common stock                                                               | (1

)                 | (1,095

)                                       | —                                                                         | —                                                     | (1,096

)        |
| Dividends declared on AAG common stock ($0\.40 per share)                                                                      | —                           | —                                                     | —                                                                         | (180

)                                         | (180

)          |
| Settlement of single\-dip unsecured claims held in Disputed Claims Reserve                                                     | —                           | 7                                                     | —                                                                         | —                                                     | 7                      |
| Share\-based compensation expense                                                                                | —                           | 94                                                    | —                                                                         | —                                                     | 94                     |
| **Balance at December 31, 2019**                                                                                | $4                          | $3,945                                                | $

(6,331

)                                                  | $2,264                                                | $

(118

) |

See accompanying notes to consolidated financial statements\.

76


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

The Company also has a noncontributory, unfunded defined\-contribution plan for certain elected officers of the Company who are ineligible for the nonqualified defined\-benefit pension plan\. Amounts recorded as liabilities under the plan are not material to the consolidated balance sheets at December 31, 2017 and 2016\.

***Pilot Long\-term Disability Benefits***

Alaska maintains a long\-term disability plan for its pilots\. The long\-term disability plan does not have a service requirement\. Therefore, the liability is calculated based on estimated future benefit payments associated with pilots that were assumed to be disabled on a long\-term basis as of December 31, 2017 and does not include any assumptions for future disability\. The liability includes the discounted expected future benefit payments and medical costs\. The total liability was $28 million and $25 million, which was recorded net of a prefunded trust account of $3 million and $3 million, and included in long\-term other liabilities on the consolidated balance sheets as of December 31, 2017 and December 31, 2016, respectively\.

***Employee Incentive\-Pay Plans***

The Company has employee incentive plans that pay employees based on certain financial and operational metrics\. These metrics are set and approved annually by the Compensation Committee of the Board of Directors\. The aggregate expense under these plans in 2017, 2016 and 2015 was $135 million, $127 million and $120 million\. The Air Group plans are summarized below\.

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Performance\-Based Pay*  (PBP) is a program that rewards the majority of Air Group employees\. The program is based on six separate metrics related to Air Group profitability, safety, loyalty Mileage Plan™ and credit card growth, achievement of unit\-cost goals and employee engagement as measured by customer satisfaction\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | The  *Operational Performance Rewards Program*  entitles the majority of Air Group employees to quarterly payouts of up to  $300  per person if certain operational and customer service objectives are met\. |

**NOTE 8\. COMMITMENTS AND CONTINGENCIES**

Future minimum payments for commitments as of December 31, 2017 (in millions):

|            |                     |                     |                                   |                                             |                                   |                                               |
| ---------- | ------------------- | ------------------- | --------------------------------- | ------------------------------------------- | --------------------------------- | --------------------------------------------- |
|            | **Aircraft Leases** | **Facility Leases** | **Aircraft Purchase Commitments** | **Capacity Purchase Agreements**  **^(a)^** | **Aircraft Maintenance Deposits** | **Aircraft Maintenance and Parts Management** |
| 2018       | $354                | $77                 | $955                              | $129                                        | $61                               | $98                                           |
| 2019       | 356                 | 67                  | 816                               | 151                                         | 65                                | 102                                           |
| 2020       | 330                 | 61                  | 377                               | 159                                         | 68                                | 105                                           |
| 2021       | 285                 | 53                  | 268                               | 165                                         | 64                                | 121                                           |
| 2022       | 262                 | 34                  | 193                               | 173                                         | 52                                | 76                                            |
| Thereafter | 1,021               | 142                 | 145                               | 1,079                                       | 39                                | 80                                            |
| Total      | $2,608              | $434                | $2,754                            | $1,856                                      | $349                              | $582                                          |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------- |
| ^(a)^ | Includes all non\-aircraft lease costs associated with capacity purchase agreements\. |

***Lease Commitments***

Aircraft lease commitments include future obligations for all of the Company's operating airlines—Alaska, Virgin America and Horizon, as well as aircraft leases operated by third parties\. At December 31, 2017, the Company had lease contracts for 10 B737 (B737) aircraft, 57 Airbus aircraft, 15 Bombardier Q400 aircraft, and 23 Embraer 175 (E175) aircraft with SkyWest Airlines, Inc\. (SkyWest)\. The Company has an additional six scheduled lease deliveries of A321neo aircraft through 2018, as well as 12 scheduled lease deliveries of E175 aircraft through 2018 to be operated by SkyWest\. All lease contracts have remaining non\-cancelable lease terms ranging from 2018 to 2030\. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft with deliveries in 2020\. Options to lease are not reflected in the commitments table above\.

