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

The following table summarizes the aircraft fleet operated by regional carriers on our behalf at December 31, 2019:

|                               |                               |                               |            |            |            |            |            |            |             |             |             |             |       |       |  |  |  |  |  |  |  |  |  |  |  |  |
|:----------------------------- |:----------------------------- |:----------------------------- |:----------:|:----------:|:----------:|:----------:|:----------:|:----------:|:-----------:|:-----------:|:-----------:|:-----------:|:-----:|:-----:|:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |
|                               |                               |                               | Fleet Type | Fleet Type | Fleet Type | Fleet Type | Fleet Type | Fleet Type | Fleet Type  | Fleet Type  | Fleet Type  | Fleet Type  |       |       |  |  |  |  |  |  |  |  |  |  |  |  |
| Carrier                       | Carrier                       | Carrier                       |  CRJ\-200  |  CRJ\-200  |  CRJ\-700  |  CRJ\-700  |  CRJ\-900  |  CRJ\-900  | Embraer 170 | Embraer 170 | Embraer 175 | Embraer 175 | Total | Total |
| Endeavor Air, Inc\. ^(1)^     | Endeavor Air, Inc\. ^(1)^     | Endeavor Air, Inc\. ^(1)^     |    42      |    42      |    11      |    11      |    111     |    111     |     —       |     —       |     —       |     —       | 164   | 164   |
| SkyWest Airlines, Inc\.       | SkyWest Airlines, Inc\.       | SkyWest Airlines, Inc\.       |    75      |    75      |    11      |    11      |    43      |    43      |     —       |     —       |     56      |     56      | 185   | 185   |
| Republic Airline, Inc\.       | Republic Airline, Inc\.       | Republic Airline, Inc\.       |     —      |     —      |     —      |     —      |     —      |     —      |     22      |     22      |     28      |     28      |  50   |  50   |
| Compass Airlines, Inc\. ^(2)^ | Compass Airlines, Inc\. ^(2)^ | Compass Airlines, Inc\. ^(2)^ |     —      |     —      |     —      |     —      |     —      |     —      |     —       |     —       |     24      |     24      |  24   |  24   |
| GoJet Airlines, LLC ^(3)^     | GoJet Airlines, LLC ^(3)^     | GoJet Airlines, LLC ^(3)^     |     —      |     —      |    12      |    12      |     7      |     7      |     —       |     —       |     —       |     —       |  19   |  19   |
| Total                         | Total                         | Total                         |    117     |    117     |    34      |    34      |    161     |    161     |     22      |     22      |    108      |    108      | 442   | 442   |

^(1)^ Endeavor Air, Inc\. is a wholly owned subsidiary of Delta\.

^(2)^ In 2019, we and Compass Airlines, Inc\., agreed not to renew our contract and to end our relationship by the end of 2020\.

^(3)^ In 2019, we and GoJet Airlines, LLC, agreed not to renew our CRJ\-700 contract and to end those operations by the end of 2020\. In addition, in January 2020, we agreed not to renew our CRJ\-900 contract and to end those operations by the end of 2020\.

Aircraft Purchase Commitments

As part of a multi\-year effort, we have been investing in new aircraft to provide more premium products, an improved customer experience, greater fuel efficiency and better operating economics\. Our purchase commitments for additional aircraft at December 31, 2019 are detailed in the following table:

|                               |                               |                                   |                                   |                                   |                                   |                                   |                                   |                                   |                                   |                                   |                                   |  |  |  |  |  |  |  |  |  |  |  |  |
|:----------------------------- |:----------------------------- |:---------------------------------:|:---------------------------------:|:---------------------------------:|:---------------------------------:|:---------------------------------:|:---------------------------------:|:---------------------------------:|:---------------------------------:|:---------------------------------:|:---------------------------------:|:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |
|                               |                               | Delivery in Calendar Years Ending | Delivery in Calendar Years Ending | Delivery in Calendar Years Ending | Delivery in Calendar Years Ending | Delivery in Calendar Years Ending | Delivery in Calendar Years Ending | Delivery in Calendar Years Ending | Delivery in Calendar Years Ending | Delivery in Calendar Years Ending | Delivery in Calendar Years Ending |  |  |  |  |  |  |  |  |  |  |  |  |
| Aircraft Purchase Commitments | Aircraft Purchase Commitments |               2020                |               2020                |               2021                |               2021                |               2022                |               2022                |            After 2022             |            After 2022             |               Total               |               Total               |
| A220\-100                     | A220\-100                     |                17                 |                17                 |                —                  |                —                  |                —                  |                —                  |                —                  |                —                  |                17                 |                17                 |
| A220\-300                     | A220\-300                     |                6                  |                6                  |                12                 |                12                 |                18                 |                18                 |                14                 |                14                 |                50                 |                50                 |
| A321\-200                     | A321\-200                     |                31                 |                31                 |                —                  |                —                  |                —                  |                —                  |                —                  |                —                  |                31                 |                31                 |
| A321\-200neo                  | A321\-200neo                  |                1                  |                1                  |                41                 |                41                 |                40                 |                40                 |                18                 |                18                 |               100                 |               100                 |
| A330\-900neo ^(1)^            | A330\-900neo ^(1)^            |                7                  |                7                  |                11                 |                11                 |                8                  |                8                  |                7                  |                7                  |                33                 |                33                 |
| A350\-900                     | A350\-900                     |                4                  |                4                  |                2                  |                2                  |                —                  |                —                  |                10                 |                10                 |                16                 |                16                 |
| CRJ\-900                      | CRJ\-900                      |                6                  |                6                  |                —                  |                —                  |                —                  |                —                  |                —                  |                —                  |                6                  |                6                  |
| Total                         | Total                         |                72                 |                72                 |                66                 |                66                 |                66                 |                66                 |                49                 |                49                 |               253                 |               253                 |

