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

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

***(b) Interest Rate Risk***

American has exposure to market risk associated with changes in interest rates related primarily to its variable rate debt obligations\. Interest rates on $9\.6 billion principal amount of long\-term debt as of December 31, 2017 are subject to adjustment to reflect changes in floating interest rates\. The weighted average effective interest rate on American’s variable rate debt was 3\.4% at December 31, 2017\. American does not currently have an interest rate hedge program\.

***(c) Foreign Currency Risk***

American is exposed to the effect of foreign exchange rate fluctuations on the U\.S\. dollar value of foreign currency\-denominated operating revenues and expenses\. American’s largest exposure comes from the British pound, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real\. American does not currently have a foreign currency hedge program\. See Part I, Item 1A\. Risk Factors – *“We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control”* for unaudited additional discussion of this risk\.

**6\. Fair Value Measurements and Other Investments**

***Assets Measured at Fair Value on a Recurring Basis***

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i\.e\. an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability\. Accounting standards include disclosure requirements around fair values used for certain financial instruments and establish a fair value hierarchy\. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market\. Each fair value measurement is reported in one of three levels:

|   |                                                                      |
| - | -------------------------------------------------------------------- |
| • | Level 1 – Observable inputs such as quoted prices in active markets; |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------- |
| • | Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions\. |

When available, American uses quoted market prices to determine the fair value of its financial assets\. If quoted market prices are not available, American measures fair value using valuation techniques that use, when possible, current market\-based or independently\-sourced market parameters, such as interest rates and currency rates\.

American utilizes the market approach to measure fair value for its financial assets\. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets\. American’s short\-term investments classified as Level 2 primarily utilize broker quotes in a non\-active market for valuation of these securities\. No changes in valuation techniques or inputs occurred during the year ended December 31, 2017\.

149


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

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

treated as stockholders under the Plan\. As of  December 31, 2019 , the Disputed Claims Reserve held approximately   7 million  shares of AAG common stock\.

Private Party Antitrust Action Related to Passenger Capacity\.  American, along with Delta Air Lines, Inc\., Southwest Airlines Co\., United Airlines, Inc\. and, in the case of litigation filed in Canada, Air Canada, were named as defendants in approximately   100  putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity\. The U\.S\. lawsuits were consolidated in the Federal District Court for the District of Columbia (the DC Court)\. On June 15, 2018, American reached a settlement agreement with the plaintiffs in the amount of   $45 million  to resolve all class claims in the U\.S\. lawsuits\. That settlement was approved by the DC Court on May 13, 2019\. Three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia\. American believes these appeals are without merit and intends to vigorously defend against them\.

Private Party Antitrust Action Related to the Merger \. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al\., v\. AMR Corporation, et al\., was filed in the Bankruptcy Court\. The complaint named as defendants US Airways Group, US Airways, AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture\. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger\. On August 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross\-motion for summary judgment\. The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019\. The parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019, and they are awaiting the Bankruptcy Court's decision\. American believes this lawsuit is without merit and intends to vigorously defend against the allegations\.

Pension Benefits Action\.  On December 11, 2018, a lawsuit captioned Torres, et al\. v\. American Airlines, Inc\., The Employee Benefits Committee and John/Jane Does 1\-5, was filed in the United States District Court for the Northern District of Texas\. The plaintiffs in this lawsuit purport to represent a class consisting of all participants in and beneficiaries under any of the four American defined benefit pension plans who elected to receive an optional form of benefit other than a lump sum distribution of a participant’s vested benefit\. Under ERISA, participants covered by defined benefit plans accrue retirement benefits in the form of a single life annuity payable upon retirement on a monthly basis until the employee’s death, and may elect certain alternative forms of benefit payments\. Plaintiffs contend that the mortality tables used by American for purposes of calculations related to these alternative forms of benefits are outdated and that more recent mortality tables would have provided more generous benefits and should have been used to make those calculations\. The court has denied American’s motion to dismiss the complaint\. American believes this lawsuit is without merit and intend to vigorously defend against the allegations\.

General \. In addition to the specifically identified legal proceedings, American and its subsidiaries are also engaged in other legal proceedings from time to time\. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within American’s control\. Therefore, although American will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on American are uncertain but could be material\.

(f) Guarantees and Indemnifications

American is a party to many routine contracts in which it provides general indemnities in the normal course of business to third parties for various risks\. American is not able to estimate the potential amount of any liability resulting from the indemnities\. These indemnities are discussed in the following paragraphs\.

In its aircraft financing agreements, American generally indemnifies the financing parties, trustees acting on their behalf and other relevant parties against liabilities (including certain taxes) resulting from the financing, manufacture, design, ownership, operation and maintenance of the aircraft regardless of whether these liabilities (including certain taxes) relate to the negligence of the indemnified parties\.

American’s loan agreements and other LIBOR\-based financing transactions (including certain leveraged aircraft leases) generally obligate American to reimburse the applicable lender for incremental costs due to a change in law that imposes (i) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (ii) any tax, duty or other charge with respect to the loan (except standard income tax) or (iii) capital adequacy requirements\. In addition, American’s loan agreements and other financing arrangements typically contain a withholding tax provision that requires American to pay additional amounts to the applicable lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law\.

