Annual Report of Southwest Airlines Co\. for year 2019

TABLE OF CONTENTS

|                                                                         |                                                                                |                                                                                |
| ----------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ |
|                                                                         | **PART I**                                                                                |                                                                                |
| Item 1\.                                                                | [Business](https://www.example.com#s0D294186A2095B36B34BEE0C13DB04CC)                                                                                |
[3](https://www.example.com#s0D294186A2095B36B34BEE0C13DB04CC)             |
| Item 1A\.                                                               | [Risk Factors](https://www.example.com#sE63E28387EDE589690D247CE6D920A3B)                                                                                |
[20](https://www.example.com#sE63E28387EDE589690D247CE6D920A3B)            |
| Item 1B\.                                                               | [Unresolved Staff Comments](https://www.example.com#s83036B3814D957368B740C20855A48C8)                                                                                |
[28](https://www.example.com#s83036B3814D957368B740C20855A48C8)            |
| Item 2\.                                                                | [Properties](https://www.example.com#s8A589D5CC75C50E0A4253AD6FF893273)                                                                                |
[29](https://www.example.com#s8A589D5CC75C50E0A4253AD6FF893273)            |
| Item 3\.                                                                | [Legal Proceedings](https://www.example.com#s89D7441943D4558DA940D1D725809B1D)                                                                                |
[31](https://www.example.com#s89D7441943D4558DA940D1D725809B1D)            |
| Item 4\.                                                                | [Mine Safety Disclosures](https://www.example.com#s48AD92D1649A5FE394454CF8AED81943)                                                                                |
[32](https://www.example.com#s48AD92D1649A5FE394454CF8AED81943)            |
|                                                                         | **PART II**                                                                                |                                                                                |
| Item 5\.                                                                | [Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities](https://www.example.com#s84B33EB60E8B5720A651493E3DCE8361) |
[35](https://www.example.com#s84B33EB60E8B5720A651493E3DCE8361)            |
| Item 6\.                                                                | [Selected Financial Data](https://www.example.com#s7415DBF944245388AC0FF1E79FC771A2)                                                                                |
[38](https://www.example.com#s7415DBF944245388AC0FF1E79FC771A2)            |
| Item 7\.                                                                | [Management’s Discussion and Analysis of Financial Condition and Results of Operations](https://www.example.com#sE8587A43CF1F5AB490968E289B7A4113)                         |
[40](https://www.example.com#sE8587A43CF1F5AB490968E289B7A4113)            |
|                                                                         | [Liquidity and Capital Resources](https://www.example.com#s1EA71A8CB86A57B985180831234CCE71)                                                                               |
[51](https://www.example.com#s1EA71A8CB86A57B985180831234CCE71)            |
|                                                                         | [Off\-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments](https://www.example.com#s138DEBE244605E2FBAD20ECBE1201404)          |
[52](https://www.example.com#s138DEBE244605E2FBAD20ECBE1201404)            |
|                                                                         | [Critical Accounting Policies and Estimates](https://www.example.com#s4A4A3C0E9ACA5FF08C3DF52FBE88051E)                                                                    |
[55](https://www.example.com#s4A4A3C0E9ACA5FF08C3DF52FBE88051E)            |
| Item 7A\.                                                               | [Quantitative and Qualitative Disclosures About Market Risk](https://www.example.com#s49B099D5BD1757CCB84F354B2ACBD7DA)                                                    |
[60](https://www.example.com#s49B099D5BD1757CCB84F354B2ACBD7DA)            |
| Item 8\.                                                                | [Financial Statements and Supplementary Data](https://www.example.com#sAABD5B4C600C53D19469E49CEE96B516)                                                                   |
[64](https://www.example.com#sAABD5B4C600C53D19469E49CEE96B516)            |
|                                                                         | [Southwest Airlines Co\. Consolidated Balance Sheet](https://www.example.com#s87AFF540A3D655FA8E1C2CC377A6FBFA)                                                            |
[64](https://www.example.com#s87AFF540A3D655FA8E1C2CC377A6FBFA)            |
|                                                                         | [Southwest Airlines Co\. Consolidated Statement of Income](https://www.example.com#s8BA19A0394675CF5889D7B40A4371C16)                                                      |
[65](https://www.example.com#s8BA19A0394675CF5889D7B40A4371C16)            |
|                                                                         | [Southwest Airlines Co\. Consolidated Statement of Comprehensive Income](https://www.example.com#s5F17AD1A3A46537D91A9AAFEC1AA2327)                                        |
[66](https://www.example.com#s5F17AD1A3A46537D91A9AAFEC1AA2327)            |
|                                                                         | [Southwest Airlines Co\. Consolidated Statement of Stockholders’ Equity](https://www.example.com#s189C420C00CC5D469C9355C8A3851BC9)                                        |
[67](https://www.example.com#s189C420C00CC5D469C9355C8A3851BC9)            |
|                                                                         | [Southwest Airlines Co\. Consolidated Statement of Cash Flows](https://www.example.com#s9FF4CFB622A9581B86A8DB39D0C48CD0)                                                  |
[68](https://www.example.com#s9FF4CFB622A9581B86A8DB39D0C48CD0)            |
|                                                                         | [Notes to Consolidated Financial Statements](https://www.example.com#s33F2C3F2F70F5BFBB619FCBA5C426869)                                                                    |
[69](https://www.example.com#s33F2C3F2F70F5BFBB619FCBA5C426869)            |
| Item 9\.                                                                | [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](https://www.example.com#sAFB30A9A81D859C78E29C288EC92E310)                          |
[115](https://www.example.com#sAFB30A9A81D859C78E29C288EC92E310)           |
| Item 9A\.                                                               | [Controls and Procedures](https://www.example.com#s681254385115593A9D5E1D5E06235652)                                                                                |
[115](https://www.example.com#s681254385115593A9D5E1D5E06235652)           |
| Item 9B\.                                                               | [Other Information](https://www.example.com#sA41333A2481A54BEAE75152DD55B58CB)                                                                                |
[116](https://www.example.com#sA41333A2481A54BEAE75152DD55B58CB)           |
|                                                                         | **PART III**                                                                                |                                                                                |
| Item 10\.                                                               | [Directors, Executive Officers, and Corporate Governance](https://www.example.com#s075B91DDB2085C82BE155887B5337C24)                                                       |
[117](https://www.example.com#s075B91DDB2085C82BE155887B5337C24)           |
| Item 11\.                                                               | [Executive Compensation](https://www.example.com#s000D369017785D2088F3CA533C3CD5F5)                                                                                |
[117](https://www.example.com#s000D369017785D2088F3CA533C3CD5F5)           |
| Item 12\.                                                               | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](https://www.example.com#sB218A7B873E55423B74C9FE86149CC56)                |
[117](https://www.example.com#sB218A7B873E55423B74C9FE86149CC56)           |
| Item 13\.                                                               | [Certain Relationships and Related Transactions, and Director Independence](https://www.example.com#s7A17C15A33B75C5D838375BA28CD517C)                                     |
[118](https://www.example.com#s7A17C15A33B75C5D838375BA28CD517C)           |
| Item 14\.                                                               | [Principal Accounting Fees and Services](https://www.example.com#sCE6399B9CF8A54A5B97D3EA24C287B2B)                                                                        |
[118](https://www.example.com#sCE6399B9CF8A54A5B97D3EA24C287B2B)           |
|                                                                         | **PART IV**                                                                                |                                                                                |
| Item 15\.                                                               | [Exhibits and Financial Statement Schedules](https://www.example.com#s87D19E6237415C989A86CC425B130903)                                                                    |
[119](https://www.example.com#s87D19E6237415C989A86CC425B130903)           |
| Item 16\.                                                               | [Form 10\-K Summary](https://www.example.com#s6F5268F4221A5532B919D421031E432D)                                                                                | [124](https://www.example.com#s6F5268F4221A5532B919D421031E432D)

 |
| [Signatures](https://www.example.com#s3D9FC3A37D0D5349AA460D3DE9A79E59) | [Signatures](https://www.example.com#s3D9FC3A37D0D5349AA460D3DE9A79E59)                                                                                |
[125](https://www.example.com#s3D9FC3A37D0D5349AA460D3DE9A79E59)           |