^(1)^ Includes two A330\-900neo lease commitments with one in each of 2020 and 2021\.

Ground Facilities

Airline Operations

We lease most of the land and buildings that we occupy\. Our largest aircraft maintenance base, various equipment maintenance, cargo, flight kitchen and training facilities and most of our principal offices are located at or near the Atlanta airport on land leased from the City of Atlanta\. We lease ticket counters, gate areas, operating facilities and other terminal space in most of the airports that we serve\. At most airports, we have entered into use agreements which provide for the non\-exclusive use of runways, taxiways and other improvements and facilities; landing fees under these agreements normally are based on the number of landings and weight of aircraft\. These leases and use agreements generally run for periods of less than one year to 30 years or more, and often contain provisions for periodic adjustments of lease rates, landing fees and other charges applicable under that type of agreement\. We also lease aircraft maintenance, equipment maintenance and air cargo facilities at several airports\. Our facility leases generally require us to pay the cost of providing, operating and maintaining such facilities, including, in some cases, amounts necessary to pay debt service on special facility bonds issued to finance their construction\. We also lease computer facilities, marketing offices, reservations offices and other off\-airport facilities in certain locations for varying terms\.

We own our Atlanta reservations center, other real property in Atlanta, and reservations centers in Minot, North Dakota and Chisholm, Minnesota\.

23


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

American’s principal financing activities in  2019  included  $3\.4 billion  in debt repayments, consisting of  $2\.1 billion  in scheduled debt repayments and the prepayment of  $1\.3 billion  of secured loans\. These cash outflows were offset in part by  $3\.2 billion  in proceeds from the issuance of debt for equipment notes related to EETCs and the financing of certain aircraft and other flight equipment\.

American’s principal financing activities in  2018  included  $2\.4 billion  in debt repayments, consisting of  $1\.9 billion  in scheduled debt repayments and the prepayment of  $513 million  of secured loans\. These cash outflows were offset by  $2\.4 billion  in proceeds from the issuance of debt, consisting of  $1\.9 billion  in connection with the issuance of equipment notes related to EETCs and the financing of certain aircraft and pre\-delivery purchase deposits, as well as an incremental  $500 million  on a term loan facility\.

Commitments

For further information regarding our commitments, see the Notes to AAG’s Consolidated Financial Statements in Part II, Item 8A and the Notes to American’s Consolidated Financial Statements in Part II, Item 8B at the referenced footnotes below\.

|                                           |         |              |
| ----------------------------------------- | ------- | ------------ |
|                                           | **AAG** | **American** |
| Long\-term debt and debt covenants        | Note 5  | Note 3       |
| Leases                                    | Note 6  | Note 4       |
| Employee benefit plans                    | Note 10 | Note 8       |
| Commitments, contingencies and guarantees | Note 12 | Note 10      |

Off\-Balance Sheet Arrangements

An off\-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us\.

We have no off\-balance sheet arrangements of the types described in the first three categories above that we believe may have a material current or future effect on financial condition, liquidity or results of operations\.

Pass\-Through Trusts

American currently operates  382  owned aircraft and  69  leased aircraft, and owns  79  spare aircraft engines, which in each case were financed with EETCs issued by pass\-through trusts\. These trusts are off\-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment or to permit issuance of debt backed by existing flight equipment\. In the case of aircraft EETCs, rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allow American to raise the financing for a number of aircraft at one time and, if applicable, place such funds in escrow pending a future purchase, delivery or refinancing of the relevant aircraft\. Similarly, in the case of the spare engine EETCs, the trusts allow American to use its existing pool of spare engines to raise financing under a single facility\. The trusts have also been structured to provide for certain credit enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to American\.

