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

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

ITEM 9B\. OTHER INFORMATION

None\.

PART III

ITEM 10\. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE  REGISTRANT

Information required by this item is set forth under the headings "Governance Matters," "Proposal 1 \- Election of Directors \- Information About Nominees" and "Other Matters \- Section 16 Beneficial Ownership Reporting Compliance" in our Proxy Statement to be filed with the Commission related to our 2018 Annual Meeting of Stockholders ("Proxy Statement"), and is incorporated by reference\. Pursuant to instruction 3 to paragraph (b) of Item 401 of Regulation S\-K, certain information regarding executive officers is contained in Part I of this Form 10\-K\.

ITEM 11\. EXECUTIVE COMPENSATION

Information required by this item is set forth under the headings "Governance Matters \- Compensation Committee Interlocks and Insider Participation," "Executive Compensation" and "Director Compensation" in our Proxy Statement and is incorporated by reference\.

ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about the number of shares of common stock that may be issued under Delta's equity compensation plans as of  December 31, 2017 \.

|                                                              |                                                                                |                                                                                |                                                                                |
| ------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Plan Category**                                            | **(a) No\. of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights** **^(1)^** | **(b) Weighted\-Average Exercise Price of Outstanding Options, Warrants and Rights** **^(2)^** | **(c) No\. of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))** **^(3)^** |
| Equity compensation plans approved by securities holders     | 3,365,648                                                                                | $21\.53                                                                                | 29,758,243                                                                                |
| Equity compensation plans not approved by securities holders | —                                                                                | —                                                                                | —                                                                                |
| Total                                                        | 3,365,648                                                                                | $21\.53                                                                                | 29,758,243                                                                                |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Includes a maximum of 1,487,298 shares of common stock that may be issued upon the achievement of certain performance conditions under outstanding performance share awards as of  December 31, 2017 \.  |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Includes performance share awards, which do not have exercise prices\. The weighted average exercise price of options is $38\.59\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | Reflects shares remaining available for issuance under Delta's Performance Compensation Plan\. If any shares of our common stock are covered by an award under the Plan that expires, is canceled, forfeited or otherwise terminates without delivery of shares (including shares surrendered or withheld for payment of taxes related to an award), then such shares will again be available for issuance under the Plan except for (i) any shares tendered in payment of an option, (ii) shares withheld to satisfy any tax withholding obligation with respect to the exercise of an option or stock appreciation right ("SAR") or (iii) shares covered by a stock\-settled SAR or other awards that were not issued upon the settlement of the award\. Because 2,599,512 shares of restricted stock remain unvested and subject to forfeiture, these shares could again be available for issuance\. |

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

ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR  INDEPENDENCE

Information required by this item is set forth under the headings "Governance Matters" and "Proposal 1 \- Election of Directors" in our Proxy Statement and is incorporated by reference\.

 91


Annual Report of Southwest Airlines Co\. for year 2018

**Route Structure**

Southwest principally provides point\-to\-point service, rather than the "hub\-and\-spoke" service provided by most major U\.S\. airlines\. The hub\-and\-spoke system concentrates most of an airline's operations at a limited number of central hub cities and serves most other destinations in the system by providing one\-stop or connecting service through a hub\. By not concentrating operations through one or more central transfer points, Southwest's point\-to\-point route structure has allowed for more direct nonstop routing than hub\-and\-spoke service\. The Company continues to focus on adding depth to schedule offerings in certain key cities, which is expected to benefit operational efficiency and give Customers additional options to reach their final destination\. Approximately 77 percent of the Company's Customers flew nonstop during 2018, and, as of December 31, 2018, Southwest served 704 nonstop city pairs\.

Southwest’s point\-to\-point service has also enabled it to provide its markets with frequent, conveniently timed flights and low fares\. For example, Southwest currently offers 20 weekday roundtrips between Dallas Love Field and Houston Hobby, 12 weekday roundtrips between Burbank and Oakland, 15 weekday roundtrips between San Diego and San Jose, eight weekday roundtrips between Denver and Chicago Midway, and 10 weekday roundtrips between Los Angeles International and Las Vegas\.

Southwest complements its high\-frequency short\-haul routes with long\-haul nonstop service between markets such as Oakland and Orlando, Los Angeles and Nashville, Las Vegas and Orlando, San Diego and Baltimore, Houston and New York LaGuardia, Los Angeles and Tampa, Oakland and Baltimore, and San Diego and Newark\. During 2018, the Company continued to incorporate the Boeing 737 MAX 8 and the Boeing 737\-800 aircraft into its fleet, both of which offer significantly more Customer seating capacity than the Company’s other aircraft\. This has enabled the Company to more economically serve long\-haul routes, as well as high\-demand, slot\-controlled, and gate\-restricted airports, by adding seats for such routes without increasing the number of flights (a "slot" is the right of an air carrier, pursuant to regulations of the FAA, to operate a takeoff or landing at a specific time at certain airports)\. The Company plans to continue its route network and schedule optimization efforts through the addition of new markets and itineraries, while also pruning less profitable flights from its schedule\. For 2018, the Company’s average aircraft trip stage length was 757 miles, with an average duration of approximately 2\.0 hours, as compared with an average aircraft trip stage length of 754 miles and an average duration of approximately 2\.0 hours in 2017\.

The Company continued its focus on California in 2018, and continues to invest significant resources to solidify its leadership position in California, including the planned addition of new domestic and international destination options and flights for California Customers, as well as marketing programs and local outreach efforts designed to retain, engage, and acquire Customers\. For example, Hawaii is an attractive leisure destination for the Company's California Customers, and the Company has announced its intent to serve Honolulu International Airport, Lihue Airport, Kona International Airport at Keahole, and Kahului Airport from four initial California cities: Oakland, San Diego, San Jose, and Sacramento\. The Company is scheduled to offer a record 800 departures from California on peak flying days in the summer of 2019 and, based on the most recent data available from the DOT, for the year ended June 30, 2018, Southwest carried more California travelers to, from, and within California than any other airline\.

In order to complement the Company’s network, during 2018, the Company entered into an agreement with Alaska Airlines to lease 12 slots at New York's LaGuardia Airport and eight slots at Washington Reagan National Airport through 2028\.