Facility lease commitments primarily include airport and terminal facilities and building leases\. Total rent expense for aircraft and facility leases was $552 million, $315 million and $295 million, in 2017, 2016 and 2015\.

 86


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

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

|                                                    |                                                     |                                                     |                                                     |                                                     |
| -------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- |
|                                                    | **Fair Value Measurements as of December 31, 2017** | **Fair Value Measurements as of December 31, 2017** | **Fair Value Measurements as of December 31, 2017** | **Fair Value Measurements as of December 31, 2017** |
|                                                    | **Total**                                           | **Level 1**                                         | **Level 2**                                         | **Level 3**                                         |
| Short\-term investments  ^(1) (2)^ :               |                                                     |                                                     |                                                     |                                                     |
| Money market funds                                 | $188                                                | $188                                                | $—                                                  | $—                                                  |
| Corporate obligations                              | 1,620                                               | —                                                   | 1,620                                               | —                                                   |
| Bank notes/certificates of deposit/time deposits   | 2,663                                               | —                                                   | 2,663                                               | —                                                   |
| Repurchase agreements                              | 300                                                 | —                                                   | 300                                                 | —                                                   |
|                                                    | 4,771                                               | 188                                                 | 4,583                                               | —                                                   |
| Restricted cash and short\-term investments  ^(1)^ | 318                                                 | 108                                                 | 210                                                 | —                                                   |
| Total                                              | $5,089                                              | $296                                                | $4,793                                              | $—                                                  |

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

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | All short\-term investments are classified as available\-for\-sale and stated at fair value\. Our short\-term investments mature in one year or less except for  $700 million  of bank notes/certificates of deposit/time deposits and  $341 million  of corporate obligations\. |

***Fair Value of Debt***

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

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

|                                               |                               |                           |                               |                           |
| --------------------------------------------- | ----------------------------- | ------------------------- | ----------------------------- | ------------------------- |
|                                               | **December 31, 2018**         | **December 31, 2018**     | **December 31, 2017**         | **December 31, 2017**     |
|                                               | **Carrying**

**Value** | **Fair**

**Value** | **Carrying**

**Value** | **Fair**

**Value** |
| Long\-term debt, including current maturities | $23,779                       | $23,775                   | $24,294                       | $24,985                   |

**10\. Employee Benefit Plans**

We sponsor defined benefit and defined contribution pension plans for eligible employees\. The defined benefit pension plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement\. Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen and we began providing enhanced benefits under our defined contribution pension plans for certain employee groups\. We use a December 31 measurement date for all of our defined benefit pension plans\. We also provide certain retiree medical and other postretirement benefits, including health care and life insurance benefits, to retired employees\. Effective November 1, 2012, we modified our retiree medical and other postretirement benefits plans to eliminate the company subsidy for employees who retire on or after November 1, 2012\. As a result of modifications to our retiree medical and other postretirement benefits plans in 2012, we recognized a negative plan amendment of $1\.9 billion, which is included as a component of prior service benefit in accumulated other comprehensive income (loss) (AOCI) and will be amortized over the future service life of the active plan participants for whom the benefit was eliminated, or approximately eight years\. As of December 31, 2018, $390 million of prior service benefit remains to be amortized\.