2


Annual Report of Southwest Airlines Co\. for year 2017

markets in which prices are high and/or rising\. The Company expects to consume approximately 2\.1 billion gallons of jet fuel in 2018\. Based on this anticipated usage, a change in jet fuel prices of just one cent per gallon would impact the Company’s Fuel and oil expense by approximately $21 million for 2018, excluding any impact associated with fuel derivative instruments held\.

As of December 31, 2017, the Company held a net position of fuel derivative instruments that represented a hedge for a portion of its anticipated jet fuel purchases for future periods\. See Note 10 to the Consolidated Financial Statements for further information\. The Company may increase or decrease the size of its fuel hedge based on its expectation of future market prices, as well as its perceived exposure to cash collateral requirements contained in the agreements it has signed with various counterparties, while considering the significant cost that can be associated with different types of hedging strategies\. The gross fair value of outstanding financial derivative instruments related to the Company’s jet fuel market price risk at December 31, 2017, was a net asset of $248 million\. In addition, $15 million in cash collateral deposits were held by the Company in connection with these instruments based on their fair value as of December 31, 2017\. The fair values of the derivative instruments, depending on the type of instrument, were determined by use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets\. An immediate 10 percent increase or decrease in underlying fuel\-related commodity prices from the December 31, 2017, prices would correspondingly change the fair value of the commodity derivative instruments in place by approximately $214 million\. Fluctuations in the related commodity derivative instrument cash flows may change by more or less than this amount based upon further fluctuations in futures prices, as well as related income tax effects\. In addition, this does not consider changes in cash, aircraft, or letters of credit utilized as collateral provided to or by counterparties, which would fluctuate in an amount equal to or less than this amount, depending on the type of collateral arrangement in place with each counterparty\. This sensitivity analysis uses industry standard valuation models and holds all inputs constant at December 31, 2017, levels, except underlying futures prices\.

The Company’s credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset position to the Company\. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements\. As of December 31, 2017, the Company had eight counterparties in which the derivatives held were a net asset\. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty\. However, if one or more of these counterparties were in a liability position to the Company and were unable to meet their obligations, any open derivative contracts with the counterparty could be subject to early termination, which could result in substantial losses for the Company\. At December 31, 2017, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty’s credit rating\. The Company also had agreements with counterparties in which cash deposits, letters of credit, and/or pledged aircraft are required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds\. Refer to the counterparty credit risk and collateral table provided in Note 10 to the Consolidated Financial Statements for the fair values of fuel derivatives, amounts held as collateral, and applicable collateral posting threshold amounts as of December 31, 2017, at which such postings are triggered\.

Due to the Company's investment grade credit rating, terms of the Company’s current fuel hedging agreements with counterparties, and the types of derivatives held as of December 31, 2017, in the Company's judgment, it does not have cash collateral exposure\. See Note 10 to the Consolidated Financial Statements\. The Company is also subject to the risk that the fuel derivatives it uses to hedge against fuel price volatility do not provide adequate protection\. The Company has found that financial derivative instruments in commodities, such as West Texas Intermediate crude oil, Brent crude oil, and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility\. In addition, to add further protection, the Company may periodically enter into jet fuel derivatives for short\-term timeframes\. Jet fuel is not widely traded on an organized futures exchange and, therefore, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately 24 months into the future\.

67


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

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

|           |                 |                                                                                |
| ---------:|:--------------- |:------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| \*^10\.74 | UAL
United | [Letter Agreement No\. 6 to the Airbus A350\-900XWB Purchase Agreement, dated March 5, 2010, by and among Airbus S\.A\.S and United Air Lines\. Inc\. (filed as Exhibit 10\.33 to UAL’s  Form 10\-Q for the quarter ended March 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312510094960/dex1033.htm)  |
| \*^10\.75 | UAL
United | [Letter Agreement No\. 7 to the Airbus A350\-900XWB Purchase Agreement, dated March 5, 2010, by and among Airbus S\.A\.S and United Air Lines\. Inc\. (filed as Exhibit 10\.34 to UAL’s  Form 10\-Q for the quarter ended March 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312510094960/dex1034.htm)  |
| \*^10\.76 | UAL
United | [Letter Agreement No\. 8 to the Airbus A350\-900XWB Purchase Agreement, dated March 5, 2010, by and among Airbus S\.A\.S and United Air Lines\. Inc\. (filed as Exhibit 10\.35 to UAL’s  Form 10\-Q for the quarter ended March 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312510094960/dex1035.htm)  |
| \*^10\.77 | UAL
United | [Letter Agreement No\. 9 to the Airbus A350\-900XWB Purchase Agreement, dated March 5, 2010, by and among Airbus S\.A\.S and United Air Lines\. Inc\. (filed as Exhibit 10\.36 to UAL’s  Form 10\-Q for the quarter ended March 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312510094960/dex1036.htm)  |
| \*^10\.78 | UAL
United | [Letter Agreement No\. 10 to the Airbus A350\-900XWB Purchase Agreement, dated March 5, 2010, by and among Airbus S\.A\.S and United Air Lines\. Inc\. (filed as Exhibit 10\.37 to UAL’s  Form 10\-Q for the quarter ended March 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312510094960/dex1037.htm) |
| \*^10\.79 | UAL
United | [Letter Agreement No\. 11 to the Airbus A350\-900XWB Purchase Agreement, dated March 5, 2010, by and among Airbus S\.A\.S and United Air Lines\. Inc\. (filed as Exhibit 10\.38 to UAL’s  Form 10\-Q for the quarter ended March 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312510094960/dex1038.htm) |
| \*^10\.80 | UAL
United | [Letter Agreement No\. 12 to the Airbus A350\-900XWB Purchase Agreement, dated March 5, 2010, by and among Airbus S\.A\.S and United Air Lines\. Inc\. (filed as Exhibit 10\.39 to UAL’s  Form 10\-Q for the quarter ended March 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312510094960/dex1039.htm) |
| \*^10\.81 | UAL
United | [Letter Agreement No\. 13 to the Airbus A350\-900XWB Purchase Agreement, dated March 5, 2010, by and among Airbus S\.A\.S and United Air Lines\. Inc\. (filed as Exhibit 10\.40 to UAL’s  Form 10\-Q for the quarter ended March 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312510094960/dex1040.htm) |
| \*^10\.82 | UAL
United | [Amendment No\. 1 to the Airbus A350\-900XWB Purchase Agreement, dated June 25, 2010, by and among Airbus S\.A\.S and United Air Lines, Inc\. (filed as Exhibit 10\.6 to UAL’s  Form 10\-Q for the quarter ended June 30, 2010, Commission file number  1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312510161812/dex106.htm)              |
| \*^10\.83 | UAL
United | [Amendment No\. 2 to the Airbus A350\-900XWB Purchase Agreement, dated June 19, 2013 (filed as Exhibit 10\.8 to UAL’s Form  10\-Q for the quarter ended June 30, 2013, Commission file number  1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex108.htm)                                                                |
| \*^10\.84 | UAL
United | [Amended and Restated Letter Agreement No\. 5 to the Airbus A350\-900XWB Purchase Agreement, dated June 19, 2013 (filed as Exhibit 10\.12 to UAL’s Form  10\-Q for the quarter ended June 30, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex1012.htm)                                 |
| \*^10\.85 | UAL
United | [Amended and Restated Letter Agreement No\. 6 to the Airbus A350\-900XWB Purchase Agreement, dated June 19, 2013 (filed as Exhibit 10\.13 to UAL’s Form  10\-Q for the quarter ended June 30, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex1013.htm)                                 |