The Company ended 2018 with international service to 14 destinations through 23 international gateway cities within the 48 contiguous United States\. During 2018, the Company commenced international service out of Indianapolis, San Jose, Sacramento, Columbus, New Orleans, Pittsburgh, and Raleigh\-Durham\. In addition, Southwest Airlines Cargo^®^ began shipping cargo to select international destinations beginning in 2018, including Mexico City, Cancun, Cabo San Lucas/Los Cabos, Puerto Vallarta, Montego Bay, and San Jose, Costa Rica\.

**Cost Structure**

A key component of the Company's business strategy is its focus on cost discipline and profitably charging competitively low fares\. Adjusted for stage length, the Company has lower unit costs, on average, than the majority of the largest domestic carriers\. The Company's strategy includes the use of a single aircraft type, the Boeing 737, the Company's operationally efficient point\-to\-point route structure, and its highly productive Employees\. Southwest's use of a single aircraft type allows for simplified scheduling, maintenance, flight operations, and training activities\. Southwest's point\-

4


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

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

**UNITED AIRLINES, INC\.**

**STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)**

**(In millions)**

|                                                           |                             |                             |                             |
| --------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                           | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                           | **2018**                    | **2017 (a)**                | **2016 (a)**                |
| Net income                                                | $2,131                      | $2,163                      | $2,234                      |
| Other comprehensive income (loss), net change related to: |                             |                             |                             |
| Employee benefit plans, net of taxes                      | 342                         | (195)                       | (313)                       |
| Fuel derivative financial instruments, net of taxes       | —                           | 1                           | 316                         |
| Investments and other, net of taxes                       | (4)                         | (6)                         | (1)                         |
| Total other comprehensive income (loss), net              | 338                         | (200)                       | 2                           |
| Total comprehensive income, net                           | $2,469                      | $1,963                      | $2,236                      |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2014\-09, *Revenue from Contracts with Customers (Topic 606)\.* 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\.

49


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

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

$93 million, respectively\. Aircraft and aircraft spare parts were assumed to have residual values of approximately 10% of original cost, and other categories of property and equipment were assumed to have no residual value\.

|      |                                                                                |
| ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (h)  | **Maintenance and Repairs—**The cost of maintenance and repairs, including the cost of minor replacements, is charged to expense as incurred, except for costs incurred under our    power\-by\-the\-hour (“PBTH”) engine maintenance agreements\. PBTH contracts transfer certain risk to third\-party service providers and fix the amount we pay per flight hour or per cycle to the service provider in exchange for maintenance and repairs under a predefined maintenance program\. Under PBTH agreements, the Company recognizes expense at a level rate per engine hour, unless the level of service effort and the related payments during the period are substantially consistent, in which case the Company recognizes expense based on the amounts paid\. |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (i) | **Lease Fair Value Adjustments—**Lease fair value adjustments, which arose from recording operating leases at fair value under fresh start or business combination accounting, are amortized on a straight\-line basis over the related lease term\. |

|      |                                                                                |
| ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (j)  | **Regional Capacity Purchase—**Payments made to regional carriers under CPAs are reported in Regional capacity purchase in our consolidated statements of operations\. |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (k) | **Advertising—**Advertising costs, which are included in Other operating expenses, are expensed as incurred\. Advertising expenses were $217 million, $220 million and $201 million for the years ended December 31, 2017, 2016 and 2015, respectively\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (l) | **Intangibles—**The Company has finite\-lived and indefinite\-lived intangible assets, including goodwill\. Finite\-lived intangible assets are amortized over their estimated useful lives\. Goodwill and indefinite\-lived intangible assets are not amortized but are reviewed for impairment annually or more frequently if events or circumstances indicate that the asset may be impaired\. Goodwill and indefinite\-lived assets are reviewed for impairment on an annual basis as of October 1, or on an interim basis whenever a triggering event occurs\. See Note 2 of this report for additional information related to intangibles\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (m) | **Long\-Lived Asset Impairments—**The Company evaluates the carrying value of long\-lived assets subject to amortization whenever events or changes in circumstances indicate that an impairment may exist\. For purposes of this testing, the Company has generally identified the aircraft fleet type as the lowest level of identifiable cash flows\. An impairment charge is recognized when the asset’s carrying value exceeds its net undiscounted future cash flows and its fair market value\. The amount of the charge is the difference between the asset’s carrying value and fair market value\. See Note 14 of this report for additional information related to asset impairments\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (n) | **Share\-Based Compensation—**The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award\. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period\. Obligations for cash\-settled restricted stock units (“RSUs”) are remeasured at fair value throughout the requisite service period on the last day of each reporting period based upon UAL’s stock price\. In addition to the service requirement, certain RSUs have performance metrics that must be achieved prior to vesting\. These awards are accrued based on the expected level of achievement at each reporting period\. A cumulative adjustment is recorded on the last day of each reporting period to adjust compensation expense based on both UAL’s stock price and the then current level of expected performance achievement for the performance\-based awards\. See Note 5 of this report for additional information on UAL’s share\-based compensation plans\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (o) | **Ticket Taxes—**Certain governmental taxes are imposed on the Company’s ticket sales through a fee included in ticket prices\. The Company collects these fees and remits them to the appropriate government agency\. These fees are recorded on a net basis (excluded from operating revenue)\. |

65


Annual Report of Southwest Airlines Co\. for year 2019

includes any revenue recognized associated with ancillary fees charged separately, such as in\-flight purchases, EarlyBird Check\-In ^®^ , and Upgraded Boarding\.