111


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

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

|          |                   |                                                                                |
| -------- | ----------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|  ^10\.70 | UAL
United   | [Supplemental Agreement No\. 9, including exhibits and side letters, to Purchase Agreement No\. 3860, dated as of May 31, 2018, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.3 to UAL's Form 10\-Q for the quarter ended June 30, 2018, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000010051718000012/ual_06301810qex103.htm)                                                                                |
|  ^10\.71 | UAL
United   | [Supplemental Agreement No\. 10, including exhibits and side letters, to Purchase Agreement No\. 3860, dated as of November 1, 2018, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.166 to UAL's Form 10\-K for the year ended December 31, 2018, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000010051719000009/ual_12311810kex10166.htm)                                                                                |
| ^10\.72  | UAL
United   | [Supplemental Agreement No\. 11, including exhibits and side letters, to Purchase Agreement No\. 3860, dated as of December 12, 2018, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.167 to UAL's Form 10\-K for the year ended December 31, 2018, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000010051719000009/ual_12311810kex10167.htm)                                                                                |
| 10\.73   | UAL
United   | [Amended and Restated Credit and Guaranty Agreement, dated as of March 29, 2017, among United Airlines, Inc\., as borrower, United Continental Holdings, Inc\., as parent and a guarantor, the subsidiaries of United Continental Holdings, Inc\. from time to time party thereto other than the borrower party thereto from time to time, as guarantors, the lenders from time to time party thereto and JPMorgan Chase Bank, N\.A\., as administrative agent (filed as Exhibit 10\.1 to UAL's Form 8\-K filed April 3, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015517000006/e77015399ex10_1.htm) |
| 10\.74   | UAL
United   | [First Amendment, dated as of November 15, 2017, to Amended and Restated Credit Guaranty Agreement (filed as Exhibit 10\.219 to UAL's Form 10\-K for the year ended December 31, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312518054235/d471340dex10219.htm)                                                                                |
| 10\.75   | UAL
United   | [Second Amendment, dated as of May 16, 2018, to Amended and Restated Credit Guaranty Agreement filed as Exhibit 10\.1 to UAL's Form 10\-Q for the quarter ended June 30, 2018, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000010051718000012/ual_06301810qex101.htm)                                                                                |
|          |                   | **List of Subsidiaries**                                                                                |
| 21       | UAL

United | [List of United Airlines Holdings, Inc\. and United Airlines, Inc\. Subsidiaries](https://www.example.com/ual12311910kex21.htm)                                                                                |
|          |                   | **Consents of Experts and Counsel**                                                                                |
| 23\.1    | UAL               | [Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for United Airlines Holdings, Inc\.](https://www.example.com/ual12311910kex231.htm)                                                                                |
| 23\.2    | United            | [Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for United Airlines, Inc\.](https://www.example.com/ual12311910kex232.htm)                                                                                |
|          |                   | **Rule 13a\-14(a)/15d\-14(a) Certifications**                                                                                |
| 31\.1    | UAL               | [Certification of the Principal Executive Officer of United Airlines Holdings, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual12311910kex311.htm)                                                                                |
| 31\.2    | UAL               | [Certification of the Principal Financial Officer of United Airlines Holdings, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual12311910kex312.htm)                                                                                |
| 31\.3    | United            | [Certification of the Principal Executive Officer of United Airlines, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual12311910kex313.htm)                                                                                |
| 31\.4    | United            | [Certification of the Principal Financial Officer of United Airlines, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual12311910kex314.htm)                                                                                |
|          |                   | **Section 1350 Certifications**                                                                                |
| 32\.1    | UAL               | [Certification of the Chief Executive Officer and Chief Financial Officer of United Airlines Holdings, Inc\. pursuant to 18 U\.S\.C\. 1350 (Section 906 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual12311910kex321.htm)                                                                                |
| 32\.2    | United            | [Certification of the Chief Executive Officer and Chief Financial Officer of United Airlines, Inc\. pursuant to 18 U\.S\.C\. 1350 (Section 906 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual12311910kex322.htm)                                                                                |

101


Annual Report of Southwest Airlines Co\. for year 2018

The Company has interest rate risk in its floating\-rate debt obligations and interest rate swaps, commodity price risk in jet fuel required to operate its aircraft fleet, and market risk in the derivatives used to manage its fuel hedging program and in the form of fixed\-rate debt instruments\. As of December 31, 2018, the Company operated a total of 123 aircraft under operating and capital lease\. However, except for a small number of aircraft that have lease payments that fluctuate based in part on changes in market interest rates, the remainder of the leases are not considered market sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below\. The Company also has 75 aircraft under operating and capital lease that have been subleased to another carrier\. Further information about these leases is disclosed in Note 7 to the Consolidated Financial Statements\. The Company does not purchase or hold any derivative financial instruments for trading purposes\. See Note 10 to the Consolidated Financial Statements for information on the Company’s accounting for its hedging program and for further details on the Company’s financial derivative instruments\.