153


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

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

|           |     |                                                                                |
| ---------:|:--- |:-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| \*†10\.29 | UAL | [Fourth Amendment to the United Continental Holdings, Inc\. Performance\-Based Restricted Stock Unit Program (adopted pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan) (filed as Exhibit 10\.22 to UAL’s Form  10\-K for the year ended December 31, 2015, Commission file number  1\-6033 and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312516468479/d13806dex1022.htm)                                                                       |
| \*†10\.30 | UAL | [Form of Performance\-Based Restricted Stock Unit Award Notice pursuant to the United Continental Holdings, Inc\. Performance\-Based Restricted Stock Unit Program (ROIC awards) (filed as Exhibit 10\.23 to UAL’s Form  10\-K for the year ended December 31, 2015, Commission file number  1\-6033 and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312516468479/d13806dex1023.htm)                                                                                |
| \*†10\.31 | UAL | [Form of Performance\-Based Restricted Stock Unit Award Notice pursuant to the United Continental Holdings, Inc\. Performance\-Based Restricted Stock Unit Program (Relative  Pre\-tax Margin awards) (for performance periods beginning on or after January 1, 2015) (filed as Exhibit 10\.2 to UAL’s Form  10\-Q for the quarter ended March 31, 2015, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312515144255/d891332dex102.htm)            |
| \*†10\.32 | UAL | [United Continental Holdings, Inc\. Incentive Plan 2010, as amended and restated February 17, 2011 (previously named the Continental Airlines, Inc\. Incentive Plan 2010) (filed as Annex B to UAL’s Definitive Proxy Statement filed April 26, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000104746913004972/a2214585zdef14a.htm#le45701_annex_b)                                                                                |
| \*†10\.33 | UAL | [First Amendment to the United Continental Holdings, Inc\. Incentive Plan 2010, as amended and restated February 17, 2011 (filed as Annex B to UAL’s 2013 Definitive Proxy Statement filed on April 26, 2013, Commission file number  1\-6033, incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000104746913004972/a2214585zdef14a.htm#le45701_annex_b)                                                                                |
| \*†10\.34 | UAL | [United Continental Holdings, Inc\. Annual Incentive Program (adopted pursuant to the United Continental Holdings, Inc\. Incentive Plan 2010) (as amended and restated February 21, 2013) (filed as Exhibit 10\.43 to UAL’s Form  10\-K for the year ended December 31, 2012, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513074391/d436512dex1043.htm)                                                                                |
| \*†10\.35 | UAL | [United Continental Holdings, Inc\. Long\-Term Relative Performance Program (adopted pursuant to the United Continental Holdings, Inc\. Incentive Plan 2010) (filed as Exhibit 10\.43 to UAL’s Form  10\-K for the year ended December 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312511042335/dex1043.htm)                                                                                |
| \*†10\.36 | UAL | [First Amendment to the United Continental Holdings, Inc\. Long\-Term Relative Performance Program (adopted pursuant to the United Continental Holdings, Inc\. Incentive Plan 2010) (effective with respect to performance periods beginning on or after January 1, 2012) (filed as Exhibit 10\.49 to UAL’s Form  10\-K for the year ended December 31, 2011, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312512073010/d260625dex1049.htm)      |
| \*†10\.37 | UAL | [Second Amendment to the United Continental Holdings, Inc\. Long\-Term Relative Performance Program (adopted pursuant to the United Continental Holdings, Inc\. Incentive Plan 2010) (effective with respect to performance periods beginning on or after January 1, 2014) (filed as Exhibit 10\.40\.2 to UAL’s Form  10\-K for the year ended December 31, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312514060695/d624298dex10402.htm) |

114


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

non\-stop markets, daily flights and seat share\. In 2019, we began departures from Paine Field\-Snohomish County Airport in Everett, Washington to ten West Coast markets\. We also optimized our current network, and reallocated flying to expand offerings between the Pacific Northwest and California, increasing network utility and providing more non\-stop service on the West Coast\.

• Revenue Generation \-   In 2018, we introduced our Saver Fare product, which offers greater choice for our guests, allowing them to purchase and pay for the ticket type and other amenities they value most\. In 2019, our Saver Fare product provided meaningful revenue growth, and is expected to continue to provide incremental revenue into 2020\. This, combined with synergies from the merger, which are expected to hit their full run rate in 2021, and capacity growth, will enable us to continue to grow our annual revenues\. Innovation will also be key to growth in our revenues\. We will focus our efforts on merchandising and demand generation, including through a variety of unique marketing strategies aimed at increasing revenues in typically off\-peak periods\.

Business Model:

Safety is the foundation of everything we do and remains our top priority\. We have an unwavering commitment to run a safe operation, and we will not compromise this commitment in the pursuit of other initiatives\. Alaska and Horizon were the first U\.S\. major airlines to receive FAA validation and acceptance of their Safety Management Systems (SMS) in 2016\. In 2018, we used SMS to safely and consistently guide our integration with the legacy Virgin America operation\. Report It\!, our mobile safety reporting application, makes it easier for employees to file safety reports\. In 2018, 100% of our Alaska and Horizon aircraft technicians completed the requirements for the FAA's "Diamond Certificate of Excellence" award, marking the 17th consecutive year Alaska has received the award, and the 17th time in the last 19 years Horizon has received this award\. In early 2020, we were again included as one of only two U\.S\. airlines on the AirlineRatings\.com list of the world's Top 20 safest airlines\. We believe that maintaining safe operations, through adherence to well\-defined processes and ensuring every Air Group employee is aware of their individual contribution to our operation, is critical to ensuring on\-time performance\. The rigor we apply to running a safe operation has resulted in Alaska consistently being one of the top airlines in North America for on\-time performance; and Horizon was recognized once again as the leader in on\-time performance in 2019 among regional airlines\.

Ultimately, our success will be driven by our business model being flexible and innovative as we drive towards our pretax margin goals of 13% to 15%, and our growth goals of 4% to 6% over the business cycle\. We know that in order to provide low fares in our growing network while generating strong returns for our shareholders, it is imperative for us to maintain a competitive cost structure\. In 2019, our unit costs, excluding fuel and special items, increased 2\.3% on a consolidated basis\. Although our unit costs are expected to rise again in 2020, primarily due to general wage inflation, higher engine maintenance on both our Airbus and B737\-800 fleets, and increased lease return costs associated with our Airbus fleet, we will continue our focus on lowering overhead, improving productivity, and managing vendor costs\. We are also actively managing fuel costs by flying larger, more fuel\-efficient aircraft, which has increased our fuel efficiency as measured by available seat miles flown per gallon by 1\.6% over the last five years\. We have a long track record of effective cost control, and we remain keenly committed to protecting our unit cost advantage relative to competitors\.

AIR GROUP

Our airlines operate different aircraft and missions\. Alaska operates a fleet of narrowbody passenger jets on primarily longer\-haul capacity\. Alaska contracts primarily with Horizon and SkyWest Airlines, Inc\. (SkyWest) for shorter\-haul capacity, such that Alaska receives all passenger revenue from those flights\. Horizon operates Embraer 175 (E175) regional jet aircraft and Bombardier Q400 turboprop aircraft and sells all of its capacity to Alaska pursuant to a CPA\. The majority of our revenues are generated by transporting passengers\. The percentage of revenues by category is as follows:

|                            |                            |                            |       |       |  |  |  |       |       |  |  |  |       |       |  |  |  |           |           |  |  |  |       |       |
|:-------------------------- |:-------------------------- |:-------------------------- | -----:| -----:|:- |:- |:- | -----:| -----:|:- |:- |:- | -----:| -----:|:- |:- |:- | ---------:| ---------:|:- |:- |:- | -----:| -----:|
|                            |                            |                            |  2019 |  2019 |  |  |  |  2018 |  2018 |  |  |  |  2017 |  2017 |  |  |  | 2016^(a)^ | 2016^(a)^ |  |  |  |  2015 |  2015 |
| Passenger revenue          | Passenger revenue          | Passenger revenue          |  92 % |  92 % |  |  |  |  93 % |  93 % |  |  |  |  93 % |  93 % |  |  |  |      91 % |      91 % |  |  |  |  85 % |  85 % |
| Mileage Plan other revenue | Mileage Plan other revenue | Mileage Plan other revenue |   5 % |   5 % |  |  |  |   5 % |   5 % |  |  |  |   5 % |   5 % |  |  |  |       6 % |       6 % |  |  |  |   (b) |   (b) |
| Cargo and other            | Cargo and other            | Cargo and other            |   3 % |   3 % |  |  |  |   2 % |   2 % |  |  |  |   2 % |   2 % |  |  |  |       3 % |       3 % |  |  |  |   (b) |   (b) |
| Other revenue              | Other revenue              | Other revenue              |   (b) |   (b) |  |  |  |   (b) |   (b) |  |  |  |   (b) |   (b) |  |  |  |       (b) |       (b) |  |  |  |  13 % |  13 % |
| Freight and Mail revenue   | Freight and Mail revenue   | Freight and Mail revenue   |   (b) |   (b) |  |  |  |   (b) |   (b) |  |  |  |   (b) |   (b) |  |  |  |       (b) |       (b) |  |  |  |   2 % |   2 % |
| Total                      | Total                      | Total                      | 100 % | 100 % |  |  |  | 100 % | 100 % |  |  |  | 100 % | 100 % |  |  |  |     100 % |     100 % |  |  |  | 100 % | 100 % |

(a) Includes information for Virgin America for the period December 14, 2016 through December 31, 2016\.