In order to determine the value of each loyalty point, certain assumptions must be made at the time of measurement, which include the following:

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Allocation of Passenger Revenue*  \- Revenues from Passengers, related to travel, who also earn Rapid Rewards Points have been allocated between flight (recognized as revenue when transportation is provided) and Rapid Rewards Points (deferred until points are redeemed) based on each obligation’s relative standalone selling price\. The Company utilizes historical earning patterns to assist in this allocation\. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Fair Value of Rapid Rewards Points*  \- Determined from the base fare value of tickets which were purchased using prior point redemptions for travel and other products and services, which the Company believes to be indicative of the fair value of points as perceived by Customers and representative of the value of each point at the time of redemption\. The Company’s booking site allows a Customer to toggle between fares utilizing either cash or point redemptions, which provides the Customer with an approximation of the equivalent value of their points\. The value can differ, however, based on demand, the amount of time prior to the flight, and other factors\. The fare mix during the period measured represents a constraint, which could result in the assumptions above changing at the measurement date, as fare classes can have different coefficients used to determine the total loyalty points needed to purchase an award ticket\. The mixture of these fare classes and changes in the coefficients used by the Company could cause the fair value per point to increase or decrease\.  |

For points that are expected to remain unused, the Company recognizes spoilage in proportion to the pattern of points used by the Customer, which approximates the average period over which the population of Rapid Reward Members redeem their points\. The Company utilizes historical behavioral data to develop a predictive statistical model to analyze the amount of spoilage expected for points sold to business partners and earned through flight\. The Company continues to evaluate expected spoilage annually and applies appropriate adjustments in the fourth quarter of each year, or other times, if changes in Customer behavior are detected\. Changes to spoilage estimates impact revenue recognition prospectively\. Due to the size of the Company’s liability for loyalty benefits, changes in Customer behavior and/or expected future redemption patterns could result in significant variations in Passenger revenue\.

The Company allocates consideration received to performance obligations based on the relative fair value of those obligations\. The Company has a co\-branded credit card agreement (“Agreement”) with Chase Bank USA, N\.A\. (“Chase”), through which the Company sells loyalty points and certain marketing components, which consist of the use of Southwest Airlines’ brand and access to Rapid Rewards Member lists, licensing and advertising elements, and the use of the Company’s resource team\. The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the two performance obligations identified in the Agreement, which have been characterized as a transportation component and a marketing component\. The allocations utilized are reviewed to determine if adjustment is necessary any time there is a modification to the Agreement\. The Company records Passenger revenue related to loyalty point redemptions for air travel when the travel is delivered, and the marketing elements are recognized as Other revenue when the performance obligations related to those services are satisfied, which is generally the same period consideration is received from Chase\.

As performance obligations to Customers are satisfied, the related revenue is recognized\. The events that result in revenue recognition that are associated with performance obligations identified as a part of the Rapid Rewards Program are as follows:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | *Tickets and Rapid Rewards Points*  \- When a flight occurs, the related performance obligation is satisfied and the related value provided by the Customer, whether from purchased tickets or Rapid Rewards Points, is recognized as revenue\.  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Loyalty points redeemed for goods and/or services other than travel*  \- Rapid Rewards Members have the option to redeem points for goods and services offered through a third party vendor, who acts as principal\. The performance obligation related to the purchase of these goods and services is satisfied when the good and/or service is delivered to the Customer\. |

82


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

There are no current statutory funding requirements for the Company’s plans in 2019\.

Future benefits expected to be paid over the next ten years under the qualified defined\-benefit pension plans from the assets of those plans (in millions):

|            |           |
| ---------- | --------- |
|            | **Total** |
| 2019       | $99       |
| 2020       | 113       |
| 2021       | 115       |
| 2022       | 129       |
| 2023       | 132       |
| 2024– 2028 | 741       |

***Nonqualified Defined\-Benefit Pension Plan***

Alaska also maintains an unfunded, noncontributory defined\-benefit plan for certain elected officers\. This plan uses a December 31 measurement date\. The assumptions used to determine benefit obligations and the net period benefit cost for the nonqualified defined\-benefit pension plan are similar to those used to calculate the qualified defined\-benefit pension plan\. The plan's unfunded status, PBO and accumulated benefit obligation are immaterial\. The net pension expense in prior year and expected future expense is also immaterial\.

***Post\-retirement Medical Benefits***

The Company allows certain retirees to continue their medical, dental and vision benefits by paying all or a portion of the active employee plan premium until eligible for Medicare, currently age 65\. This results in a subsidy to retirees, because the premiums received by the Company are less than the actual cost of the retirees’ claims\. The accumulated post\-retirement benefit obligation for this subsidy is unfunded\. The accumulated post\-retirement benefit obligation was $82 million and $85 million at December 31, 2018 and 2017, respectively\. The net periodic benefit cost was not material in 2018 or 2017\.

***Defined\-Contribution Plans***

The seven defined\-contribution plans are deferred compensation plans under section 401(k) of the Internal Revenue Code\. All of these plans require Company contributions\. Total expense for the defined\-contribution plans was $126 million, $103 million and $67 million in 2018, 2017, and 2016, respectively\.

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, 2018 and 2017\.

***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, 2018 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 $25 million and $28 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, 2018 and December 31, 2017, 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 2018, 2017 and 2016 was $147 million, $135 million and $127 million\. The incentive plans are summarized below\.

 83


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

The following table summarizes information about outstanding stock awards:

|                                |                                |                                             |                                                                                |                                                                              |
| ------------------------------ | ------------------------------ | ------------------------------------------- | -------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- |
|                                | **Number**

**of Units** | **Weighted\-Average Grant Date Fair Value** | **Weighted\-**

**Average**

**Contractual**

**Life (Years)** | **Aggregate**

**Intrinsic**

**Value (in**

**millions)** |
| Non\-vested, December 31, 2016 | 440,093                        | $63\.86                                     | 1\.4                                                                             | $39                                                                          |
| Granted                        | 433,340                        | 88\.43                                      |                                                                                |                                                                              |
| Vested                         | (286,138)                      | 61\.47                                      |                                                                                |                                                                              |
| Forfeited                      | (62,150)                       | 65\.06                                      |                                                                                |                                                                              |
| Non\-vested, December 31, 2017 | 525,145                        | $85\.47                                     | 1\.6                                                                             | $39                                                                          |

***Deferred Stock Awards***

Deferred Stock Units (DSUs) are awarded to members of the Board of Directors as part of their retainers\. The underlying common shares are issued upon retirement from the Board, but require no future service period\. As a result, the entire intrinsic value of the awards is expensed on the date of grant\.

***Employee Stock Purchase Plan***

The ESPP allows employees to purchase common stock at 85% of the stock price on the first day of the offering period or the specified purchase date, whichever is lower\. Employees may contribute up to 10% of their base earnings during the offering period to purchase stock\. Employees purchased 406,628, 308,920 and 281,058 shares in 2017, 2016 and 2015 under the ESPP\.