118


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

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

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

We are exposed to the effect of foreign exchange rate fluctuations on the U\.S\. dollar value of foreign currency\-denominated operating revenues and expenses\. Our largest exposure comes from the British pound, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real\. We do 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\.

**8\. 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, we use quoted market prices to determine the fair value of our financial assets\. If quoted market prices are not available, we measure fair value using valuation techniques that use, when possible, current market\-based or independently\-sourced market parameters, such as interest rates and currency rates\.

We utilize the market approach to measure fair value for our financial assets\. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets\. Our 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\.

Assets measured at fair value on a recurring basis are summarized below (in millions):

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

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

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

105


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

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

when a loss is probable and reasonably estimable\. These amounts are recorded based on the Company's assessments of the likelihood of their eventual disposition\.

Guarantees and Indemnifications\.  In the normal course of business, the Company enters into numerous real estate leasing and aircraft financing arrangements that have various guarantees included in the contracts\. These guarantees are primarily in the form of indemnities under which the Company typically indemnifies the lessors and any tax/financing parties against liabilities that arise out of or relate to the use, operation or maintenance of the leased premises or financed aircraft\. Currently, the Company believes that any future payments required under these guarantees or indemnities would be immaterial, as most liabilities and related indemnities are covered by insurance (subject to deductibles)\. Additionally, certain real estate leases include indemnities for any environmental liability that may arise out of or relate to the use of the leased premises\.

As of  December 31, 2019 , United is the guarantor of approximately   $1\.9 billion  in aggregate principal amount of tax\-exempt special facilities revenue bonds and interest thereon\. These bonds, issued by various airport municipalities, are payable solely from rentals paid under long\-term agreements with the respective governing bodies\. The leasing arrangements associated with these obligations are accounted for as operating leases recognized on the Company's balance sheet with the associated expense recorded on a straight\-line basis over the expected lease term\.  The obligations associated with these tax\-exempt special facilities revenue bonds are included in our lease commitments disclosed in Note 11 of this report\. All of these bonds are due between  2020  and  2038 \.

In connection with funding the BRW Term Loan Agreement, the Company entered into an agreement with Kingsland, pursuant to which, in return for Kingsland's pledge of its   144\.8 million  common shares of AVH (which are eligible to be converted into the same number of preferred shares, which may be deposited with the depositary for AVH's American Depositary Receipts ("ADRs"), the class of AVH securities that trades on the New York Stock Exchange (the "NYSE"), in exchange for   18\.1 million  ADRs) and its consent to BRW's pledge of its AVH common shares to United under the BRW Term Loan Agreement and related agreements, United (1) granted to Kingsland the right to put its AVH common shares to United at market price on the fifth anniversary of the BRW Term Loan Agreement or upon certain sales of AVH common shares owned by BRW, including upon a foreclosure, and (2) guaranteed BRW's obligation to pay Kingsland the difference (which amount, if paid by United, will increase the BRW Term Loan by such amount) if the market price of AVH common shares on the fifth anniversary, or upon any such sale, as applicable, is less than   $12  per ADR on the NYSE, for an aggregate maximum possible combined put payment and guarantee amount on the fifth anniversary of   $217 million \. In 2018, the Company recorded a liability of   $31 million  for the fair value of its guarantee to loan additional funds to BRW if required\. Any such additional loans to BRW would be collateralized by BRW's AVH shares and other collateral\.

As of  December 31, 2019 , United is the guarantor of   $132 million  of aircraft mortgage debt issued by one of United's regional carriers\. The aircraft mortgage debt is subject to similar increased cost provisions as described below for the Company's debt, and the Company would potentially be responsible for those costs under the guarantees\.

As of December 31, 2019, United had cash collateralized   $73 million  of letters of credit, which generally have evergreen clauses and are expected to be renewed on an annual basis\. As of December 31, 2019, United also had   $414 million  of surety bonds securing various obligations with expiration dates through 2023\.

Increased Cost Provisions\.  In United's financing transactions that include loans in which United is the borrower, United typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans with respect to which the interest rate is based on LIBOR, for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject, in most cases, to obligations of the lenders to take certain limited steps to mitigate the requirement for, or the amount of, such increased costs\. At December 31, 2019, the Company had   $3\.4 billion  of floating rate debt with remaining terms of up to   11 years  that are subject to these increased cost provisions\. In several financing transactions involving loans or leases from non\-U\.S\. entities, with remaining terms of up to   11 years  and an aggregate balance of   $3\.2 billion , the Company bears the risk of any change in tax laws that would subject loan or lease payments thereunder to non\-U\.S\. entities to withholding taxes, subject to customary exclusions\.

Fuel Consortia\.  United participates in numerous fuel consortia with other air carriers at major airports to reduce the costs of fuel distribution and storage\. Interline agreements govern the rights and responsibilities of the consortia members and provide for the allocation of the overall costs to operate the consortia based on usage\. The consortia (and in limited cases, the participating carriers) have entered into long\-term agreements to lease certain airport fuel storage and distribution facilities that are typically financed through tax\-exempt bonds, either special facilities lease revenue bonds or general airport revenue bonds, issued by various local municipalities\. In general, each consortium lease agreement requires the consortium to make lease payments in amounts sufficient to pay the maturing principal and interest payments on the bonds\. As of December 31, 2019, approximately   $1\.9 billion  principal amount of such bonds were secured by significant fuel facility leases in which United participates, as to which United and each of the signatory airlines has provided indirect guarantees of the debt\. As of December 31, 2019, the Company's contingent exposure was approximately   $175 million  principal amount of such bonds

84


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

ITEM 1B\. UNRESOLVED STAFF COMMENTS

We had no unresolved Securities and Exchange Commission staff comments that were issued 180 days or more preceding  December 31, 2019 \.