***Hedging***

The Company purchases jet fuel at prevailing market prices, but seeks to manage market risk through execution of a documented hedging strategy\. The Company utilizes financial derivative instruments, on both a short\-term and a long\-term basis, as a form of insurance against the potential for significant increases in fuel prices\. The Company believes there can be significant risk in not hedging against the possibility of such fuel price increases, especially in energy markets in which prices are high and/or rising\. The Company expects to consume approximately 2\.2 billion gallons of jet fuel in 2019\. Based on this anticipated usage, a change in jet fuel prices of just one cent per gallon would impact the Company’s Fuel and oil expense by approximately $22 million for 2019, excluding any impact associated with fuel derivative instruments held\.

As of December 31, 2018, the Company held a net position of fuel derivative instruments that represented a hedge for a portion of its anticipated jet fuel purchases for future periods\. See Note 10 to the Consolidated Financial Statements for further information\. The Company may increase or decrease the size of its fuel hedge based on its expectation of future market prices, as well as its perceived exposure to cash collateral requirements contained in the agreements it has signed with various counterparties, while considering the significant cost that can be associated with different types of hedging strategies\. The gross fair value of outstanding financial derivative instruments related to the Company’s jet fuel market price risk at December 31, 2018, was an asset of $138 million\. No cash collateral deposits were provided by or held by the Company in connection with these instruments based on their fair value as of December 31, 2018\. The fair values of the derivative instruments, depending on the type of instrument, were determined by use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets\. An immediate 10 percent increase or decrease in underlying fuel\-related commodity prices from the December 31, 2018, prices would correspondingly change the fair value of the commodity derivative instruments in place by approximately $114 million\. Fluctuations in the related commodity derivative instrument cash flows may change by more or less than this amount based upon further fluctuations in futures prices, as well as related income tax effects\. In addition, this does not consider changes in cash, aircraft, or letters of credit utilized as collateral provided to or by counterparties, which would fluctuate in an amount equal to or less than this amount, depending on the type of collateral arrangement in place with each counterparty\. This sensitivity analysis uses industry standard valuation models and holds all inputs constant at December 31, 2018, levels, except underlying futures prices\.

The Company’s credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are in an asset position to the Company\. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements\. As of December 31, 2018, the Company had eight counterparties in which the derivatives held were an asset\. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty\. However, if one or more of these counterparties were in a liability position to the Company and were unable to meet their obligations, any open derivative contracts with the counterparty could be subject to early termination, which could result in substantial losses for the Company\. At December 31, 2018, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty’s credit rating\. The

63


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

The following table sets forth the status of the qualified defined\-benefit pension plans (in millions):

|                                        |            |          |
| -------------------------------------- | ---------- | -------- |
|                                        | **2018**   | **2017** |
| **Projected benefit obligation (PBO)** |            |          |
| Beginning of year                      | **$2,387** | $2,043   |
| Service cost                           | **48**     | 39       |
| Interest cost                          | **79**     | 74       |
| Actuarial (gain)/loss                  | **(191)**  | 300      |
| Benefits paid                          | **(98)**   | (69)     |
| End of year                            | **$2,225** | $2,387   |
| **Plan assets at fair value**          |            |          |
| Beginning of year                      | **$2,083** | $1,846   |
| Actual return on plan assets           | **(127)**  | 291      |
| Employer contributions                 | **—**      | 15       |
| Benefits paid                          | **(98)**   | (69)     |
| End of year                            | **$1,858** | $2,083   |
| Unfunded status                        | **$(367)** | $(304)   |
| Percent funded                         | **84%**    | 87%      |

The accumulated benefit obligation for the combined qualified defined\-benefit pension plans was $2\.1 billion and $2\.2 billion at December 31, 2018 and 2017\.