**NOTE 12\. OPERATING SEGMENT INFORMATION**

Alaska Air Group has three operating airlines—Alaska, Virgin America and Horizon\. Each is a regulated airline by the U\.S\. Department of Transportation’s Federal Aviation Administration\. Alaska has CPAs for regional capacity with Horizon, as well as with third\-party carriers SkyWest and PenAir, under which Alaska receives all passenger revenues\.

Under U\.S\. General Accepted Accounting Principles, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions\. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | **Mainline**  \- includes Alaska's and Virgin America’s scheduled air transportation for passengers and cargo throughout the U\.S\., and in parts of Canada, Mexico, and Latin America\.  |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | **Regional**  \- includes Horizon's and other third\-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U\.S\. under CPAs\. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations\.  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | **Horizon**  \- includes the capacity sold to Alaska under CPA\. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs\.  |

The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information\.

The "Consolidating and Other" column reflects parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company\. The “Air Group Adjusted” column represents a non\-GAAP measure that is used by the Company CODM to evaluate performance and allocate resources\. Adjustments are further explained below in reconciling to consolidated GAAP results\.

 91


Annual Report of DELTA AIR LINES, INC\.  for year 2019

Significant Accounting Policies

Our significant accounting policies are disclosed below or included within the topic\-specific notes included herein\.

Cash and Cash Equivalents and Short\-Term Investments

Short\-term, highly liquid investments with maturities of three months or less when purchased are classified as cash and cash equivalents\.Investments with maturities of greater than three months, but not in excess of one year, when purchased are classified as short\-term investments\. Investments with maturities beyond one year when purchased may be classified as short\-term investments if they are expected to be available to support our short\-term liquidity needs\. Our short\-term investments were classified as fair value investments and gains and losses were recorded in non\-operating expense\.

Inventories

Fuel\.  As part of our strategy to mitigate the cost of the refining margin reflected in the price of jet fuel our wholly owned subsidiaries, Monroe Energy, LLC and MIPC, LLC (collectively, "Monroe"), operate the Trainer oil refinery\. Refined product, feedstock and blendstock inventories, all of which are finished goods, are carried at recoverable cost\. We use jet fuel in our airline operations that is produced by the refinery and procured through the exchange with third parties of gasoline, diesel and other refined products ("non\-jet fuel products") the refinery produces\. Cost is determined using the first\-in, first\-out method\. Costs include the raw material consumed plus direct manufacturing costs (such as labor, utilities and supplies) incurred and an applicable portion of manufacturing overhead\.

Expendables Parts and Supplies\.  Inventories of expendable parts related to flight equipment, which cannot be economically repaired, reconditioned or reused after removal from the aircraft, are carried at moving average cost and charged to operations as consumed\. An allowance for obsolescence is provided over the remaining useful life of the related fleet\. We also provide allowances for parts identified as excess or obsolete to reduce the carrying costs to the lower of cost or net realizable value\. These parts are assumed to have an estimated residual value of 5% of the original cost\.

Accounting for Refinery Related Buy/Sell Agreements

To the extent that we receive jet fuel for non\-jet fuel products exchanged under buy/sell agreements, we account for these transactions as nonmonetary exchanges\. We have recorded these nonmonetary exchanges at the carrying amount of the non\-jet fuel products transferred within aircraft fuel and related taxes on the income statement\.

Derivatives

Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations\. In an effort to manage our exposure to these risks, we may enter into derivative contracts and adjust our derivative portfolio as market conditions change\. We recognize derivative contracts at fair value on our Consolidated Balance Sheets ("balance sheets")\.

The following table summarizes the risk hedged and the classification of related gains and losses in our income statement, by each type of derivative contract:

|                                     |                                     |                                     |                                                 |                                                 |                                                 |                                                          |                                                          |                                                          |
|:----------------------------------- |:----------------------------------- |:----------------------------------- |:-----------------------------------------------:|:-----------------------------------------------:|:-----------------------------------------------:|:--------------------------------------------------------:|:--------------------------------------------------------:|:--------------------------------------------------------:|
| Derivative Type                     | Derivative Type                     | Derivative Type                     |                   Hedged Risk                   |                   Hedged Risk                   |                   Hedged Risk                   |            Classification of Gains and Losses            |            Classification of Gains and Losses            |            Classification of Gains and Losses            |
| Fuel hedge contracts                | Fuel hedge contracts                | Fuel hedge contracts                |           Fluctuations in fuel prices           |           Fluctuations in fuel prices           |           Fluctuations in fuel prices           |             Aircraft fuel and related taxes              |             Aircraft fuel and related taxes              |             Aircraft fuel and related taxes              |
| Interest rate contracts             | Interest rate contracts             | Interest rate contracts             |           Increases in interest rates           |           Increases in interest rates           |           Increases in interest rates           |                  Interest expense, net                   |                  Interest expense, net                   |                  Interest expense, net                   |
| Foreign currency exchange contracts | Foreign currency exchange contracts | Foreign currency exchange contracts | Fluctuations in foreign currency exchange rates | Fluctuations in foreign currency exchange rates | Fluctuations in foreign currency exchange rates | Passenger revenue or non\-operating expense (See Note 5) | Passenger revenue or non\-operating expense (See Note 5) | Passenger revenue or non\-operating expense (See Note 5) |

The following table summarizes the accounting treatment of our derivative contracts:

|                                 |                                 |                                 |                                                             |                                                             |                                                             |
|:------------------------------- |:------------------------------- |:------------------------------- |:-----------------------------------------------------------:|:-----------------------------------------------------------:|:-----------------------------------------------------------:|
| Accounting Designation          | Accounting Designation          | Accounting Designation          |            Impact of Unrealized Gains and Losses            |            Impact of Unrealized Gains and Losses            |            Impact of Unrealized Gains and Losses            |
| Not designated as hedges        | Not designated as hedges        | Not designated as hedges        | Change in fair value^(1)^  of hedge is recorded in earnings | Change in fair value^(1)^  of hedge is recorded in earnings | Change in fair value^(1)^  of hedge is recorded in earnings |
| Designated as cash flow hedges  | Designated as cash flow hedges  | Designated as cash flow hedges  |           Market adjustments are recorded in AOCI           |           Market adjustments are recorded in AOCI           |           Market adjustments are recorded in AOCI           |
| Designated as fair value hedges | Designated as fair value hedges | Designated as fair value hedges | Market adjustments are recorded in debt and finance leases  | Market adjustments are recorded in debt and finance leases  | Market adjustments are recorded in debt and finance leases  |

^(1)^ Including settled gains and losses as well as mark\-to\-market adjustments ("MTM adjustments")\.