36


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

**Report of Independent Registered Public Accounting Firm**

To the Stockholder and Board of Directors

American Airlines, Inc\.:

*Opinion on Internal Control Over Financial Reporting*

We have audited American Airlines, Inc\.’s and subsidiaries’ (American) internal control over financial reporting as of December 31, 2017, based on criteria established in *Internal Control – Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission\. In our opinion, American maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in *Internal Control – Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of American as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, cash flows, and stockholder’s equity for each of the years in the three\-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated February 21, 2018 expressed an unqualified opinion on those consolidated financial statements\.

*Basis for Opinion*

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

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

*Definition and Limitations of Internal Control Over Financial Reporting*

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

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

/s/ KPMG LLP

Dallas, Texas

February 21, 2018

173


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

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

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

|                                                       |                             |                             |                             |
| ----------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                       | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                       | **2017**                    | **2016**                    | **2015**                    |
| Statutory income tax provision                        | $1,135                      | $1,555                      | $1,635                      |
| State income tax provision, net of federal tax effect | 54                          | 67                          | 71                          |
| Book expenses not deductible for tax purposes         | 30                          | 32                          | 55                          |
| Bankruptcy administration expenses                    | 1                           | 1                           | 3                           |
| 2017 Tax Act                                          | 93                          | —                           | —                           |
| Change in valuation allowance                         | 4                           | (1)                         | (5,216)                     |
| Other, net                                            | 5                           | 8                           | —                           |
| Income tax provision (benefit)                        | $1,322                      | $1,662                      | $(3,452)                    |

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

In connection with the preparation of American’s financial statements at the end of 2015, American determined that after considering all positive and negative evidence, including the completion of certain critical Merger integration milestones as well as its financial performance, it was more likely than not that substantially all of its deferred income tax assets, which include its NOLs, would be realized\. Accordingly, during the year ended December 31, 2015, American reversed $3\.5 billion of the valuation allowance, which resulted in a special non\-cash tax benefit recorded in the consolidated statement of operations\.

In addition to the changes in the valuation allowance from operations described above, the valuation allowance was also impacted by the changes in the components of accumulated other comprehensive income (loss), described in Note 8\. The total increase to the valuation allowance was $12 million in 2017, $8 million of which is included in the 2017 Tax Act amount in the table above\. In 2016 and 2015, the decrease in the valuation allowance was $1 million and $5\.2 billion, respectively\.

146


Annual Report of Southwest Airlines Co\. for year 2018

**7****\. LEASES**

The Company's fleet included 51 aircraft on operating lease and 72 aircraft on capital lease as of December 31, 2018, compared with 53 aircraft on operating lease and 69 aircraft on capital lease, as of December 31, 2017\. Amounts applicable to these aircraft on capital lease that are included in property and equipment were:

|                                |          |          |
| ------------------------------ | -------- | -------- |
| **(in millions)**              | **2018** | **2017** |
| Flight equipment               | $1,329   | $1,207   |
| Less: accumulated amortization | 304      | 172      |
|                                | $1,025   | $1,035   |

Total rental expense for operating leases, both aircraft and other, charged to operations in 2018, 2017, and 2016 was $935 million, $939 million, and $932 million, respectively\. The majority of the Company’s terminal operations space, as well as 124 aircraft, including 73 B717s subleased to Delta, were under operating leases at December 31, 2018\. For aircraft operating leases and for terminal operating leases and other real estate leases, expense is recorded on a straight–line basis and included in Other operating expenses and in Landing fees and airport rentals, respectively, in the Consolidated Statement of Income\. The majority of the Company’s terminal operations space payments are considered variable, and thus excluded from the Company’s disclosures of future minimum lease payments\. Future minimum lease payments under capital leases and noncancelable operating leases and rentals to be received under subleases with initial or remaining terms in excess of one year at December 31, 2018, were:

|                                             |                               |                                 |               |                                      |
| ------------------------------------------- | ----------------------------- | ------------------------------- | ------------- | ------------------------------------ |
| **(in millions)**                           | **Capital**

**leases** | **Operating**

**leases** | **Subleases** | **Operating**

**leases, net** |
| 2019                                        | $111                          | $348                            | $(92)         | $256                                 |
| 2020                                        | 109                           | 357                             | (78)          | 279                                  |
| 2021                                        | 105                           | 244                             | (41)          | 203                                  |
| 2022                                        | 100                           | 172                             | (17)          | 155                                  |
| 2023                                        | 97                            | 146                             | (7)           | 139                                  |
| Thereafter                                  | 335                           | 474                             | (1)           | 473                                  |
| Total minimum lease payments                | $857                          | $1,741                          | $(236)        | $1,505                               |
| Less amount representing interest           | 126                           |                                 |               |                                      |
| Present value of minimum lease payments (a) | 731                           |                                 |               |                                      |
| Less current portion                        | 85                            |                                 |               |                                      |
| Long\-term portion                          | $646                          |                                 |               |                                      |

(a) Excludes lease incentive obligation of $114 million\.

The aircraft leases generally can be renewed for one to five years at rates based on fair market value at the end of the lease term\. Most aircraft leases have purchase options at or near the end of the lease term at fair market value, generally limited to a stated percentage of the lessor’s defined cost of the aircraft\.

94


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

The following table summarizes the benefit payments that are scheduled to be paid in the years ending December 31:

|               |               |               |                  |                                                  |
|:------------- |:------------- |:------------- | ----------------:| ------------------------------------------------:|
| (in millions) | (in millions) | (in millions) | Pension Benefits | Other Postretirement and Postemployment Benefits |
| 2020          | 2020          | 2020          |          $ 1,170 |                                            $ 324 |
| 2021          | 2021          | 2021          |            1,188 |                                              327 |
| 2022          | 2022          | 2022          |            1,211 |                                              324 |
| 2023          | 2023          | 2023          |            1,226 |                                              321 |
| 2024          | 2024          | 2024          |            1,239 |                                              317 |
| 2025\-2029    | 2025\-2029    | 2025\-2029    |            6,248 |                                            1,520 |

Plan Assets

We have adopted and implemented investment policies for our defined benefit pension plans that incorporate strategic asset allocation mixes intended to best meet the plans' long\-term obligations, while maintaining an appropriate level of risk and liquidity\. These asset portfolios employ a diversified mix of investments, which are reviewed periodically\. Active management strategies are utilized where feasible in an effort to realize investment returns in excess of market indices\. Derivatives in the plans are primarily used to manage risk and gain asset class exposure while still maintaining liquidity\. As part of these strategies, the plans are required to hold cash collateral associated with certain derivatives\. Our investment strategies target a mix of 30\-50% growth\-seeking assets, 25\-35% income\-generating assets and 30\-40% risk\-diversifying assets\. Risk diversifying assets include hedged mandates implementing long\-short, market neutral and relative value strategies that invest primarily in publicly\-traded equity, fixed income, foreign currency and commodity securities and are used to improve the impact of active management on the plans\.