(b) As a result of the new revenue recognition standards, certain financial statement line items were modified to address new requirements\. We did not apply this change to fiscal year 2015, and have left the captioning above as it was presented in that fiscal year\.

6


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

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

American is part of the AAG consolidated income tax return\. American files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates\. American’s 2014 through 2016 tax years are still subject to examination by the Internal Revenue Service\. Various state and foreign jurisdiction tax years remain open to examination and American is under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions\. American believes that the effect of any assessments will not be material to its consolidated financial statements\.

The amount of, and changes to, American’s uncertain tax positions were not material in any of the years presented\. American accrues interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively\.

The 2017 Tax Act was enacted on December 22, 2017\. The 2017 Tax Act is the most comprehensive tax change in more than 30 years\. As of December 31, 2017, American has not completed its evaluation of the 2017 Tax Act; however, to the extent possible, American has made a reasonable estimate of its effects, including the impact of lower corporate income tax rates (21% vs\. 35%) on its deferred tax assets and liabilities and the one\-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred\. For the year ended December 31, 2017, American recognized a special income tax expense of $93 million to reflect these impacts of the 2017 Tax Act\.

The 2017 Tax Act is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementation regulations by the Treasury and Internal Revenue Service\. In addition, it is unclear how these U\.S\. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities\. Accordingly, American has not yet been able to make a reasonable estimate of the impact of certain items and continues to account for those items based on the tax laws in effect prior to the 2017 Tax Act\.

As further interpretations, clarifications and amendments to the 2017 Tax Act are made, American’s future financial statements could be materially impacted\.

**5\. Risk Management**

American’s economic prospects are heavily dependent upon two variables it cannot control: the health of the economy and the price of fuel\.

Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, American’s revenues are heavily influenced by the condition of the U\.S\. economy and economies in other regions of the world\. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by American’s competitors, all of which in turn have had, and may have in the future, a negative effect on American’s business\. In addition, during challenging economic times, actions by its competitors to increase their revenues can have an adverse impact on American’s revenues\.

American’s operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in American’s business\. Jet fuel market prices have fluctuated substantially over the past several years and prices continue to be highly volatile\. Because of the amount of fuel needed to operate American’s business, even a relatively small increase or decrease in the price of fuel can have a material effect on American’s operating results and liquidity\.

These additional factors could impact American’s results of operations, financial performance and liquidity:

***(a) Credit Risk***

Most of American’s receivables relate to tickets sold to individual passengers through the use of major credit cards or to tickets sold by other airlines and used by passengers on American\. These receivables are short\-term, mostly settled within seven days after sale\. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts\. American does not believe it is subject to any significant concentration of credit risk\.

148


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

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

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (l) | **Labor Costs—** The Company records expenses associated with new or amendable labor agreements when the amounts are probable and estimable\. These include costs associated with lump sum cash payments that would be made in conjunction with the ratification of labor agreements\. To the extent these upfront costs are in lieu of future pay increases, they would be capitalized and amortized over the term of the labor agreements\. If not, these amounts would be expensed\. |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (m) | **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 at the close of the 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\. An adjustment is recorded each reporting period to adjust compensation expense based on the then current level of expected performance achievement for the performance\-based awards\. See Note 4 of this report for additional information on UAL's share\-based compensation plans\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (n) | **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\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| (o) | **Advertising—** Advertising costs, which are included in Other operating expenses, are expensed as incurred\. Advertising expenses were   $212 million ,   $211 million  and   $217 million  for the years ended December 31,  2019 ,  2018  and  2017 , respectively\. |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (p)  | **Third\-Party Business—** The Company has third\-party business revenue that includes fuel sales, catering, ground handling, maintenance services and frequent flyer award non\-travel redemptions\. Third\-party business revenue is recorded in Other operating revenue\. The Company also incurs third\-party business expenses, such as maintenance, ground handling and catering services for third parties, fuel sales and non\-travel mileage redemptions\. The third\-party business expenses are recorded in Other operating expenses, except for non\-travel mileage redemption\. Non\-travel mileage redemption expenses are recorded to Other operating revenue\.  |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (q) | **Uncertain Income Tax Positions—** The Company has recorded reserves for income taxes and associated interest that may become payable in future years\. Although management believes that its positions taken on income tax matters are reasonable, the Company nevertheless has established tax and interest reserves in recognition that various taxing authorities may challenge certain of the positions taken by the Company, potentially resulting in additional liabilities for taxes and interest\. The Company's uncertain tax position reserves are reviewed periodically and are adjusted as events occur that affect its estimates, such as the availability of new information, the lapsing of applicable statutes of limitation, the conclusion of tax audits, the measurement of additional estimated liability, the identification of new tax matters, the release of administrative tax guidance affecting its estimates of tax liabilities, or the rendering of relevant court decisions\. The Company records penalties and interest relating to uncertain tax positions as part of income tax expense in its consolidated statements of operations\. See Note 6 of this report for additional information on UAL's uncertain tax positions\. |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| (r)  | **Recently Issued Accounting Standards—** The Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 842,  *Leases*  (the "New Lease Standard"), effective January 1, 2019\. The Company used the modified retrospective approach for all leases existing at or commencing after January 1, 2017 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of our contracts are or contain leases, (2) lease classification and (3) initial direct costs\. The New Lease Standard prescribes that an entity should recognize a right\-of\-use asset and a lease liability for all leases at the commencement date of each lease and recognize expenses on their income statements similar to the prior FASB Accounting Standards Codification Topic 840,  *Leases*  ("Topic 840")\. |

The adoption of the New Lease Standard had the same impact on the financial statements of United as it had on the financial statements of UAL\. The table below presents the impact of the adoption of the New Lease Standard on select accounts and captions of UAL's statement of consolidated operations for the year ended December 31 (in millions, except per share amounts):

60


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

***American***

*2017* *Compared to* *2016*

*Operating Activities*

American’s net cash provided by operating activities was $2\.9 billion and $1\.8 billion in 2017 and 2016, respectively, a year\-over\-year increase of $1\.1 billion\. AAG has the ability to move funds freely between its subsidiaries to support its cash requirements\. The increase in operating cash flows from 2017 to 2016 was primarily due to a decrease in intercompany cash transfers from American to AAG\. This increase in operating cash flows was offset in part by lower profitability in 2017 driven by higher fuel costs and wage rates, which were offset in part by higher revenues\.