59


Annual Report of Southwest Airlines Co\. for year 2017

offering perspective\. As discussed above under "Business \- Industry," legacy carrier offerings ranged from a "Basic Economy" fare product, designed to compete with ULCC fares, to a "Premium Economy" product, targeted to appeal to customers willing to pay a premium for additional amenities\. Also in response to ULCC pricing, some legacy carriers have removed their fare floors for certain routes, leading to lower fares across the industry\. These changes have put increased pressure on the industry's fare environment and have created a challenging revenue environment\.

Pricing can be driven by a variety of factors\. For example, airlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors and/or cash flow\. In addition, multiple airlines have been able to reduce fares because they have been able to lower their operating costs as a result of reorganization within and outside of bankruptcy\. Further, some of the Company's competitors have continued to grow and modernize their fleets and expand their networks, potentially enabling them to better control costs per available seat mile (the average cost to fly an aircraft seat (empty or full) one mile), which in turn may enable them to lower their fares\.

The Company believes its low\-cost operating structure continues to provide it with an advantage over many of its airline competitors by enabling it to continue to charge low fares\. However, ULCCs, which have increased capacity in the Company's markets, have surpassed the Company's cost advantage with larger gauge aircraft, increased seat density, and lower wages\. The Company believes it continues to have a competitive advantage through its differentiation of Southwest from many of its competitors by not charging additional fees for items such as first and second checked bags for each ticketed Customer, flight changes, seat selection, snacks, curb\-side check\-in, and telephone reservations; nevertheless it has become increasingly difficult for the Company to improve upon its industry cost position\.

**Routes, Frequent Flyer Programs, and Schedules**

The Company also competes with other airlines based on markets served, frequent flyer opportunities, and flight schedules\. Some major airlines have more extensive route structures than Southwest, including more extensive international networks\. In addition, many competitors have entered into significant commercial relationships with other airlines, such as global alliances, code\-sharing, and capacity purchase agreements, which increase the airlines' opportunities to expand their route offerings\. An alliance or code\-sharing agreement enables an airline to offer flights that are operated by another airline and also allows the airline’s customers to book travel that includes segments on different airlines through a single reservation or ticket\. As a result, depending on the nature of the specific alliance or code\-sharing arrangement, a participating airline may be able to, among other things, (i) offer its customers access to more destinations than it would be able to serve on its own, (ii) gain exposure in markets it does not otherwise serve, and (iii) increase the perceived frequency of its flights on certain routes\. Alliance and code\-sharing arrangements not only provide additional route flexibility for participating airlines, they can also allow these airlines to offer their customers more opportunities to earn and redeem frequent flyer miles or points\. A capacity purchase agreement enables an airline to expand its route structure by paying another airline (e\.g\., a regional airline with smaller aircraft) to operate flights on its behalf in markets that it does not, or cannot, serve itself\. The Company continues to evaluate and implement initiatives to better enable itself to offer additional itineraries\.

**Customer Service, Operational Reliability, and Amenities**

Southwest also competes with other airlines with respect to customer service, operational reliability (such as ontime performance), and passenger amenities\. According to statistics published by the DOT, Southwest consistently ranks at or near the top among domestic carriers in Customer Satisfaction for having the lowest Customer complaint ratio\. However, carriers are increasingly focusing on operational reliability as an opportunity to win and retain Customers\. In addition, some airlines have more seating options and associated passenger amenities than does Southwest, including first\-class, business class, and other premium seating and related amenities\. New and different types of aircraft flown by competitors could have operational attributes and passenger amenities that could be considered more favorable than those associated with the Company's existing fleet\.

**Other Forms of Competition**

The airline industry is subject to varying degrees of competition from surface transportation by automobiles, buses, and trains\. Inconveniences and delays associated with air travel security measures can increase surface competition\. In addition, surface competition can be significant during economic downturns when consumers cut back on discretionary spending and fewer choose to fly, or when gasoline prices are lower, making surface transportation a less expensive option\. Because of the relatively high percentage of short\-haul travel provided by Southwest, it is particularly

18


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

Economic conditions following the United Kingdom’s exit from the European Union could adversely affect our business\.

Following a referendum in June 2016 in which voters in the U\.K\. approved an exit from the European Union (often referred to as Brexit), the U\.K\.’s withdrawal is scheduled to become effective March 29, 2019 but there is substantial uncertainty regarding the terms of the withdrawal\. Regardless of what happens with Brexit, the U\.S\.\-EU Open Skies air services agreement will remain in effect and the recently signed U\.S\.\-U\.K\. Open Skies agreement will take effect, maintaining the current liberal air services regime in the transatlantic market\. The imposition of restrictions on flying rights between the EU and U\.K\. in connection with Brexit could negatively impact Virgin Atlantic, our joint venture partner in which we have 49% ownership, and could impact the planned integration of our transatlantic joint ventures\.

The exit of the U\.K\. from the EU without agreement on matters such as trade, customs, financial services and the movement of goods and people between the EU and the U\.K\. could adversely impact the demand for air travel in the U\.K\. and increase costs for us and our joint venture partners\. Furthermore, post\-Brexit ambiguity or changes in regulations could diminish the value of route authorities, slots or other assets owned by us or our joint venture partners and, therefore, could adversely impact on our business and results of operations\.

The rapid spread of contagious illnesses can have a material adverse effect on our business and results of operations\.

The rapid spread of a contagious illness, or fear of such an event, can have a material adverse effect on the demand for worldwide air travel and therefore have a material adverse effect on our business and results of operations\. Moreover, our operations could be negatively affected if employees are quarantined as the result of exposure to a contagious illness\. Similarly, travel restrictions or operational issues resulting from the rapid spread of contagious illnesses in a part of the world in which we have significant operations may have a materially adverse impact on our business and results of operations\.

ITEM 1B\. UNRESOLVED STAFF COMMENTS

None\.