Benefit Plan Assets Measured at Fair Value on a Recurring Basis

Benefit Plan Assets\.  Benefit plan assets relate to our defined benefit pension plans and certain of our postemployment benefit plans\. These investments are presented net of the related benefit obligation in pension, postretirement and related benefits on the balance sheets\. See Note 3, "Fair Value," for a description of the levels within the fair value hierarchy and associated valuation techniques used to measure fair value\. The following table shows our benefit plan assets by asset class\.

|                                                      |                                                      |                                                      |                   |                   |                   |  |  |  |         |         |                   |                   |                   |                   |                   |                   |                   |  |  |  |  |  |  |  |  |  |                     |                     |                     |
|:---------------------------------------------------- |:---------------------------------------------------- |:---------------------------------------------------- | -----------------:| -----------------:| -----------------:|:- |:- |:- | -------:| -------:| -----------------:|:-----------------:|:-----------------:|:-----------------:|:-----------------:|:-----------------:|:-----------------:|:- |:- |:- |:- |:- |:- |:- |:- |:- |:-------------------:|:-------------------:|:-------------------:|
|                                                      |                                                      |                                                      | December 31, 2019 | December 31, 2019 | December 31, 2019 |  |  |  |         |         | December 31, 2018 | December 31, 2018 | December 31, 2018 | December 31, 2018 | December 31, 2018 | December 31, 2018 | December 31, 2018 |  |  |  |  |  |  |  |  |  | Valuation Technique | Valuation Technique | Valuation Technique |
| (in millions)                                        | (in millions)                                        | (in millions)                                        |           Level 1 |           Level 2 |             Total |  |  |  | Level 1 | Level 2 |             Total |                   |                   |                   |                   |                   |                   |
| Equities and equity\-related instruments             | Equities and equity\-related instruments             | Equities and equity\-related instruments             |             $ 840 |              $ 49 |             $ 889 |  |  |  |   $ 400 |   $ 100 |             $ 500 |                   |                   |                   |        (a)        |        (a)        |        (a)        |
| Delta common stock                                   | Delta common stock                                   | Delta common stock                                   |               737 |                 — |               737 |  |  |  |     675 |       — |               675 |                   |                   |                   |        (a)        |        (a)        |        (a)        |
| Cash equivalents                                     | Cash equivalents                                     | Cash equivalents                                     |               327 |               952 |             1,279 |  |  |  |     312 |     708 |             1,020 |                   |                   |                   |        (a)        |        (a)        |        (a)        |
| Fixed income and fixed income\-related instruments   | Fixed income and fixed income\-related instruments   | Fixed income and fixed income\-related instruments   |                97 |             3,472 |             3,569 |  |  |  |     233 |   2,157 |             2,390 |                   |                   |                   |      (a)(b)       |      (a)(b)       |      (a)(b)       |
| Benefit plan assets                                  | Benefit plan assets                                  | Benefit plan assets                                  |           $ 2,001 |           $ 4,473 |           $ 6,474 |  |  |  | $ 1,620 | $ 2,965 |           $ 4,585 |                   |                   |                   |                   |                   |                   |
| Investments measured at net asset value ("NAV")^(1)^ | Investments measured at net asset value ("NAV")^(1)^ | Investments measured at net asset value ("NAV")^(1)^ |                   |                   |             9,854 |  |  |  |         |         |             9,136 |                   |                   |                   |                   |                   |                   |
| Total benefit plan assets                            | Total benefit plan assets                            | Total benefit plan assets                            |                   |                   |          $ 16,328 |  |  |  |         |         |          $ 13,721 |                   |                   |                   |                   |                   |                   |

^(1)^  Investments that were measured at NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy\.

Equities and Equity\-Related Instruments\.  These investments include common stock and equity\-related instruments\. Common stock is valued at the closing price reported on the active market on which the individual securities are traded\. Equity\-related instruments include investments in securities traded on exchanges, including listed futures and options, which are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices\. Over\-the\-counter securities are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes\.

Delta Common Stock\.  In both 2017 and 2016, we contributed $350 million of Delta common stock as a portion of the employer contribution to certain of our defined benefit pension plans\. The Delta common stock investment is managed by an independent fiduciary\.

84


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

|                               |                                                                                |
| ----------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Exhibit**

**Number** | **Description**                                                                                |
| 4\.7                          | [First Amendment to Participation Agreement (N907AN), dated as of November 27, 2013, among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein (incorporated by reference to Exhibit 4\.8 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex48.htm)                                                                                |
| 4\.8                          | [First Amendment to Indenture and Security Agreement (N907AN), dated as of November 27, 2013, between American Airlines, Inc\. and Wilmington Trust Company, as Loan Trustee (incorporated by reference to Exhibit 4\.9 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex49.htm)                                                                                |
| 4\.9                          | [Series 2013\-2A N907AN Equipment Note No\. 1, dated as of September 9, 2013 (incorporated by reference to Exhibit 4\.10 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex410.htm)                                                                                |
| 4\.10                         | [Series 2013\-2B N907AN Equipment Note No\. 1, dated as of November 27, 2013 (incorporated by reference to Exhibit 4\.11 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex411.htm)                                                                                |
| 4\.11                         | [Registration Rights Agreement, dated as of November 27, 2013, among American Airlines, Inc\., Wilmington Trust Company, as Trustee under Trust Supplement No\. 2013\-2B, dated as of November 27, 2013, and Morgan Stanley & Co\. LLC, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc\., Goldman, Sachs & Co\., Citigroup Global Markets Inc\. and J\.P\. Morgan Securities LLC, in their capacity as representatives of the Initial Purchasers (incorporated by reference to Exhibit 4\.12 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex412.htm)                                                                                |
| 4\.12                         | [Schedule I (Pursuant to Instruction 2 to Item 601 of Regulation S\-K, this Schedule I contains a list of documents applicable to the financing of the Aircraft in connection with the offering of the Class B Certificates, which documents are substantially identical to those filed herewith as Exhibits 4\.6, 4\.7, 4\.8, 4\.9, 4\.10 and 4\.11 to Exhibit 99\.2 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400)\. Schedule I sets forth the details by which such documents differ from the corresponding Exhibits) (incorporated by reference to Exhibit 99\.2 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex992.htm) |
| 4\.13                         | [Trust Supplement No\. 2013\-2C, dated as of December 20, 2013, among American Airlines, Inc\. and Wilmington Trust Company, as Class C Trustee, to the Pass Through Trust Agreement, dated as of March 12, 2013 (incorporated by reference to Exhibit 4\.2 to AMR’s Current Report on Form 8\-K filed on December 20, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513480827/d647497dex42.htm)                                                                                |
| 4\.14                         | [Form of Pass Through Trust Certificate, Series 2013\-2C (incorporated by reference to Exhibit A to Exhibit 4\.2 to AAG’s Current Report on Form 8\-K filed on December 20, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513480827/d647497dex42.htm)                                                                                |
| 4\.15                         | [Amended and Restated Intercreditor Agreement (2013\-2), dated as of December 20, 2013, among Wilmington Trust Company, as Trustee of American Airlines Pass Through Trust 2013\-2A, American Airlines Pass Through Trust 2013\-2B and American Airlines Pass Through Trust 2013\-2C, Morgan Stanley Bank, N\.A\., as Class A Liquidity Provider and as Class B Liquidity Provider, and Wilmington Trust Company, as Subordination Agent (incorporated by reference to Exhibit 4\.4 to AMR’s Current Report on Form 8\-K filed on December 20, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513480827/d647497dex44.htm)                                                                                |
| 4\.16                         | [Second Amendment to Participation Agreement (N907AN), dated as of December 20, 2013, among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein (incorporated by reference to Exhibit 4\.9 to AMR’s Current Report on Form 8\-K filed on December 20, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513480827/d647497dex49.htm)                                                                                |
| 4\.17                         | [Second Amendment to Indenture and Security Agreement (N907AN), dated as of December 20, 2013, between American Airlines, Inc\. and Wilmington Trust Company, as Loan Trustee (incorporated by reference to Exhibit 4\.10 to AMR’s Current Report on Form 8\-K filed on December 20, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513480827/d647497dex410.htm)                                                                                |
| 4\.18                         | [Series 2013\-2C N907AN Equipment Note No\. 1, dated as of December 20, 2013 (incorporated by reference to Exhibit 4\.11 to AMR’s Current Report on Form 8\-K filed on December 20, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513480827/d647497dex411.htm)                                                                                |
| 4\.19                         | [Registration Rights Agreement, dated as of December 20, 2013, among American Airlines, Inc\., Wilmington Trust Company, as Trustee under Trust Supplement No\. 2013\-2C, dated as of December 20, 2013, and Morgan Stanley & Co\. LLC, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc\., Goldman, Sachs & Co\., Citigroup Global Markets Inc\. and J\.P\. Morgan Securities LLC, in their capacity as representatives of the Initial Purchasers (incorporated by reference to Exhibit 4\.12 to AMR’s Current Report on Form 8\-K filed on December 20, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513480827/d647497dex412.htm)                                                                                |
| 4\.20                         | [Schedule I (Pursuant to Instruction 2 to Item 601 of Regulation S\-K, this Schedule I contains a list of documents applicable to the financing of the Aircraft in connection with the offering of the Class C Certificates, which documents are substantially identical to those filed herewith as Exhibits 4\.14, 4\.17 and 4\.20\. Schedule I sets forth the details by which such documents differ from the corresponding Exhibits) (incorporated by reference to Exhibit 99\.2 to AMR’s Current Report on Form 8\-K filed on December 20, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513480827/d647497dex992.htm)                                                                                |