*Investing Activities*

American’s net cash used in investing activities was $3\.6 billion and $5\.6 billion in 2017 and 2016, respectively\.

American’s principal investing activities in 2017 included expenditures of $5\.9 billion for property and equipment, including 20 Airbus A321 aircraft, 20 Boeing 737\-800 aircraft, 16 Embraer E175 aircraft, 13 Boeing 787 Family aircraft and four Boeing 737\-8 MAX aircraft\. American also made a $203 million equity investment in China Southern Airlines\. These cash outflows were offset in part by $1\.3 billion in net sales of short\-term investments, $922 million of net proceeds from the sale of property and equipment, primarily representing cash proceeds from aircraft sale\-leaseback transactions, and a $319 million decrease in restricted cash and short\-term investments\.

American’s principal investing activities in 2016 included expenditures of $5\.7 billion for property and equipment, including 25 Airbus A321 aircraft, 24 Embraer E175 aircraft, 20 Boeing 737\-800 aircraft, 18 Bombardier CRJ 900 aircraft, eight Boeing 787 aircraft and two Boeing 777 aircraft\.

*Financing Activities*

American’s net cash provided by financing activities was $668 million and $3\.8 billion in 2017 and 2016, respectively\.

American’s principal financing activities in 2017 included net proceeds of $3\.1 billion from the issuance of debt, including the issuance of $2\.0 billion of EETCs and $1\.0 billion borrowed in connection with the financing of certain aircraft\. These cash inflows were offset in part by $2\.3 billion in debt repayments\.

American’s principal financing activities in 2016 included net proceeds of $7\.7 billion from the issuance of debt, including the issuance of $2\.8 billion of EETCs, $2\.3 billion provided under the April 2016 and December 2016 Term Loan Facilities and $1\.8 billion borrowed in connection with the financing of certain aircraft\. These cash inflows were offset in part by $3\.8 billion in debt repayments, including the repayment of $588 million and $970 million in remaining principal of the 2013 Citicorp Credit Facility Tranche B\-2 and Tranche B\-1 term loans, respectively\.

*2016* *Compared to* *2015*

*Operating Activities*

American’s net cash provided by operating activities was $1\.8 billion and $2\.6 billion in 2016 and 2015, respectively, a year\-over\-year decrease of $837 million\. AAG has the ability to move funds freely between its subsidiaries to support its cash requirements\. The decline in American’s operating cash flows from 2016 to 2015 was primarily due to intercompany transfers of cash from American to AAG in order to fund higher share repurchases in 2016\. Additionally, in 2015, American’s operating cash flows included the proceeds from the $500 million issuance of AAG’s 4\.625% senior notes, which also contributed to the year\-over\-year decline in operating cash flows\. These declines were offset in part by certain payments received related to American’s co\-branded credit card agreements that became effective in the third quarter of 2016\.

*Investing Activities*

American’s net cash used in investing activities was $5\.6 billion in each of 2016 and 2015\.

American’s principal investing activities in 2016 included expenditures of $5\.7 billion for property and equipment, including 25 Airbus A321 aircraft, 24 Embraer E175 aircraft, 20 Boeing 737\-800 aircraft, 18 Bombardier CRJ 900 aircraft, eight Boeing 787 aircraft and two Boeing 777 aircraft\.

American’s principal investing activities in 2015 included expenditures of $6\.1 billion for property and equipment, including 38 Airbus A320 family aircraft, 24 Embraer E175 aircraft, 20 Bombardier CRJ 900 aircraft, 17 Boeing 737\-800 aircraft, 13

68


Annual Report of Southwest Airlines Co\. for year 2018

**PART II**

**Item 5\.*****Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities***

The Company’s common stock is listed on the New York Stock Exchange ("NYSE") and is traded under the symbol "LUV\." The Company currently intends to continue declaring dividends on a quarterly basis for the foreseeable future; however, the Company’s Board of Directors may elect to alter the timing, amount, and payment of dividends on the basis of operational results, financial condition, cash requirements, future prospects, and other factors deemed relevant by the Board\. As of February 1, 2019, there were approximately 12,267 holders of record of the Company’s common stock\.

34


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

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

|           |     |                                                                                |
| ---------:|:--- |:------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| \*†10\.19 | UAL | [United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (filed as Annex A to UAL Corporation’s 2013 Definitive Proxy Statement filed on April 26, 2013, Commission file number  1\-6033, and incorporated herein by reference) (now named the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan) ](http://www.sec.gov/Archives/edgar/data/100517/000104746913004972/a2214585zdef14a.htm#la45701_annex_a)                                                                                |
| \*†10\.20 | UAL | [First Amendment to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (changing the name to United Continental Holdings, Inc\. 2008 Incentive Compensation Plan) (filed as Annex A to UAL’s Definitive Proxy Statement filed on April 26, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000104746913004972/a2214585zdef14a.htm#la45701_annex_a)                                                                                |
| \*†10\.21 | UAL | [Second Amendment to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (filed as Exhibit 10\.19 to UAL’s Form  10\-K for the year ended December 31, 2016, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517054129/d300268dex1019.htm)                                                                                |
| \*†10\.22 | UAL | [Form of Stock Option Award Notice pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (filed as Exhibit 10\.5 to UAL’s Form  10\-Q for the quarter ended June 30, 2008, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000104746908008342/a2186941zex-10_5.htm)                                                                                |
| \*†10\.23 | UAL | [Form of Restricted Stock Unit Award Notice pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (stock settled) (filed as Exhibit 10\.21 to UAL’s Form  10\-K for the year ended December 31, 2016, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517054129/d300268dex1021.htm)                                                                                |
| \*†10\.24 | UAL | [Form of Restricted Share Award Notice pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (awards during and after 2014) (filed as Exhibit 10\.27 to UAL’s Form  10\-K for the year ended December 31, 2013, Commission file number  1\-6033, and incorporated by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312514060695/d624298dex1027.htm)                                                                                |
| \*†10\.25 | UAL | [United Continental Holdings, Inc\. Performance\-Based Restricted Stock Unit Program (adopted pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan) (filed as Exhibit 10\.31 to UAL’s Form  10\-K for the year ended December 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312511042335/dex1031.htm)                                                                                |
| \*†10\.26 | UAL | [First Amendment to the United Continental Holdings, Inc\. Performance\-Based Restricted Stock Unit Program (adopted pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan) (effective with respect to performance periods beginning on or after January 1, 2012) (filed as Exhibit 10\.33 to UAL’s Form  10\-K for the year ended December 31, 2011, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312512073010/d260625dex1033.htm) |
| \*†10\.27 | UAL | [Second Amendment to the United Continental Holdings, Inc\. Performance\-Based Restricted Stock Unit Program (adopted pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan) (filed as Exhibit 10\.29 to UAL’s Form  10\-K for the year ended December 31, 2012, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513074391/d436512dex1029.htm)                                                                                |
| \*†10\.28 | UAL | [Third Amendment to the United Continental Holdings, Inc\. Performance\-Based Restricted Stock Unit Program (adopted pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan) (filed as Exhibit 10\.1 to UAL’s Form  10\-Q for the quarter ended March 31, 2015, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312515144255/d891332dex101.htm)                                                                                |