 19


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

Regional

As of  December 31, 2019 , the fleet of our wholly\-owned and third\-party regional carriers operating as American Eagle consisted of the following aircraft:

|                            |                                         |           |            |                                                                           |           |                                           |                                                       |
| -------------------------- | --------------------------------------- | --------- | ---------- | ------------------------------------------------------------------------- | --------- | ----------------------------------------- | ----------------------------------------------------- |
|                            | **Average Seating**

**Capacity** | **Owned** | **Leased** | **Owned or Leased**

**by Third Party**

**Regional Carrier** | **Total** | **Operating Regional**

**Carrier** | **Number of**

**Aircraft**

**Operated** |
| Bombardier CRJ 200         | 50                                      | 12        | 7          | —                                                                         | 19        | PSA                                       | 19                                                    |
| Bombardier CRJ 700         | 66                                      | 54        | 7          | 60                                                                        | 121       | SkyWest                                   | 60                                                    |
|                            |                                         |           |            |                                                                           |           | PSA                                       | 56                                                    |
|                            |                                         |           |            |                                                                           |           | Envoy                                     | 5                                                     |
|                            |                                         |           |            |                                                                           |           | Total                                     | 121                                                   |
| Bombardier CRJ 900         | 77                                      | 66        | —          | 60                                                                        | 126       | PSA                                       | 66                                                    |
|                            |                                         |           |            |                                                                           |           | Mesa                                      | 60                                                    |
|                            |                                         |           |            |                                                                           |           | Total                                     | 126                                                   |
| Embraer E175               | 76                                      | 90        | —          | 85                                                                        | 175       | Republic                                  | 85                                                    |
|                            |                                         |           |            |                                                                           |           | Envoy                                     | 70                                                    |
|                            |                                         |           |            |                                                                           |           | Compass                                   | 20                                                    |
|                            |                                         |           |            |                                                                           |           | Total                                     | 175                                                   |
| Embraer ERJ 140  **^(1)^** | 44                                      | 46        | —          | —                                                                         | 46        | Envoy                                     | 46                                                    |
| Embraer ERJ 145            | 50                                      | 118       | —          | —                                                                         | 118       | Piedmont                                  | 60                                                    |
|                            |                                         |           |            |                                                                           |           | Envoy                                     | 58                                                    |
|                            |                                         |           |            |                                                                           |           | Total                                     | 118                                                   |
| Total                      |                                         | 386       | 14         | 205                                                                       | 605       |                                           | 605                                                   |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Excluded from the total operating aircraft count above are  12  owned Embraer ERJ 140s that are being held in temporary storage\.  |

See Note 12 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 10 to American’s Consolidated Financial Statements in Part II, Item 8B for additional information on our capacity purchase agreements with third\-party regional carriers\.

38


Annual Report of Southwest Airlines Co\. for year 2019

Company\. The Use and Lease Agreement is a 20\-year agreement providing for, among other things, the Company’s lease of space at the Airport from the City of Dallas\. The remainder of such monies transferred from the City of Dallas to the Company under the Revenue Credit Agreement originates from (i) use and lease agreements with other airlines, (ii) various concession agreements, and (iii) other airport miscellaneous revenues\.

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

Los Angeles International Airport

In October 2017, the Company executed a lease agreement (the "T1\.5 Lease") with Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles International Airport ("LAX")\. Under the T1\.5 Lease, the Company is overseeing and managing the design, development, financing, construction, and commissioning of a passenger processing facility between Terminal 1 and 2 (the "Terminal 1\.5 Project")\. The Terminal 1\.5 Project is expected to include ticketing, baggage claim, passenger screening, and a bus gate at a cost not to exceed  $479 million  for site improvements and non\-proprietary improvements\.

Funding for the Terminal 1\.5 Project is primarily through the Regional Airports Improvement Corporation (the "RAIC"), which is a quasi\-governmental special purpose entity that acts as a conduit borrower under a syndicated credit facility provided by a group of lenders\. A loan made under the credit facility for the Terminal 1\.5 Project is being used to fund the development of this project, and the outstanding loan will be repaid with the proceeds of LAWA’s payments to purchase completed construction phases\. The Company guaranteed the obligation of the RAIC under the credit facility associated with the T1\.5 Lease\. As of  December 31, 2019 , the Company's outstanding guaranteed obligation under the credit facility for the Terminal 1\.5 Project was  $176 million \.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s Consolidated Financial Statements have been prepared in accordance with GAAP\. The Company’s significant accounting policies are described in Note  1  to the Consolidated Financial Statements\. The preparation of financial statements in accordance with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying footnotes\. The Company’s estimates and assumptions are based on historical experience and changes in the business environment\. However, actual results may differ from estimates under different conditions, sometimes materially\. Critical accounting policies and estimates are defined as those that both (i) are most important to the portrayal of the Company’s financial condition and results and (ii) require management’s most subjective judgments\. The Company’s critical accounting policies and estimates are described below\.

Revenue Recognition

Tickets sold for Passenger air travel are initially deferred as Air traffic liability\. Passenger revenue is recognized and Air traffic liability is reduced when the service is provided (i\.e\., when the flight takes place)\. Air traffic liability primarily represents tickets sold for future travel dates, funds that are past flight date and remain unused, but are expected to be used in the future, and the Company’s liability for loyalty benefits that are expected to be redeemed in the future\. Air traffic liability fluctuates throughout the year based on seasonal travel patterns, fare sale activity, and activity associated with the Company’s loyalty program\. See Note  1  to the Consolidated Financial Statements for information about the Company's revenue recognition policies\.

55


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

Our Board of Directors commenced declaring quarterly cash dividends in July 2014 as part of our capital deployment program\. However, any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors\. We are not obligated to continue a dividend for any fixed period, and the payment of dividends may be suspended or discontinued at any time at our discretion and without prior notice\. We will continue to retain future earnings to develop our business, as opportunities arise, and evaluate on a quarterly basis the amount and timing of future dividends based on our operating results, financial condition, capital requirements and general business conditions\. The amount and timing of any future dividends may vary, and the payment of any dividend does not assure that we will pay dividends in the future\.