177


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

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

Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):

|                                                   |                  |                  |
| ------------------------------------------------- | ---------------- | ---------------- |
|                                                   | **December 31,** | **December 31,** |
|                                                   | **2019**         | **2018**         |
| Operating leases:                                 |                  |                  |
| Operating lease ROU assets                        | $8,694           | $9,094           |
| Current operating lease liabilities               | $1,695           | $1,639           |
| Noncurrent operating lease liabilities            | 7,388            | 7,857            |
| Total operating lease liabilities                 | $9,083           | $9,496           |
| Finance leases:                                   |                  |                  |
| Property and equipment, at cost                   | $954             | $936             |
| Accumulated amortization                          | (447

)    | (391

)    |
| Property and equipment, net                       | $507             | $545             |
| Current finance lease liabilities                 | $112             | $81              |
| Noncurrent finance lease liabilities              | 558              | 613              |
| Total finance lease liabilities                   | $670             | $694             |
| Weighted average remaining lease term (in years): |                  |                  |
| Operating leases                                  | 7\.4             | 7\.6             |
| Finance leases                                    | 6\.2             | 7\.4             |
| Weighted average discount rate:                   |                  |                  |
| Operating leases                                  | 4\.7%            | 4\.6%            |
| Finance leases                                    | 6\.2%            | 6\.5%            |

Supplemental cash flow and other information related to leases was as follows (in millions):

|                                                                         |                             |                             |
| ----------------------------------------------------------------------- | --------------------------- | --------------------------- |
|                                                                         | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                         | **2019**                    | **2018**                    |
| Cash paid for amounts included in the measurement of lease liabilities: |                             |                             |
| Operating cash flows from operating leases                              | $1,996                      | $1,914                      |
| Operating cash flows from finance leases                                | 43                          | 48                          |
| Financing cash flows from finance leases                                | 83                          | 78                          |
| Non\-cash transactions:                                                 |                             |                             |
| ROU assets acquired through operating leases                            | 1,144                       | 1,258                       |
| Operating lease conversion to finance lease                             | 41                          | —                           |
| Property and equipment acquired through finance leases                  | 20                          | —                           |
| Gain on sale leaseback transactions, net                                | 107                         | 59                          |

136


Annual Report of Southwest Airlines Co\. for year 2019

AirTran Holdings is party to aircraft purchase financing facilities, and as of  December 31, 2019 ,   three  Boeing 737 aircraft remained that were financed under floating\-rate facilities\. Each  note is secured by a first mortgage on the aircraft to which it relates\.  The notes bear interest at a floating rate per annum equal to a margin plus the three or six\-month LIBOR in effect at the commencement of each semi\-annual or three\-month period, as applicable\. As of  December 31, 2019 , the weighted average interest rate was   3\.49 percent \. Principal and interest under the notes are payable semi\-annually or every three months as applicable\. As of  December 31, 2019 , the remaining debt outstanding may be prepaid without penalty under all aircraft loans provided under such facilities\. The remaining notes mature in  2020 \. As discussed further in  Note 10 , a portion of the above floating\-rate debt has been effectively converted to a fixed rate via interest rate swap agreements which expire as the underlying notes mature\.

During November 2017, the Company issued   $300 million  senior unsecured notes due  2022 \. The notes bear interest at   2\.75 percent \. Interest is payable semi\-annually in arrears on May 16 and November 16\.

Also during November 2017, the Company issued   $300 million  senior unsecured notes due  2027 \. The notes bear interest at   3\.45 percent \. Interest is payable semi\-annually in arrears on May 16 and November 16\.

During November 2016, the Company issued   $300 million  senior unsecured notes due  2026 \. The notes bear interest at   3\.00 percent \. Interest is payable semi\-annually in arrears on May 15 and November 15\.

During October 2016, the Company entered into a term loan agreement providing for loans to the Company aggregating up to   $215 million , to be secured by mortgages on   seven  of the Company's 737\-800 aircraft\. The Company borrowed the full   $215 million  and secured this loan with the requisite   seven  aircraft mortgages\. The loan matures on October 31, 2026, and is repayable via semi\-annual installments of principal that began on April 30, 2018\. The loan bears interest at the LIBO Rate (as defined in the term loan agreement) plus   1\.10 percent , which equates to a current rate of   3\.03 percent , and interest is payable semi\-annually in installments\.

During November 2015, the Company issued   $500 million  senior unsecured notes due  2020 \. The notes bear interest at   2\.65 percent , payable semi\-annually in arrears on May 5 and November 5\. Concurrently, the Company entered into a fixed\-to\-floating interest rate swap to convert the interest on these unsecured notes to a floating rate until their maturity\. See Note  10  for further information on the interest\-rate swap agreement\.