113


Annual Report of Southwest Airlines Co\. for year 2017

forward jet fuel prices, depending on specific geographic locations in which the Company hedges\. The Company then adjusts for certain items, such as transportation costs, that are stated in fuel purchasing contracts with its vendors, in order to estimate the actual price paid for jet fuel associated with each hedge\. This methodology for estimating expected future cash flows (i\.e\., jet fuel prices) has been consistently applied during 2017, 2016, and 2015, and has not changed for either assessing or measuring hedge ineffectiveness during these periods\.

The Company believes it is unlikely that materially different estimates for the fair value of financial derivative instruments and forward jet fuel prices would be made or reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made\.

***Fair Value Measurements***

The Company utilizes unobservable (Level 3) inputs in determining the fair value of certain assets and liabilities\. At December 31, 2017, these consisted of a portion of its fuel derivative option contracts, which were a net asset of $248 million\.

The Company determines the fair value of fuel derivative option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are quoted by its counterparties\. In situations where the Company obtains inputs via quotes from its counterparties, it verifies the reasonableness of these quotes via similar quotes from another counterparty as of each date for which financial statements are prepared\. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds\. Due to the fact that certain inputs used in determining estimated fair value of its option contracts are considered unobservable (primarily implied volatility), the Company has categorized these option contracts as Level 3\. Although implied volatility is not directly observable, it is derived primarily from changes in market prices, which are observable\. Based on the Company’s portfolio of option contracts as of December 31, 2017, a 10 percent change in implied volatility, holding all other factors constant, would have resulted in a change in the fair value of this portfolio of less than $35 million\.

As discussed in Note 10 to the Consolidated Financial Statements, any changes in fair value of cash flow hedges that are considered to be effective, as defined, are offset within AOCI until the period in which the expected future cash flow impacts earnings\. Any changes in the fair value of fuel derivatives that are ineffective, as defined, or that do not qualify for hedge accounting, are reflected in earnings within Other (gains) losses, net, in the period of the change\. Because the Company has extensive historical experience in valuing the derivative instruments it holds, and such experience is continually evaluated against its counterparties each period when such instruments expire and are settled for cash, the Company believes it is unlikely that an independent third party would value the Company’s derivative contracts at a significantly different amount than what is reflected in the Company’s financial statements\. In addition, the Company also has bilateral credit provisions in some of its counterparty agreements, which provide for parties (or the Company) to provide cash collateral when the fair value of fuel derivatives with a single party exceeds certain threshold levels\. Since this cash collateral is based on the estimated fair value of the Company’s outstanding fuel derivative contracts, this provides further validation to the Company’s estimate of fair values\.

***Frequent Flyer Accounting***

The Company utilizes estimates in the recognition of liabilities associated with its frequent flyer program\. These estimates primarily include the liability associated with Rapid Rewards frequent flyer member ("Member") account balances that are expected to be redeemed for travel or other products at a future date\. Frequent flyer account balances include points earned through flights taken, points sold to Customers, or points earned through business partners participating in the frequent flyer program\.

Under the Southwest Rapid Rewards frequent flyer program, Members earn points for every dollar spent\. The amount of points earned under the program is based on the fare and fare class purchased, with higher fare products (e\.g\., Business Select) earning more points than lower fare products (e\.g\., Wanna Get Away)\. Each fare class is associated

63


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

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

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(f)^ | Includes limited partnerships that invest primarily in domestic private equity and private income opportunities\. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated\. It is estimated that the underlying assets of these funds will be gradually liquidated over the next  one  to   ten years \. Additionally, the pension plan’s master trust has future funding commitments of approximately   $1\.4 billion  over the next   ten years \. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(g)^ | Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy\. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(h)^ | Investment includes   36%  in a common/collective trust investing in securities of larger companies within the U\.S\.,   29%  in a common/collective trust investing in securities of smaller companies located outside the U\.S\.,   16%  in a collective interest trust investing primarily in short\-term securities,   15%  in an emerging market 103\-12 Investment Trust with investments in emerging country equity securities and   4%  in Canadian segregated balanced value, income growth and diversified pooled funds\. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred\. |

|                                                                                |                                                                                |                                                                              |                                                                                |                                                     |
| --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- |
|                                                                                | **Fair Value Measurements as of December 31, 2018**                                                            | **Fair Value Measurements as of December 31, 2018**                          | **Fair Value Measurements as of December 31, 2018**                            | **Fair Value Measurements as of December 31, 2018** |
| **Asset Category**                                                                            | **Quoted Prices in**

**Active Markets**

**for Identical**

**Assets**

**(Level 1)** | **Significant**

**Observable**

**Inputs**

**(Level 2)** | **Significant**

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Cash and cash equivalents                                                                     | $23                                                                                | $—                                                                           | $—                                                                             | $23                                                 |
| Equity securities:                                                                            |                                                                                |                                                                              |                                                                                |                                                     |
| International markets  ^(a), (b)^                                                             | 3,181                                                                                | —                                                                            | —                                                                              | 3,181                                               |
| Large\-cap companies  ^(b)^                                                                   | 2,021                                                                                | —                                                                            | —                                                                              | 2,021                                               |
| Mid\-cap companies  ^(b)^                                                                     | 583                                                                                | —                                                                            | —                                                                              | 583                                                 |
| Small\-cap companies  ^(b)^                                                                   | 122                                                                                | —                                                                            | —                                                                              | 122                                                 |
| Mutual funds  ^(c)^                                                                           | 52                                                                                | —                                                                            | —                                                                              | 52                                                  |
| Fixed income:                                                                                |                                                                                |                                                                              |                                                                                |                                                     |
| Corporate debt  ^(d)^                                                                         | —                                                                                | 2,116                                                                        | —                                                                              | 2,116                                               |
| Government securities  ^(e)^                                                                  | —                                                                                | 228                                                                          | —                                                                              | 228                                                 |
| U\.S\. municipal securities                                                                   | —                                                                                | 40                                                                           | —                                                                              | 40                                                  |
| Alternative instruments:                                                                      |                                                                                |                                                                              |                                                                                |                                                     |
| Private market partnerships  ^(f)^                                                            | —                                                                                | —                                                                            | 7                                                                              | 7                                                   |
| Private market partnerships measured at net asset value  ^(f), (g)^                           | —                                                                                | —                                                                            | —                                                                              | 1,188                                               |
| Common/collective trusts  ^(h)^                                                               | —                                                                                | 218                                                                          | —                                                                              | 218                                                 |
| Common/collective trusts and 103\-12 Investment Trust measured at net asset value  ^(g), (h)^ | —                                                                                | —                                                                            | —                                                                              | 227                                                 |
| Insurance group annuity contracts                                                             | —                                                                                | —                                                                            | 2                                                                              | 2                                                   |
| Dividend and interest receivable                                                              | 47                                                                                | —                                                                            | —                                                                              | 47                                                  |
| Due to/from brokers for sale of securities – net                                              | 5                                                                                | —                                                                            | —                                                                              | 5                                                   |
| Other liabilities – net                                                                       | (7

