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

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

***(q) Regional Expenses***

Expenses associated with American Eagle operations are classified as regional expenses on American’s consolidated statements of operations\. Regional expenses consist of the following (in millions):

|                                                               |                             |                             |                             |
| ------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                               | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                               | **2018**                    | **2017**                    | **2016**                    |
| Aircraft fuel and related taxes                               | $1,843                      | $1,382                      | $1,109                      |
| Salaries, wages and benefits                                  | 338                         | 356                         | 327                         |
| Capacity purchases from third\-party regional carriers  ^(1)^ | 3,267                       | 3,283                       | 3,186                       |
| Maintenance, materials and repairs                            | 8                           | 7                           | 4                           |
| Other rent and landing fees                                   | 583                         | 602                         | 487                         |
| Aircraft rent                                                 | 27                          | 27                          | 28                          |
| Selling expenses                                              | 369                         | 361                         | 347                         |
| Depreciation and amortization                                 | 267                         | 262                         | 237                         |
| Special items, net                                            | —                           | 3                           | 13                          |
| Other                                                         | 362                         | 289                         | 271                         |
| Total regional expenses                                       | $7,064                      | $6,572                      | $6,009                      |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | In  2018 , American recognized  $565 million  of expense under its capacity purchase agreement with Republic Airline Inc\. (Republic)\. American holds a  25%  equity interest in Republic Airways Holdings Inc\. (Republic Holdings), the parent company of Republic\. |

**2\. Special Items, Net**

Special items, net on American’s consolidated statements of operations consisted of the following (in millions):

|                                                                    |                             |                             |                             |
| ------------------------------------------------------------------ | --------------------------- | --------------------------- | --------------------------- |
|                                                                    | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                    | **2018**                    | **2017**                    | **2016**                    |
| Fleet restructuring expenses  ^(1)^                                | $422                        | $232                        | $177                        |
| Merger integration expenses  ^(2)^                                 | 268                         | 273                         | 514                         |
| Severance expenses  ^(3)^                                          | 58                          | —                           | —                           |
| Litigation settlement  ^(4)^                                       | 45                          | —                           | —                           |
| Intangible asset impairment  ^(5)^                                 | 26                          | —                           | —                           |
| Labor contract expenses                                            | 13                          | 46                          | —                           |
| Mark\-to\-market adjustments on bankruptcy obligations, net  ^(6)^ | (76)                        | 27                          | 25                          |
| Employee 2017 Tax Act bonus expense  ^(7)^                         | —                           | 123                         | —                           |
| Other operating charges (credits), net                             | 31                          | 11                          | (7)                         |
| Mainline operating special items, net                              | 787                         | 712                         | 709                         |
| Regional operating special items, net                              | —                           | 3                           | 13                          |
| Operating special items, net                                       | 787                         | 715                         | 722                         |
| Mark\-to\-market adjustments on equity investments, net  ^(8)^     | 104                         | —                           | —                           |
| Debt refinancing and extinguishment charges                        | 13                          | 22                          | 49                          |
| Other nonoperating credits, net                                    | (4)                         | —                           | —                           |
| Nonoperating special items, net                                    | 113                         | 22                          | 49                          |
| Income tax special items  ^(9)^                                    | 18                          | —                           | —                           |
| Impact of the 2017 Tax Act  ^(10)^                                 | —                           | 924                         | —                           |
| Income tax special items, net                                      | 18                          | 924                         | —                           |

145


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

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

16\. Transactions with Related Parties

The following represents the net receivables (payables) to related parties (in millions):

|                                         |                  |                  |
| --------------------------------------- | ---------------- | ---------------- |
|                                         | **December 31,** | **December 31,** |
|                                         | **2019**         | **2018**         |
| AAG  ^(1)^                              | $14,597          | $12,808          |
| AAG’s wholly\-owned subsidiaries  ^(2)^ | (2,146

)  | (2,142

)  |
| Total                                   | $12,451          | $10,666          |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | The increase in American’s net related party receivable from AAG is primarily due to American providing the cash funding for AAG’s share repurchase and dividend programs\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | The net payable to AAG’s wholly\-owned subsidiaries consists primarily of amounts due under regional capacity purchase agreements with AAG’s wholly\-owned regional airlines operating under the brand name of American Eagle\. |

Pursuant to a capacity purchase agreement between American and AAG’s wholly\-owned regional airlines operating as American Eagle, American purchases all of the capacity from these carriers and recognizes passenger revenue from flights operated by American Eagle\. In  2019 ,  2018  and  2017 , American recognized expense of approximately   $2\.2 billion ,   $1\.8 billion  and   $1\.7 billion , respectively, related to wholly\-owned regional airline capacity purchase agreements\.