During  November 2014 , the Company issued   $300 million  senior unsecured notes due November  2019 \. The notes bore interest at   2\.75 percent , payable semi\-annually in arrears\. Concurrently, the Company entered into a fixed\-to\-floating interest rate swap to convert the interest on these unsecured notes to a floating rate until their maturity\. The notes matured and were redeemed in full on November 6, 2019, utilizing available cash on hand\.

On  July 1, 2009 , the Company entered into a term loan agreement providing for loans to the Company aggregating up to   $124 million , to be secured by mortgages on   five  of the Company’s 737\-700 aircraft\. The Company borrowed the full   $124 million  and secured this loan with the requisite   five  aircraft mortgages\. The loan bore interest at a fixed rate of   4\.84 percent \. The loan matured and was paid out in full on  July 1, 2019 , utilizing available cash on hand\.

On  April 29, 2009 , the Company entered into a term loan agreement providing for loans to the Company aggregating up to   $332 million , to be secured by mortgages on   14  of the Company’s 737\-700 aircraft\. The Company borrowed the full   $332 million  and secured the loan with the requisite   14  aircraft mortgages\. The loan bore interest at the  LIBO Rate  (as defined in the term loan agreement) plus   3\.30 percent \. Pursuant to the terms of the term loan agreement, the Company entered into an interest rate swap agreement to convert the variable rate on the term loan to a fixed   6\.315 percent  until maturity\. The loan matured and was paid out in full on  May 6, 2019 , utilizing available cash on hand\.

On  May 6, 2008 , the Company entered into a term loan agreement providing for loans to the Company aggregating up to   $600 million , to be secured by first\-lien mortgages on   21  of the Company’s 737\-700 aircraft\. On May 9, 2008, the Company borrowed the full   $600 million  and secured these loans with the requisite   21  aircraft mortgages\. The loans mature on  May 9, 2020 , and are being repaid via quarterly installments of principal and interest that began on  August 9, 2008\.  The loans bear interest at the  LIBO Rate  (as defined in the term loan agreement) plus   0\.95 percent \.

85


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

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

Accounts receivable primarily consist of amounts due from credit card companies and customers of our aircraft maintenance and cargo transportation services\. We provide an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical write\-offs and other specific analyses\. Bad debt expense and write\-offs were not material for the years ended December 31, 2017, 2016 and 2015\.

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| (c)  | **Frequent Flyer Accounting—**United’s MileagePlus program builds customer loyalty by offering awards, benefits and services to program participants\. Members in this program earn miles for flights on United, United Express, Star Alliance members and certain other airlines that participate in the program\. Members can also earn miles by purchasing the goods and services of our network of  non\-airline partners\. We sell miles to these partners, which include domestic and international credit card issuers, retail merchants, hotels, car rental companies and our participating airline partners\. Miles can be redeemed for free (other than taxes and government imposed fees), discounted or upgraded air travel and  non\-travel awards\. The Company records its obligation for future award redemptions using a deferred revenue model\. |

**Miles Earned in Conjunction with Flights**

When frequent flyers earn miles for flights, the Company recognizes a portion of the ticket sales as revenue when the air transportation occurs and defers a portion of the ticket sale representing the value of the related miles as a multiple\-deliverable revenue arrangement\. The Company determines the estimated selling price of air transportation and miles as if each element is sold on a separate basis\. The total consideration from each ticket sale is then allocated to each of these elements, individually, on a pro rata basis\. The miles are recorded in Frequent flyer deferred revenue on the Company’s consolidated balance sheet and recognized into revenue when the transportation is provided\.

The Company’s estimated selling price of miles is based on an equivalent ticket value less fulfillment discount, which incorporates the expected redemption of miles, as the best estimate of selling price for these miles\. The equivalent ticket value is based on the prior 12 months’ weighted average equivalent ticket value of similar fares as those used to settle award redemptions while taking into consideration such factors as redemption pattern, cabin class, loyalty status and geographic region\. The estimated selling price of miles is adjusted by a fulfillment discount that considers a number of factors, including redemption patterns of various customer groups\.

**Co\-branded Credit Card Partner Mileage Sales**

United has a significant contract, the Second Amended and Restated Co\-Branded Card Marketing Services Agreement (the “Co\-Brand Agreement”), to sell MileagePlus miles to its co\-branded credit card partner, Chase Bank USA, N\.A\. (“Chase”)\. United identified the following significant revenue elements in the Co\-Brand Agreement: the air transportation element represented by the value of the mile (generally resulting from its redemption for future air transportation and whose fair value is described above); use of the United brand and access to MileagePlus member lists; advertising; and other travel related benefits\.

The fair value of the elements is determined using management’s estimated selling price of each element\. The objective of using the estimated selling price based methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand\-alone basis\. Accordingly, we determine our best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, volume discounts, published selling prices, number of miles awarded and number of miles redeemed\. The Company estimated the selling prices and volumes over the term of the Co\-Brand Agreement in order to determine the allocation of proceeds to each of the multiple elements to be delivered\. We also evaluate volumes on an annual basis, which may result in a change in the allocation of estimated selling price on a prospective basis\.

62


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

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consortia (and in limited cases, the participating carriers) have entered into long\-term agreements to lease certain airport fuel storage and distribution facilities that are typically financed through tax\-exempt bonds (either special facilities lease revenue bonds or general airport revenue bonds), issued by various local municipalities\. In general, each consortium lease agreement requires the consortium to make lease payments in amounts sufficient to pay the maturing principal and interest payments on the bonds\. As of December 31, 2017, approximately $1\.5 billion principal amount of such bonds were secured by significant fuel facility leases in which United participates, as to which United and each of the signatory airlines has provided indirect guarantees of the debt\. As of December 31, 2017, the Company’s contingent exposure was approximately $244 million principal amount of such bonds based on its recent consortia participation\. The Company’s contingent exposure could increase if the participation of other air carriers decreases\. The guarantees will expire when the tax\-exempt bonds are paid in full, which ranges from 2022 to 2049\. The Company did not record a liability at the time these indirect guarantees were made\.

**Critical Accounting Policies**

Critical accounting policies are defined as those that are affected by significant judgments and uncertainties which potentially could result in materially different accounting under different assumptions and conditions\. The Company has prepared the financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires management to make estimates and assumptions that affect the reported amounts in the financial statements\. Actual results could differ from those estimates under different assumptions or conditions\. The Company has identified the following critical accounting policies that impact the preparation of the financial statements\.

***Revenue Recognition\.*** The Company records passenger ticket sales and tickets sold by other airlines for use on United as passenger revenue when the transportation is provided or upon estimated breakage\. The value of unused passenger tickets is included in current liabilities as Advance ticket sales\. Tickets sold by other airlines are recorded at the estimated values to be billed to the other airlines\. Differences between amounts billed and the actual amounts may be rejected and rebilled or written off if the amount recorded was different from the original estimate\. When necessary, the Company records a reserve against its interline billings and payables if historical experience indicates that these amounts are different\. Non\-refundable tickets generally expire on the date of the intended flight, unless the date is extended by notification from the customer on or before the intended flight date\. Basic Economy tickets cannot be extended and refunds are not allowed except for ticket cancellations that are within 24 hours of purchase and one week or more prior to the original scheduled departure flight\.