In addition, any future repurchases of AAG common stock or payment of dividends, or any determination to cease repurchasing stock or paying dividends, could affect our stock price and increase its volatility\. The existence of a share repurchase program and any future dividends could cause our stock price to be higher than it would otherwise be and could potentially reduce the market liquidity for our stock\. Additionally, any future repurchases of AAG common stock or payment of dividends will diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions\. Further, our repurchase of AAG common stock may fluctuate such that our cash flow may be insufficient to fully cover our share repurchases\. Although our share repurchase programs are intended to enhance long\-term stockholder value, there is no assurance that they will do so\.

AAG’s Certificate of Incorporation and Bylaws include provisions that limit voting and acquisition and disposition of our equity interests\.

Our Certificate of Incorporation and Bylaws include significant provisions that limit voting and ownership and disposition of our equity interests, as described in Part II, Item 5\. Market for American Airlines Group’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities \- “ Ownership Restrictions ” and AAG’s Description of the Registrants’ Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, which is filed as Exhibit 4\.1 hereto\. These restrictions may adversely affect the ability of certain holders of AAG common stock and our other equity interests to vote such interests and adversely affect the ability of persons to acquire shares of AAG common stock and our other equity interests\.

Certain provisions of AAG’s Certificate of Incorporation and Bylaws make it difficult for stockholders to change the composition of our Board of Directors and may discourage takeover attempts that some of our stockholders might consider beneficial\.

Certain provisions of our Certificate of Incorporation and Bylaws, as currently in effect, may have the effect of delaying or preventing changes in control if our Board of Directors determines that such changes in control are not in our best interest and the best interest of our stockholders\. These provisions include, among other things, the following:

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------- |
| • | advance notice procedures for stockholder proposals to be considered at stockholders’ meetings; |

|   |                                                                       |
| - | --------------------------------------------------------------------- |
| • | the ability of our Board of Directors to fill vacancies on the board; |

|   |                                                                      |
| - | -------------------------------------------------------------------- |
| • | a prohibition against stockholders taking action by written consent; |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | stockholders are restricted from calling a special meeting unless they hold at least 20% of our outstanding shares and follow the procedures provided for in the amended Bylaws; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | a requirement that holders of at least 80% of the voting power of the shares entitled to vote in the election of directors approve any amendment of our Bylaws submitted to stockholders for approval; and |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------- |
| • | super\-majority voting requirements to modify or amend specified provisions of our Certificate of Incorporation\. |

These provisions are not intended to prevent a takeover, but are intended to protect and maximize the value of the interests of our stockholders\. While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our Board of Directors, they could enable our Board of Directors to prevent a transaction that some, or a majority, of our stockholders might believe to be in their best interest and, in that case, may prevent or discourage attempts to remove and replace incumbent directors\. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested stockholders\. Interested stockholders do not include stockholders whose acquisition of our securities is approved by the Board of Directors prior to the investment under Section 203\.

35


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

During 2018, net actuarial gains decreased our benefit obligation due to the increase in discount rates, while in 2017 our obligations increased due to the actuarial losses from a decrease in discount rates\. These gains and losses are recorded in AOCI and reflected in the table below\.

A net actuarial loss of   $320 million  will be amortized from AOCI into net periodic benefit cost in  2019 \. Amounts are generally amortized from AOCI over the expected future lifetime of plan participants\.

Balance Sheet Position

|                                                      |                          |                          |                                                      |                                                      |
| ---------------------------------------------------- | ------------------------ | ------------------------ | ---------------------------------------------------- | ---------------------------------------------------- |
|                                                      | **Pension Benefits**     | **Pension Benefits**     | **Other Postretirement and Postemployment Benefits** | **Other Postretirement and Postemployment Benefits** |
|                                                      | **December 31,**         | **December 31,**         | **December 31,**                                     | **December 31,**                                     |
| **(in millions)**                                    | **2018**                 | **2017**                 | **2018**                                             | **2017**                                             |
| Current liabilities                                  | $

(27

)    | $

(32

)    | $

(123

)                               | $

(121

)                               |
| Noncurrent liabilities                               | (6,323

)          | (6,920

)          | (2,465

)                                      | (2,517

)                                      |
| Total liabilities                                    | $

(6,350

) | $

(6,952

) | $

(2,588

)                             | $

(2,638

)                             |
| Net actuarial loss                                   | $

(8,682

) | $

(8,495

) | $

(613

)                               | $

(651

)                               |
| Prior service credit                                 | —                        | —                        | 47                                                   | 56                                                   |
| Total accumulated other comprehensive loss, pre\-tax | $

(8,682

) | $

(8,495

) | $

(566

)                               | $

(595

)                               |

Net Periodic (Benefit) Cost

|                                      |                             |                             |                             |                                                      |                                                      |                                                      |
| ------------------------------------ | --------------------------- | --------------------------- | --------------------------- | ---------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------- |
|                                      | **Pension Benefits**        | **Pension Benefits**        | **Pension Benefits**        | **Other Postretirement and Postemployment Benefits** | **Other Postretirement and Postemployment Benefits** | **Other Postretirement and Postemployment Benefits** |
|                                      | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,**                          | **Year Ended December 31,**                          | **Year Ended December 31,**                          |
| **(in millions)**                    | **2018**                    | **2017**                    | **2016**                    | **2018**                                             | **2017**                                             | **2016**                                             |
| Service cost                         | $—                          | $—                          | $—                          | $85                                                  | $87                                                  | $68                                                  |
| Interest cost                        | 781                         | 853                         | 917                         | 126                                                  | 138                                                  | 147                                                  |
| Expected return on plan assets       | (1,318

)             | (1,143

)             | (902

)               | (67

)                                         | (69

)                                         | (74

)                                         |
| Amortization of prior service credit | —                           | —                           | —                           | (24

)                                         | (26

)                                         | (26

)                                         |
| Recognized net actuarial loss        | 267                         | 262                         | 233                         | 36                                                   | 32                                                   | 24                                                   |
| Settlements                          | 4                           | 3                           | 3                           | —                                                    | —                                                    | —                                                    |
| Curtailment                          | —                           | —                           | —                           | (53

)                                         | —                                                    | —                                                    |
| Net periodic (benefit) cost ^(1)^    | $

(266

)      | $

(25

)       | $251                        | $103                                                 | $162                                                 | $139                                                 |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | See Note 1, "Summary of Significant Accounting Policies," for discussion on ASU No\. 2017\-07, "Compensation \- Retirement Benefits (Topic 715)\."  |

Service cost is recorded in salaries and related costs in the income statement while other components are recorded within miscellaneous under non\-operating expense\.