17\. Subsequent Event

2014 Credit Facilities Refinancing

In January 2020, American and AAG entered into the Eighth Amendment (the Eighth Amendment) to Amended and Restated Credit and Guaranty Agreement, amending the 2014 Credit Agreement, pursuant to which American refinanced the 2014 Term Loan Facility, increasing the total aggregate principal outstanding to   $1\.22 billion , reducing LIBOR margin from   2\.00%  to   1\.75% , with a LIBOR floor of   0% , and reducing the base rate margin from   1\.00%  to   0\.75% \. In addition, the maturity date for the 2014 Term Loan Facility was extended to January 2027 from October 2021\. The 2014 Revolving Facility remains unchanged and, as of January 29, 2020, the effective date of the Eighth Amendment, there were no borrowings or letters of credit outstanding thereunder\.

157


Annual Report of Southwest Airlines Co\. for year 2019

The Company owns two additional headquarters buildings, located across the street from the Company's main headquarters building, on land owned by the Company including (a) an energy\-efficient, modern building, called TOPS, which houses certain operational and training functions, including the Company's 24\-hour operations and (b) the Wings Complex, completed in 2018, consisting of a Leadership Education and Aircrew Development (LEAD) Center (housing 18 of the Company's 20 Boeing 737 flight simulators and classroom space for Pilot training), an additional office building, and a parking garage\. Construction has begun on an expansion of the LEAD Center, and is expected to be operational in late 2020\.

As of December 31, 2019, the Company operated seven Customer Support and Services call centers\. The centers located in Atlanta, San Antonio, Chicago, Albuquerque, and Oklahoma City occupy leased space\. The Company owns its Houston and Phoenix centers\.

The Company performs substantially all line maintenance on its aircraft and provides ground support services at most of the airports it serves\. However, the Company has arrangements with certain aircraft maintenance providers for major component inspections and repairs for its airframes and engines, which comprise the majority of the Company's annual aircraft maintenance costs\.

Item 3\.  Legal Proceedings

On June 30, 2015, the U\.S\. Department of Justice ("DOJ") issued a Civil Investigative Demand ("CID") to the Company\. The CID seeks information and documents about the Company’s capacity from January 2010 to the date of the CID, including public statements and communications with third parties about capacity\. In June 2015, the Company also received a letter from the Connecticut Attorney General requesting information about capacity\. The Company is cooperating fully with the DOJ CID and the state inquiry\.

Further, on July 1, 2015, a complaint was filed in the United States District Court for the Southern District of New York on behalf of putative classes of consumers alleging collusion among the Company, American Airlines, Delta Air Lines, and United Airlines to limit capacity and maintain higher fares in violation of Section 1 of the Sherman Act\. Since then, a number of similar class action complaints were filed in the United States District Courts for the Central District of California, the Northern District of California, the District of Columbia, the Middle District of Florida, the Southern District of Florida, the Northern District of Georgia, the Northern District of Illinois, the Southern District of Indiana, the Eastern District of Louisiana, the District of Minnesota, the District of New Jersey, the Eastern District of New York, the Southern District of New York, the Middle District of North Carolina, the District of Oklahoma, the Eastern District of Pennsylvania, the Northern District of Texas, the District of Vermont, and the Eastern District of Wisconsin\. On October 13, 2015, the Judicial Panel on Multi\-District Litigation centralized the cases to the United States District Court in the District of Columbia\. On March 25, 2016, the plaintiffs filed a Consolidated Amended Complaint in the consolidated cases alleging that the defendants conspired to restrict capacity from 2009 to present\. The plaintiffs seek to bring their claims on behalf of a class of persons who purchased tickets for domestic airline travel on the defendants' airlines from July 1, 2011 to present\. They seek treble damages, injunctive relief, and attorneys' fees and expenses\. On May 11, 2016, the defendants moved to dismiss the Consolidated Amended Complaint, and on October 28, 2016, the Court denied this motion\. On December 20, 2017, the Company reached an agreement to settle these cases with a proposed class of all persons who purchased domestic airline transportation services from July 1, 2011, to the date of the settlement\. The Company agreed to pay $15 million and to provide certain cooperation with the plaintiffs as set forth in the settlement agreement\. The Court granted preliminary approval of the settlement on January 3, 2018, and the plaintiffs provided notice to the proposed settlement class\. The Court held a fairness hearing on March 22, 2019, and it issued an order granting final approval of the settlement on May 9, 2019\. On June 10, 2019, three objectors filed notices of appeal to the United States Court of Appeals for the District of Columbia Circuit\. Two of the objectors dismissed their appeals, and the Company and the other settling parties moved to dismiss the remaining appeal because the district court did not certify the approval order as appealable\. The district court denied the remaining objectors' request to certify the approval order as a final appealable order, and on November 6, 2019, the objectors asked the court of appeals to dismiss their appeal\. The case is continuing as to the remaining defendants\. The Company denies all allegations of wrongdoing\.

On July 11, 2019, a complaint alleging violations of federal and state laws and seeking certification as a class action was filed against Boeing and the Company in the United States District Court for the Eastern District of Texas in Sherman\. The complaint alleges that Boeing and the Company colluded to conceal defects with the MAX aircraft in

31