Fees charged in association with changes or extensions to non\-refundable tickets are recorded as other revenue at the time the fee is incurred\. The fare on the changed ticket, including any additional collection of fare, is deferred and recognized in accordance with our transportation revenue recognition policy at the time the transportation is provided\. Change fees related to non\-refundable tickets are considered a separate transaction from the air transportation because they represent a charge for the Company’s additional service to modify a previous sale\. Therefore, the pricing of the change fee and the initial customer order are separately determined and represent distinct earnings processes\.

The Company records an estimate of breakage revenue on the flight date for tickets that will expire unused\. These estimates are based on the evaluation of actual historical results and forecasted trends\. Refundable tickets expire after one year from the date of issuance\.

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No\. 2014\-09,*Revenue from Contracts with Customers (Topic 606)* (“Topic 606”)*\.* Topic 606 prescribes that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services\. The standard impacts the classification of certain revenue streams and affects the timing of revenue and expense recognition for others\. For the Company, the most significant impact of the standard is the reclassification of certain ancillary fees from other operating revenue into passenger revenue on the statement of consolidated operations\. For 2016 and 2017, the amount to be

40


Annual Report of Southwest Airlines Co\. for year 2018

million shares in total under the Fourth Quarter 2018 ASR Program, which was completed in December 2018\. The purchase was recorded as a treasury share purchase for purposes of calculating earnings per share\.

On January 28, 2019, the Company launched a new accelerated share repurchase program by advancing $500 million to a financial institution in a privately negotiated transaction ("First Quarter 2019 ASR Program")\. The specific number of shares that the Company ultimately will repurchase under the First Quarter 2019 ASR Program will be determined based generally on a discount to the volume\-weighted average price per share of the Company's common stock during a calculation period to be completed no later than April 2019\. The purchase will be recorded as a treasury share purchase for purposes of calculating earnings per share\. Subsequent to the launch of the First Quarter 2019 ASR Program, the Company has $850 million remaining under its May 2018 $2\.0 billion share repurchase authorization\. See Part II, Item 5 for further information on the Company's share repurchase authorizations\.

**Company Overview**

The Company now serves 99 destinations across 40 states and ten near\-international countries, and operates over 4,000 departures a day\. Additionally, the Company has announced plans to begin service to Hawaii, subject to requisite governmental approvals, including approval from the Federal Aviation Administration (the "FAA") for Extended Operations ("ETOPS"), a regulatory requirement to operate between the U\.S\. mainland and the Hawaiian Islands\. The Company has also announced its intent to begin service to four Hawaiian airports: Honolulu International Airport, Lihue Airport, Kona International Airport at Keahole, and Kahului Airport, from four initial gateway airports in California: Oakland Metropolitan Airport, San Diego International Airport, Mineta San Jose International Airport, and Sacramento International Airport\. The Company has further announced its decision to cease service at Benito Juárez Mexico City International Airport, with the last day of service scheduled on March 30, 2019\.

During 2018, the Company took delivery of 26 new 737\-800 aircraft and 18 new 737 MAX 8 aircraft from Boeing, as well as 1 pre\-owned Boeing 737\-700 aircraft from a third party\. The Company became the first airline in North America to offer scheduled service utilizing Boeing’s new, more fuel\-efficient, 737 MAX 8 aircraft, which entered service in fourth quarter 2017\. The Company is scheduled to be the launch customer for the Boeing 737 MAX 7 series aircraft, with deliveries expected to begin in 2019\. As of December 31, 2018, the Company had firm orders in place with Boeing for 219 737 MAX 8 aircraft and 30 737 MAX 7 aircraft\. For 2019, the Company's current firm aircraft commitments and forecasted Boeing 737\-700 retirements would result in approximately 775 aircraft by year\-end 2019\. See Part I, Item 2 for further information\.

The Company plans to continue its route network and schedule optimization efforts through the addition of new markets and itineraries, while also pruning less profitable flights from its schedule\. The Company currently plans to grow its 2019 available seat miles no more than five percent, year\-over\-year, with first quarter 2019 year\-over\-year growth in the 3\.5 to 4 percent range\. The Company continues to expect the retirement of its Boeing 737\-300 ("Classic") aircraft, the last of which took place at the end of third quarter 2017, to produce significant incremental cost savings and improvements in pre\-tax results of at least $200 million, cumulatively, by the end of 2020\.

On May 9, 2017, the Company completed a multi\-year initiative to completely transition its reservation system to the Amadeus Altéa Passenger Service System\. As expected, the new reservation system produced incremental benefits in pretax results of approximately $200 million in 2018 through the deployment of certain revenue management tools and techniques\.

40


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

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

Plan Assets

The objectives of our investment policies are to: maintain sufficient income and liquidity to pay retirement benefits; produce a long\-term rate of return that meets or exceeds the assumed rate of return for plan assets; limit the volatility of asset performance and funded status; and diversify assets among asset classes and investment managers\.

Based on these investment objectives, a long\-term strategic asset allocation has been established\. This strategic allocation seeks to balance the potential benefit of improving the funded position with the potential risk that the funded position would decline\. The current strategic target asset allocation is as follows:

|                                 |                   |
| ------------------------------- | ----------------- |
| **Asset Class/Sub\-Class**      | **Allowed Range** |
| Equity                          | 45% \- 80%        |
| Public:                         |                   |
| U\.S\. Large                    | 15% \- 40%        |
| U\.S\. Small/Mid                | 2% \- 10%         |
| International                   | 10% \- 25%        |
| Emerging Markets                | 2% \- 15%         |
| Alternative Investments         | 5% \- 30%         |
| Fixed Income                    | 20% \- 55%        |
| Public:                         |                   |
| U\.S\. Long Duration            | 15% \- 45%        |
| High Yield and Emerging Markets | 0% \- 10%         |
| Private Income                  | 0% \- 10%         |
| Other                           | 0% \- 5%          |
| Cash Equivalents                | 0% \- 20%         |

Public equity as well as high yield and emerging market fixed income securities are used to provide diversification and are expected to generate higher returns over the long\-term than U\.S\. long duration bonds\. Public stocks are managed using a value investment approach in order to participate in the returns generated by stocks in the long\-term, while reducing year\-over\-year volatility\. U\.S\. long duration bonds are used to partially hedge the assets from declines in interest rates\. Alternative (private) investments are used to provide expected returns in excess of the public markets over the long\-term\. The pension plan’s master trust also participates in securities lending programs to generate additional income by loaning plan assets to borrowers on a fully collateralized basis\. These programs are subject to market risk\.

Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year\. Securities traded in the over\-the\-counter market are valued at the last bid price\. The money market fund is valued at fair value which represents the net asset value of the shares of such fund as of the close of business at the end of the period\. Investments in limited partnerships are carried at estimated net asset value as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships\. Common/collective trusts are valued at net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts\. The pension plan’s master trust also invests in a 103\-12 investment entity (the 103\-12 Investment Trust) which is designed to invest plan assets of more than one unrelated employer\. The 103\-12 Investment Trust is valued at net asset value which is determined by the issuer daily and is based on the aggregate fair value of trust assets less liabilities, divided by the number of units outstanding\. No changes in valuation techniques or inputs occurred during the year\.

102