 83


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

credit losses in the event of non\-performance by counterparties\. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR\-based interest forward rates at period end, multiplied by the total notional value\.

The Company has no other financial assets that are measured at fair value on a nonrecurring basis at December 31, 2017\.

***Activity and Maturities for Marketable Securities***

Unrealized losses from marketable securities are primarily attributable to changes in interest rates\. Management does not believe any remaining losses represent other\-than\-temporary impairments based on the Company's evaluation of available evidence as of December 31, 2017\.

Activity for marketable securities (in millions):

|                                    |          |          |          |
| ---------------------------------- | -------- | -------- | -------- |
|                                    | **2017** | **2016** | **2015** |
| Proceeds from sales and maturities | $1,388   | $962     | $1,175   |

Maturities for marketable securities (in millions):

|                                       |                |                |
| ------------------------------------- | -------------- | -------------- |
| **December 31, 2017**                 | **Cost Basis** | **Fair Value** |
| Due in one year or less               | $113           | $113           |
| Due after one year through five years | 1,272          | 1,264          |
| Due after five years through 10 years | 50             | 50             |
| **Total**                             | $1,435         | $1,427         |

***Fair Value of Other Financial Instruments***

The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below\.

*Cash and Cash Equivalents*: Carried at amortized costs which approximate fair value\.

*Debt*: Debt assumed in the acquisition of Virgin America was subject to a non\-recurring fair valuation adjustment as part of purchase price accounting\. The adjustment is amortized over the life of the associated debt\. All other fixed\-rate debt is carried at cost\. To estimate the fair value of all fixed\-rate as of December 31, 2017, the Company uses the income approach by discounting cash flows using borrowing rates for comparable debt over the weighted life of the outstanding debt\. The estimated fair value of the fixed\-rate debt is Level 3 as certain inputs used are unobservable\.

Fixed\-rate debt on the consolidated balance sheet and the estimated fair value of long\-term fixed\-rate debt (in millions):

|                                                                |          |          |
| -------------------------------------------------------------- | -------- | -------- |
|                                                                | **2017** | **2016** |
| Fixed rate debt at cost                                        | **$956** | $1,175   |
| Non\-recurring purchase price accounting fair value adjustment | **3**    | 4        |
| Total fixed rate debt                                          | **$959** | $1,179   |
| December 31, 2017 estimated fair value                         | **$959** | $1,199   |

 78


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

Report of Independent Registered Public Accounting Firm

To the Stockholder and Board of Directors

American Airlines, Inc\.:

Opinion on Internal Control Over Financial Reporting

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

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of American as of  December 31, 2019  and  2018 , the related consolidated statements of operations, comprehensive income, cash flows, and stockholder’s equity for each of the years in the three\-year period ended  December 31, 2019 , and the related notes (collectively, the consolidated financial statements), and our report dated  February 19, 2020  expressed an unqualified opinion on those consolidated financial statements\.

Basis for Opinion

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

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

Definition and Limitations of Internal Control Over Financial Reporting

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

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

/s/ KPMG LLP

Dallas, Texas

February 19, 2020

161


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

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Fuel Contracts\.*  Our fuel hedge portfolio consists of options, swaps and futures\. Option and swap contracts are valued under income approaches using option pricing models and discounted cash flow models, respectively, based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets\. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices\.  |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Interest Rate Contracts\.*  Our interest rate derivatives are swap contracts, which are valued based on data readily observable in public markets\. |

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

NOTE 4 \. INVESTMENTS

Short\-Term Investments

The estimated fair values of short\-term investments, which approximate cost at  December 31, 2018 , are shown below by contractual maturity\. Actual maturities may differ from contractual maturities because issuers of certain securities have the right to retire our investments without prepayment penalties\.

|                                          |                                          |                                          |      |
| ---------------------------------------- | ---------------------------------------- | ---------------------------------------- | ---- |
| **(in millions)**                        | **(in millions)**                        | **(in millions)**                        |      |
| Due in one year or less                  | Due in one year or less                  | Due in one year or less                  | $93  |
| Due after one year through three years   | Due after one year through three years   | Due after one year through three years   | 96   |
| Due after three years through five years | Due after three years through five years | Due after three years through five years | 1    |
| Due after five years                     | Due after five years                     | Due after five years                     | 13   |
| Total                                    | Total                                    | Total                                    | $203 |

Long\-Term Investments

We have developed strategic relationships with a number of airlines and airline services companies through equity investments and other forms of cooperation and support\. Strategic relationships improve our coordination with these companies and enable our customers to seamlessly connect to more destinations while enjoying a consistent, high\-quality travel experience\. Our equity investments reinforce our commitment to these relationships and provide us with the ability to participate in strategic decision\-making, often through representation on the boards of directors of the other company\.

During the year ended December 31, 2018, we recorded a net gain on our strategic investments of   $14 million , which was recorded in unrealized gain/(loss) on investments in our income statement under non\-operating expense\. This net gain was primarily driven by changes in stock prices and foreign currency fluctuations\. During 2017 and 2016, before we adopted the new financial instruments accounting standard in 2018, we recorded unrealized gains and losses on available\-for\-sale investments in AOCI\.

Equity Method Investments

We account for the following investments under the equity method of accounting and recognize our portion of Aeroméxico's and Virgin Atlantic's financial results in miscellaneous in our income statement under non\-operating expense\. Our equity method investments are recorded in other noncurrent assets on our balance sheet\. If an equity method investment experiences a loss in fair value that is determined to be other than temporary, we will reduce our basis in the investment to fair value and record the loss in unrealized gain/(loss) on investments\.

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| *•* | *Aeroméxico* \. We have a   51%  equity stake in Grupo Aeroméxico, the parent company of Aeroméxico, which is recorded at   $897 million  as of  December 31, 2018 \. Our investment is non\-controlling and accounted for under the equity method as Mexican law and Grupo Aeroméxico's corporate bylaws limit our voting interest to   49% \. |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| *•* | *Virgin Atlantic* \. We have a non\-controlling   49%  equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways, which is recorded at   $383 million  as of  December 31, 2018 \. |

 70