The amounts recognized in the consolidated balance sheets (in millions):

|                                                         |          |          |
| ------------------------------------------------------- | -------- | -------- |
|                                                         | **2018** | **2017** |
| Accrued benefit liability\-long term                    | **$392** | $335     |
| Plan assets\-long term (within Other noncurrent assets) | **(25)** | (31)     |
| Total liability recognized                              | **$367** | $304     |

The amounts not yet reflected in net periodic benefit cost and included in AOCL (in millions):

|                                    |          |          |
| ---------------------------------- | -------- | -------- |
|                                    | **2018** | **2017** |
| Prior service credit               | **$(8)** | $(9)     |
| Net loss                           | **607**  | 597      |
| Amount recognized in AOCL (pretax) | **$599** | $588     |

The expected amortization of prior service credit and net loss from AOCL in 2019 is $1 million and $37 million, respectively, for the qualified defined\-benefit pension plans\.

Net pension expense for the qualified defined\-benefit plans included the following components (in millions):

|                                      |           |          |          |
| ------------------------------------ | --------- | -------- | -------- |
|                                      | **2018**  | **2017** | **2016** |
| Service cost                         | **$48**   | $39      | $37      |
| Interest cost                        | **79**    | 74       | 73       |
| Expected return on assets            | **(107)** | (106)    | (108)    |
| Amortization of prior service credit | **(1)**   | (1)      | (1)      |
| Recognized actuarial loss            | **33**    | 26       | 25       |
| Net pension expense                  | **$52**   | $32      | $26      |

 82


Annual Report of Southwest Airlines Co\. for year 2018

The Company plans to elect the package of practical expedients available under the transition provisions of the New Lease Standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) lease classification, and (iii) not revaluing initial direct costs for existing leases\. Also, the Company plans to elect the practical expedient which will allow aggregation of non\-lease components with the related lease components when evaluating accounting treatment\. Lastly, the Company currently plans to apply the modified retrospective adoption method, utilizing the simplified transition option available in the New Lease Standard, which allows entities to continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption\. The Company will adopt the New Lease Standard on January 1, 2019\.

The expected impact of applying the New Lease Standard effective as of January 1, 2019, to the Company’s results of operations and cash flows is not expected to be significant\. The expected major impacts to the balance sheet will be 1) the removal of approximately $1\.5 billion in Assets constructed for others, net, and related Construction obligations, and 2) the addition of approximately $1\.4 billion in Operating lease right of use assets and lease liabilities, which includes approximately $700 million from operating lease aircraft, approximately $450 million from the Company’s remaining obligations associated with the LFMP bonds, and approximately $220 million from other operating leases\.

On May 28, 2014, the FASB issued the New Revenue Standard, also referred to as ASC 606, Revenue From Contracts With Customers ("ASC 606"), which replaces numerous revenue recognition requirements in GAAP, including industry\-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with Customers\. The New Revenue Standard establishes a five\-step model whereby revenue is recognized as performance obligations within a contract are satisfied in an amount that reflects the consideration the Company expects to receive in exchange for satisfaction of those performance obligations, or standalone selling price\. The New Revenue Standard also requires new, expanded disclosures regarding revenue recognition\. See Note 5 for further information\. The Company adopted the provisions of the New Revenue Standard effective January 1, 2018, using the full retrospective method\. As such, results for the years ended December 31, 2017 and 2016, have been recast under the New Revenue Standard in order to be comparative with current period results in the accompanying Consolidated Statements of Income and Cash Flows\. The amounts in the accompanying Consolidated Balance Sheet as of December 31, 2017, have also been recast\.

The most significant impact of the New Revenue Standard relates to the accounting for the Company’s loyalty program\. The New Revenue Standard eliminated the incremental cost method for flight points awarded, which was previously allowed in prior accounting guidance\. The Company now accounts for the revenue and liability for loyalty points earned through flight activity using a relative fair value approach\.