)                                                                                | —                                                                            | —                                                                              | (7

)                                         |
| Total                                                                                | $6,027                                                                                | $2,602                                                                       | $9                                                                             | $10,053                                             |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(a)^ | Holdings are diversified as follows:   17%  United Kingdom,   10%  Japan,   8%  France,   7%  Switzerland,   6%  Ireland,   17%  emerging markets and the remaining   35%  with no concentration greater than 5% in any one country\. |

|       |                                                                              |
| ----- | ---------------------------------------------------------------------------- |
| ^(b)^ | There are no significant concentrations of holdings by company or industry\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(c)^ | Investment includes mutual funds invested   37%  in equity securities of large\-cap, mid\-cap and small\-cap U\.S\. companies,   38%  in U\.S\. treasuries and corporate bonds and   25%  in equity securities of international companies\. |

104


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

Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States\. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition\. See Part I, Item 1A\. Risk Factors –  “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control”  for additional discussion of this and other currency risks\.

Interest

Our earnings and cash flow are affected by changes in interest rates due to the impact those changes have on our interest expense from variable\-rate debt instruments and our interest income from short\-term, interest bearing investments\.

Our largest exposure with respect to variable\-rate debt comes from changes in LIBOR\. We had variable\-rate debt instruments representing approximately  40%  of our total long\-term debt at  December 31, 2019 \. We currently do not have an interest rate hedge program to hedge our exposure to floating interest rates on our variable\-rate debt obligations\. If annual interest rates increase 100 basis points, based on our  December 31, 2019  variable\-rate debt and short\-term investments balances, annual interest expense on variable\-rate debt would increase by approximately  $95 million  and annual interest income on short\-term investments would increase by approximately  $40 million \. Additionally, the fair value of fixed\-rate debt would have decreased by approximately  $600 million  for AAG and  $580 million  for American\.

On July 27, 2017, the U\.K\. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021\. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021\. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR\-linked financial instruments\. While the U\.S\. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U\.S\. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by treasury securities, we cannot currently predict whether this index will gain widespread acceptance as a replacement for LIBOR\. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere\.

We may in the future pursue amendments to our LIBOR\-based debt transactions to provide for a transaction mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments\. As of  December 31, 2019 , we had  $9\.6 billion  of borrowings based on LIBOR\. The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long\-term debt to be different or higher than expected\.

69


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

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

|                               |                 |                 |                                    |                                    |                 |                 |
| ----------------------------- | --------------- | --------------- | ---------------------------------- | ---------------------------------- | --------------- | --------------- |
|                               | **As Reported** | **As Reported** | **New Lease Standard Adjustments** | **New Lease Standard Adjustments** | **As Adjusted** | **As Adjusted** |
|                               | **2018**        | **2017**        | **2018**                           | **2017**                           | **2018**        | **2017**        |
| Regional capacity purchase    | $2,601          | $2,232          | $48                                | $36                                | $2,649          | $2,268          |
| Landing fees and other rent   | 2,359           | 2,240           | 90                                 | 70                                 | 2,449           | 2,310           |
| Depreciation and amortization | 2,240           | 2,149           | (75

)                       | (53

)                       | 2,165           | 2,096           |
| Interest expense              | (729

)   | (671

)   | 59                                 | 45                                 | (670

)   | (626

)   |
| Interest capitalized          | 70              | 84              | (5

)                        | (10

)                       | 65              | 74              |
| Income tax expense            | 529             | 896             | (3

)                        | (16

)                       | 526             | 880             |
| Net income                    | 2,129           | 2,144           | (7

)                        | (1

)                        | 2,122           | 2,143           |
| Earnings per share, basic     | 7\.73           | 7\.08           | (0\.03

)                    | —                                  | 7\.70           | 7\.08           |
| Earnings per share, diluted   | 7\.70           | 7\.06           | (0\.03

)                    | —                                  | 7\.67           | 7\.06           |

The expense for leases under the New Lease Standard will continue to be classified in their historical income statement captions (primarily in Aircraft rent, Landing fees and other rent and Regional capacity purchase in our statements of consolidated operations)\. The adoption of the New Lease Standard resulted in the recharacterization of certain leases from capital leases under Topic 840 to operating leases under the New Lease Standard\. This change resulted in less depreciation and amortization and interest expense associated with capital leases offset by higher lease expense associated with operating leases\. The recharacterization is associated with leases of certain airport facilities that were derecognized as part of the build\-to\-suit transition guidance under the New Lease Standard\. The reduction in capitalized interest is also associated with the same airport facilities leases\.

The table below presents the impact of the adoption of the New Lease Standard on UAL's balance sheet accounts and captions (in millions):

|                                                                         |                       |                                    |                       |
| ----------------------------------------------------------------------- | --------------------- | ---------------------------------- | --------------------- |
|                                                                         | **December 31, 2018** | **December 31, 2018**              | **December 31, 2018** |
|                                                                         | **As Reported**       | **New Lease Standard Adjustments** | **As Adjusted**       |
| Receivables, less allowance for doubtful accounts                       | $1,346                | $80                                | $1,426                |
| Prepaid expenses and other                                              | 913                   | (180

)                      | 733                   |
| Flight equipment, owned and finance leases (a)                          | 32,636                | (37

)                       | 32,599                |
| Other property and equipment, owned and finance leases (a)              | 7,930                 | (1,041

)                    | 6,889                 |
| Accumulated depreciation and amortization, owned and finance leases (a) | (13,414

)      | 148                                | (13,266

)      |
| Operating lease right\-of\-use assets                                   | —                     | 5,262                              | 5,262                 |
| Current maturities of finance leases (a)                                | 149                   | (26

)                       | 123                   |
| Current maturities of operating leases                                  | —                     | 719                                | 719                   |
| Other current liabilities                                               | 619                   | (66

)                       | 553                   |
| Long\-term obligations under finance leases (a)                         | 1,134                 | (910

)                      | 224                   |
| Long\-term obligations under operating leases                           | —                     | 5,276                              | 5,276                 |
| Deferred income taxes                                                   | 814                   | 14                                 | 828                   |
| Other long\-term liabilities                                            | 1,832                 | (822

)                      | 1,010                 |
| Retained earnings                                                       | 6,668                 | 47                                 | 6,715                 |

(a) Finance leases, under the New Lease Standard, are the equivalent of capital leases under Topic 840\.

The table below presents the impact of the adoption of the New Lease Standard on select line items of UAL's statement of consolidated cash flows for the year ended December 31 (in millions):

61


Annual Report of Southwest Airlines Co\. for year 2017

markets or the impact to its financial statements in future periods\. Accordingly, the Company believes a reconciliation of non\-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort\.

ASU No\. 2017\-12, Targeted Improvements to Accounting for Hedging Activities, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted in any interim or annual period\. The Company plans to adopt the standard as of January 1, 2018\. See Note 2 to the Consolidated Financial Statements for further information\.

Maintenance materials and repairs expense for 2017decreased by $44 million, or 4\.2 percent, compared with 2016\. On a per ASM basis, Maintenance materials and repairs expense for 2017decreased 7\.1 percent, compared with 2016\. On both a dollar and per ASM basis, the majority of the decreases were attributable to a decrease in airframe maintenance expenses primarily as a result of the retirement of the Company's Classic fleet, partially offset by increases in Boeing 737\-700 engine maintenance due to increased utilization\. The Company currently expects Maintenance materials and repairs expense per ASM for first quarter 2018 to increase, compared with first quarter 2017\.

Aircraft rentals expense for 2017decreased by $31 million, or 13\.5 percent, compared with 2016\. On a per ASM basis, Aircraft rentals expense decreased 13\.3 percent, compared with 2016\. On both a dollar and per ASM basis, the majority of the decreases were due to 737\-300 lease returns and the purchase of ten 737\-300 aircraft, that were previously on operating leases, since 2016\. See the accompanying Note Regarding Use of Non\-GAAP Financial Measures for further information\. The Company currently expects Aircraft rentals expense per ASM for first quarter 2018 to decrease, compared with first quarter 2017\.

Landing fees and other rentals expense for 2017increased by $81 million, or 6\.7 percent, compared with 2016\. On a per ASM basis, Landing fees and other rentals expense for 2017increased 2\.4 percent, compared with 2016\. On a dollar basis, approximately 50 percent of the increase was due to an increase in Landing fees as a result of the 2\.8 percentincrease in Trips flown and a change in fleet mix to larger capacity aircraft\. Approximately 25 percent of the increase on a dollar basis was an increase in space rentals related to rate escalations and capital projects at many airports across the Company's network\. The remaining increase was due to growth in international markets which gives rise to additional fees\. The increase per ASM was primarily due to rate escalations at many airports across the Company's network\. The Company currently expects Landing fees and other rentals expense per ASM for first quarter 2018 to increase, compared with first quarter 2017\.

Depreciation and amortization expense for 2017decreased by $3 million, or 0\.2 percent, compared with 2016\. On a per ASM basis, Depreciation and amortization expense decreased 3\.7 percent, compared with 2016\. On both a dollar and per ASM basis, the majority of the decreases were associated with a net decrease in depreciation expense related to the Company's flight equipment, as the decrease from the retirement of the Company's Classic fleet exceeded the additional depreciation from the addition of new 737 MAX 8 aircraft, new 737\-800 aircraft, and pre\-owned 737\-700 aircraft on capital leases\. These decreases were partially offset by the deployment of new technology assets\. The Company currently expects Depreciation and amortization expense per ASM for first quarter 2018 to decrease, compared with first quarter 2017\.

Other operating expenses for 2017increased by $174 million, or 6\.9 percent, compared with 2016\. On a per ASM basis, Other operating expenses for 2017increased 2\.9 percent, compared with 2016\. These increases were both impacted by charges associated with the retirement of the Company's remaining Classic aircraft\. These charges included a $63 million aircraft grounding charge related to the leased portion of the Classic fleet, representing the remaining net lease payments due and certain lease return requirements that could have to be performed on these leased aircraft prior to their return to the lessors, as of the cease\-use date\. The Classic fleet charges in 2017 also included $33 million in lease termination expenses associated with Classic aircraft being acquired off their operating leases, compared with $22 million related to the acquisition of aircraft coming off operating leases in 2016\. These charges related to the grounding or cease\-use of the Classic fleet were considered special items and thus excluded from the Company's non\-GAAP results\. See Note Regarding Use of Non\-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non\-GAAP Financial Measures for additional detail regarding non\-GAAP financial measures\. The remainder of

45


Annual Report of Southwest Airlines Co\. for year 2018

historical actuals for similar grants, and are trued\-up to actuals over the vesting period\. The Company recognizes all expense on a straight\-line basis over the vesting period, with any changes in expense due to the number of PBRSUs expected to vest being modified on a prospective basis\.

Aggregated information regarding the Company’s RSUs and PBRSUs is summarized below:

|                                         |                                |                                |                                                                |
| --------------------------------------- | ------------------------------ | ------------------------------ | -------------------------------------------------------------- |
|                                         | **All Restricted Stock Units** | **All Restricted Stock Units** | **All Restricted Stock Units**                                 |
|                                         | **Units (000)**                |                                | **Wtd\. Average**

**Fair Value**

**(per share)** |
| Outstanding December 31, 2015           | 1,485                          |                                | $30\.17                                                        |
| Granted                                 | 675                            | (a)                            | 37\.29                                                         |
| Vested                                  | (665)                          |                                | 23\.29                                                         |
| Surrendered                             | (56)                           |                                | 36\.29                                                         |
| Outstanding December 31, 2016           | 1,439                          |                                | 36\.52                                                         |
| Granted                                 | 717                            | (b)                            | 52\.73                                                         |
| Vested                                  | (806)                          |                                | 30\.23                                                         |
| Surrendered                             | (56)                           |                                | 43\.86                                                         |
| Outstanding December 31, 2017, Unvested | 1,294                          |                                | 45\.32                                                         |
| Granted                                 | 782                            | (c)                            | 60\.80                                                         |
| Vested                                  | (670)                          |                                | 45\.11                                                         |
| Surrendered                             | (64)                           |                                | 47\.05                                                         |
| Outstanding December 31, 2018, Unvested | 1,342                          |                                | 52\.56                                                         |

(a) Includes 247 thousand PBRSUs

(b) Includes 235 thousand PBRSUs

(c) Includes 308 thousand PBRSUs

In addition, the Company granted approximately 28 thousand shares of unrestricted stock at a weighted average grant price of $53\.01 in 2018, approximately 26 thousand shares at a weighted average grant price of $57\.04 in 2017, and approximately 27 thousand shares at a weighted average grant price of $42\.90 in 2016, to members of its Board of Directors\.

A remaining balance of up to 21 million shares of the Company’s common stock may be issued pursuant to grants under the 2007 Equity Plan\.