The New Revenue Standard also resulted in different income statement classification for certain types of revenues (primarily ancillary revenues) which were previously classified as Other revenues, but under the New Revenue Standard are included in Passenger revenues, and certain expenses, which were previously classified as Other operating expenses, but under the New Revenue Standard are offset against Passenger revenues\.

80


Annual Report of Southwest Airlines Co\. for year 2018

The Company operates in a public\-facing industry with significant exposure to social media\. Negative publicity, whether or not justified, can spread rapidly through social media\. To the extent that the Company is unable to respond timely and appropriately to negative publicity, the Company’s reputation and brand can be harmed\. Damage to the Company’s overall reputation and brand could have a negative impact on its financial results\.

**Item 1B\.** ***Unresolved Staff Comments***

None\.

28


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

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

The following table summarizes investments measured at fair value based on NAV per share as a practical expedient:

|                                                                          |                       |                          |                              |                          |                       |                          |                              |                          |
| ------------------------------------------------------------------------ | --------------------- | ------------------------ | ---------------------------- | ------------------------ | --------------------- | ------------------------ | ---------------------------- | ------------------------ |
|                                                                          | **December 31, 2017** | **December 31, 2017**    | **December 31, 2017**        | **December 31, 2017**    | **December 31, 2016** | **December 31, 2016**    | **December 31, 2016**        | **December 31, 2016**    |
| **(in millions)**                                                        | **Fair Value**        | **Redemption Frequency** | **Redemption Notice Period** | **Unfunded Commitments** | **Fair Value**        | **Redemption Frequency** | **Redemption Notice Period** | **Unfunded Commitments** |
| Hedge funds and hedge fund\-related strategies                           | $4,768                | (5)                      | 2\-120 Days                  | $—                       | $3,308                | (5)                      | 4\-120 Days                  | $—                       |
| Commingled funds, private equity and private equity\-related instruments | 1,375                 | (1) (3) (4)              | 10\-30 Days                  | —                        | 1,214                 | (1) (3) (4)              | 15\-30 Days                  | 525                      |
| Fixed income and fixed income\-related instruments                       | 311                   | (2)                      | 3\-15 Days                   | —                        | 270                   | (2)                      | 5 Days                       | —                        |
| Real assets                                                              | 924                   | (3) (4)                  | N/A                          | 94                       | 698                   | (3) (4)                  | N/A                          | 529                      |
| Other                                                                    | —                     | (1)                      | 30 Days                      | —                        | 234                   | (2)                      | 2 Days                       | —                        |
| Total investments measured at NAV                                        | $7,378                |
                   |
                       | $94                      | $5,724                |
                   |
                       | $1,054                   |

|       |         |
| ----- | ------- |
| ^(1)^ | Monthly |

|       |               |
| ----- | ------------- |
| ^(2)^ | Semi\-monthly |

|       |                |
| ----- | -------------- |
| ^(3)^ | Semi\-annually |

|       |          |
| ----- | -------- |
| ^(4)^ | Annually |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(5)^ | Various\. Includes funds with weekly, monthly, semi\-monthly, quarterly and custom redemption frequencies as well as funds with a redemption window following the anniversary of the initial investment\. |

Hedge Funds and Hedge Fund\-Related Strategies\.  These investments are primarily made through shares of limited partnerships or similar structures for which a liquid secondary market does not exist\. These funds are typically valued monthly by third\-party administrators that have been appointed by the funds' general partners\.

Commingled Funds, Private Equity and Private Equity\-Related Instruments\.  Investments include commingled funds invested in common stock, as well as private equity and private equity\-related instruments\. Commingled funds are based on quoted market prices of the underlying assets owned by the fund\. Private equity and private equity\-related strategies are valued based on valuation models where one or more of the significant inputs into the model cannot be observed and which require the development of assumptions\.

Fixed Income and Fixed Income\-Related Instruments\.  Investments include commingled funds invested in debt obligations\. Commingled funds are based on quoted market prices of the underlying assets owned by the fund\.