***Employee Stock Purchase Plan***

Under the Amended and Restated 1991 Employee Stock Purchase Plan ("ESPP"), which has been approved by Shareholders, the Company is authorized to issue up to a remaining balance of 8 million shares of the Company’s common stock to Employees of the Company\. These shares may be issued at a price equal to 90 percent of the market value at the end of each monthly purchase period\. Common stock purchases are paid for through periodic payroll deductions\.

96


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

Our maintenance costs will increase as our fleet ages, and we will periodically incur substantial maintenance costs due to the timing of maintenance events of our aircraft\.

As of December 31, 2019, the average age of our NextGen aircraft (B737\-700, \-800, \-900, \-900ERs) was approximately 8\.9 years, the average age of our A319, A320, and A321neo aircraft was approximately 8\.6 years, the average age of our owned E175 aircraft was approximately 1\.6 years, and the average age of our Q400 aircraft was approximately 11\.7 years\. Currently, our newer aircraft require less maintenance than they will in the future\. Any significant increase in maintenance expenses could have a material adverse effect on our results of operations\. In addition, expenses for aircraft coming off lease could result in unplanned maintenance expense as we are required to return the leased planes in a contractually specified condition\.

The application of the acquisition method of accounting resulted in us recording a significant amount of goodwill, which could result in significant future impairment charges and negatively affect our financial results\.

In accordance with acquisition accounting rules, we recorded goodwill on our consolidated balance sheet to the extent the Virgin America acquisition purchase price exceeded the net fair value of Virgin America’s tangible and identifiable intangible assets and liabilities as of the acquisition date\. Goodwill is not amortized, but is tested for impairment at least annually\. We could record impairment charges in our results of operations as a result of, among other items, extreme fuel price volatility, a significant decline in the fair value of certain tangible or intangible assets, unfavorable trends in forecasted results of operations and cash flows, uncertain economic environment and other uncertainties\. We can provide no assurance that a significant impairment charge will not occur in one or more future periods\. Any such charges may materially negatively affect our financial results\.

BRAND AND REPUTATION

As we evolve our brand to appeal to a changing demographic and grow into new markets, we will engage in strategic initiatives that may not be favorably received by all of our guests\.

We continue to focus on strategic initiatives designed to increase our brand appeal to a diverse and evolving demographic of airline travelers\. These efforts could include significant enhancements to our in\-airport and on\-board environments, increasing our direct customer relationships through improvements to our purchasing portals (digital and mobile) and optimization of our customer loyalty programs\. In pursuit of these efforts we may negatively affect our reputation with some of our existing customer base\.

The Company's brand and reputation could be harmed if it is exposed to significant negative publicity distributed through social media\.

We operate in a highly visible industry that has significant exposure to social media\. Negative publicity, including as a result of misconduct by our guests or employees, can spread rapidly through social media\. Should the Company not respond in a timely and appropriate manner to address negative publicity, the Company's brand and reputation may be significantly harmed\. Such harm could have a negative impact on our financial results\.

LABOR RELATIONS AND LABOR STRATEGY

A significant increase in labor costs, unsuccessful attempts to strengthen our relationships with union employees or loss of key personnel could adversely affect our business and results of operations\.

Labor costs remain a significant component of our total expenses\. In addition to costs associated with represented employee groups, labors costs could also increase for non\-unionized employees and via vendor agreements as we work to compete for highly skilled and qualified employees against the major U\.S\. airlines and other businesses in a thriving job market\. Although ample efforts have been dedicated to right\-sizing our management structure following the merger with Virgin America, these increased labor costs may adversely affect our financial performance\.

Should employees engage in job actions, such as slow\-downs, sick\-outs, or other actions designed to disrupt normal operations and pressure the employer to acquiesce to bargaining demands during Section 6 negotiations, although unlawful until after lengthy mediation attempts, the operation could be significantly impacted\. Although we have a long track record of fostering good communications, negotiating approaches and developing other strategies to enhance workforce engagement in our long\-term vision, unsuccessful attempts to strengthen relationships with union employees or loss of key personnel could divert management’s attention from other projects and issues, which could adversely affect our business and results of operations\.

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

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

between the United States and Brazil\. Accordingly, the Company recorded a   $105 million  special charge to write off the entire value of the intangible asset associated with its Brazil routes\. Also during 2018, the Company recorded   $66 million  of fair value adjustments related to aircraft purchased off lease, write\-offs of unexercised aircraft purchase options and other impairments related to certain fleet types and international slots no longer in use\.

During 2018, the Company recorded   $22 million  of severance and benefit costs related to the voluntary early\-out program for its technicians and related employees represented by the IBT as described above\. Also during 2018, the Company recorded other management severance of   $19 million \.

During 2018, the Company recorded a one\-time termination charge of   $64 million  related to one of its engine maintenance service agreements\.

During 2018, the Company recorded gains of   $28 million  for the change in market value of certain of its equity investments, primarily Azul\. Also, the Company recorded losses of   $33 million  for the change in fair value of the AVH Derivative Assets\.

2017

During 2017, the Company recorded a   $10 million  impairment charge related to obsolete spare parts inventory and a   $15 million  intangible asset impairment charge related to a maintenance service agreement\.

During 2017, the Company recorded   $83 million  of severance and benefit costs related to the voluntary early\-out program for its technicians and related employees represented by the IBT as described above\. Also during 2017, the Company recorded   $33 million  of other management severance\.

During 2017, the Company recorded charges of   $12 million  for weather\-related damages,   $11 million  for losses on the sale of assets, and   $12 million  of other charges\.

NOTE 15 \- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

|                                             |                   |                   |                   |                   |
| ------------------------------------------- | ----------------- | ----------------- | ----------------- | ----------------- |
|                                             | **Quarter Ended** | **Quarter Ended** | **Quarter Ended** | **Quarter Ended** |
| **(In millions, except per share amounts)** | **March 31**      | **June 30**       | **September 30**  | **December 31**   |
| **2019**                                    |                   |                   |                   |                   |
| Operating revenue                           | $9,589            | $11,402           | $11,380           | $10,888           |
| Income from operations                      | 495               | 1,472             | 1,473             | 861               |
| Net income                                  | 292               | 1,052             | 1,024             | 641               |
| Basic earnings per share                    | 1\.09             | 4\.03             | 4\.01             | 2\.54             |
| Diluted earnings per share                  | 1\.09             | 4\.02             | 3\.99             | 2\.53             |
| **2018**                                    |                   |                   |                   |                   |
| Operating revenue                           | $9,032            | $10,777           | $11,003           | $10,491           |
| Income from operations (a)                  | 262               | 1,145             | 1,187             | 635               |
| Net income (a)                              | 145               | 683               | 833               | 461               |
| Basic earnings per share (a)                | 0\.51             | 2\.48             | 3\.06             | 1\.70             |
| Diluted earnings per share (a)              | 0\.51             | 2\.48             | 3\.05             | 1\.69             |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2016\-02,  Leases (Topic 842) \. See Note 1 of this report for additional information on the adjustments\.

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