Real Assets\.  These investments include real estate, energy, timberland, agriculture and infrastructure\. The valuation of real assets requires significant judgment due to the absence of quoted market prices as well as the inherent lack of liquidity and the long\-term nature of these assets\. Investments are valued based on valuation models where one or more of the significant inputs into the model cannot be observed and which require the development of assumptions\.

Other\.  Primarily includes globally\-diversified, risk\-managed commingled funds consisting mainly of equity, fixed income and commodity exposures\.

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

Other

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

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

of these service providers cease operations, and there is no guarantee that we could replace these providers on a timely basis with comparably priced providers, or at all\. Any material problems with the efficiency and timeliness of contract services, resulting from financial hardships or otherwise, could have a material adverse effect on our business, results of operations and financial condition\.

***The commercial relationships that we have with airlines, including any related equity investment, may not produce the returns or results we expect\.***

An important part of our strategy to expand our network has been to expand our commercial relationships with other airlines, such as by entering into global alliance, joint business and codeshare relationships, and, in one recent instance involving China Southern Airlines, by making a significant equity investment in another airline in connection with initiating such a commercial relationship\. We may explore similar non\-controlling investments in, and joint ventures and strategic alliances with, other carriers as part of our global business strategy\. We face competition in forming these commercial relationships since there are a limited number of potential arrangements and other airlines are looking to enter into similar relationships\. Any such existing or future investment could involve significant challenges and risks, including that we may not realize a satisfactory return on our investment or that they may not generate the expected revenue synergies\. These events could have a material adverse effect on our business, results of operations and financial condition\.

***We rely on third\-party distribution channels and must manage effectively the costs, rights and functionality of these channels\.***

We rely on third\-party distribution channels, including those provided by or through global distribution systems (GDSs) (e\.g\., Amadeus, Sabre and Travelport), conventional travel agents, travel management companies and online travel agents (OTAs) (e\.g\., Expedia, including its booking sites Orbitz and Travelocity, and The Priceline Group), to distribute a significant portion of our airline tickets, and we expect in the future to continue to rely on these channels\. We are also dependent upon the ability and willingness of these distribution channels to expand their ability to distribute and collect revenues for ancillary products (e\.g\., fees for selective seating)\. These distribution channels are more expensive and at present have less functionality in respect of ancillary product offerings than those we operate ourselves, such as our website at *www\.aa\.com*\. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally\. To remain competitive, we will need to manage successfully our distribution costs and rights, increase our distribution flexibility and improve the functionality of our distribution channels, while maintaining an industry\-competitive cost structure\. Further, as distribution technology changes we will need to continue to update our technology by acquiring new technology from third parties, building the functionality ourselves, or a combination, which in any event will likely entail significant technological and commercial risk and involve potentially material investments\. These imperatives may affect our relationships with conventional travel agents, travel management companies, GDSs and OTAs, including if consolidation of conventional travel agents, travel management companies, GDSs or OTAs continues, or should any of these parties seek to acquire other technology providers thereby potentially limiting our technology alternatives, such as the proposed acquisition of Farelogix by Sabre\. Any inability to manage our third\-party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material adverse effect on our business, results of operations and financial condition\.

***Our business is subject to extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages\.***

Airlines are subject to extensive domestic and international regulatory requirements\. In the last several years, Congress has passed laws, and the DOT, the FAA, the TSA and the DHS have issued a number of directives and other regulations, that affect the airline industry\. These requirements impose substantial costs on us and restrict the ways we may conduct our business\.

For example, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions\. These requirements can be issued with little or no notice, or can otherwise impact our ability to efficiently or fully utilize our aircraft, and in some instances have resulted in the temporary grounding of aircraft types altogether, or otherwise caused substantial disruption and resulted in material costs to us and lost revenues\. The FAA also exercises comprehensive regulatory authority over nearly all technical aspects of our operations\. Our failure to comply with such requirements has in the past and may in the future result in fines and other enforcement actions by the FAA or other regulators\. In the future, any new regulatory requirements, particularly requirements that limit our ability to operate or price our products, could have a material adverse effect on us and the industry\.

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