Each trust covers a set number of aircraft or spare engines scheduled to be delivered, financed or refinanced upon the issuance of the EETC or within a specific period of time thereafter\. At the time of each covered aircraft or spare engine financing, the relevant trust used the proceeds of the issuance of the EETC (which may have been available at the time of issuance thereof or held in escrow until financing of the applicable aircraft following its delivery) to purchase equipment notes relating to the financed aircraft or engines\. The equipment notes are issued, at American’s election, in connection with a mortgage financing of the aircraft or spare engines or, in certain cases, by a separate owner trust in connection with a leveraged lease financing of the aircraft\. In the case of a leveraged lease financing, the owner trust then leases the aircraft to American\. In both cases, the equipment notes are secured by a security interest in the aircraft or engines, as applicable\. The pass\-through trust certificates are not direct obligations of, nor are they guaranteed by, AAG or American\. However, in the case of mortgage financings, the equipment notes issued to the trusts are direct obligations of American and, in certain instances, have been guaranteed by AAG\. As of  December 31, 2019 ,  $11\.9 billion  associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet\.

62


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

Hedge Position as of December 31, 2018

|                                             |                                             |                                             |                            |                            |                            |                                            |                                            |                     |                     |                     |                            |                         |                           |                              |                        |      |
|:------------------------------------------- |:------------------------------------------- |:------------------------------------------- | --------------------------:| --------------------------:| --------------------------:|:------------------------------------------ |:------------------------------------------ |:-------------------:|:-------------------:|:-------------------:| --------------------------:| -----------------------:| -------------------------:| ----------------------------:| ----------------------:| ----:|
| (in millions)                               | (in millions)                               | (in millions)                               |                     Volume |                     Volume |                     Volume |                                            |                                            | Final Maturity Date | Final Maturity Date | Final Maturity Date | Prepaid Expenses and Other | Other Noncurrent Assets | Other Accrued Liabilities | Other Noncurrent Liabilities | Hedge Derivatives, net |
| *Designated as hedges*                      | *Designated as hedges*                      | *Designated as hedges*                      |                            |                            |                            |                                            |                                            |                     |                     |                     |                            |                         |                           |                              |                        |
| Interest rate contracts (fair value hedges) | Interest rate contracts (fair value hedges) | Interest rate contracts (fair value hedges) |                      1,893 |                      1,893 |                      1,893 | U\.S\. dollars                             | U\.S\. dollars                             |     April 2028      |     April 2028      |     April 2028      |                        $ — |                     $ 8 |                     $ (7) |                          $ — |                    $ 1 |
| Foreign currency exchange contracts         | Foreign currency exchange contracts         | Foreign currency exchange contracts         |                      6,934 |                      6,934 |                      6,934 | Japanese yen                               | Japanese yen                               |    November 2019    |    November 2019    |    November 2019    |                          1 |                       — |                         — |                            — |                      1 |
| *Not designated as hedges*                  | *Not designated as hedges*                  | *Not designated as hedges*                  | *Not designated as hedges* | *Not designated as hedges* | *Not designated as hedges* |                                            |                                            |                     |                     |                     |                            |                         |                           |                              |                        |      |
| Foreign currency exchange contract          | Foreign currency exchange contract          | Foreign currency exchange contract          |                        397 |                        397 |                        397 | Euros                                      | Euros                                      |    December 2020    |    December 2020    |    December 2020    |                         13 |                       — |                         — |                         (17) |                    (4) |
| Fuel hedge contracts                        | Fuel hedge contracts                        | Fuel hedge contracts                        |                        219 |                        219 |                        219 | gallons \- crude oil and refined products  | gallons \- crude oil and refined products  |    December 2019    |    December 2019    |    December 2019    |                         30 |                       — |                      (15) |                            — |                     15 |
| Total derivative contracts                  | Total derivative contracts                  | Total derivative contracts                  | Total derivative contracts | Total derivative contracts | Total derivative contracts |                                            |                                            |                     |                     |                     |                            |                    $ 44 |                       $ 8 |                       $ (22) |                 $ (17) | $ 13 |

Balance Sheet Location of Hedged Item in Fair Value Hedges

|                                               |                                               |                                               |                                      |                                      |  |  |  |                   |                                                   |                                                   |                                                   |                                                   |  |  |  |
|:--------------------------------------------- |:--------------------------------------------- |:--------------------------------------------- | ------------------------------------:| ------------------------------------:|:- |:- |:- | -----------------:| -------------------------------------------------:|:-------------------------------------------------:|:-------------------------------------------------:|:-------------------------------------------------:|:- |:- |:- |
|                                               |                                               |                                               | Carrying Amount of Hedge Instruments | Carrying Amount of Hedge Instruments |  |  |  |                   | Cumulative Amount of Fair Value Hedge Adjustments | Cumulative Amount of Fair Value Hedge Adjustments | Cumulative Amount of Fair Value Hedge Adjustments | Cumulative Amount of Fair Value Hedge Adjustments |  |  |  |
| (in millions)                                 | (in millions)                                 | (in millions)                                 |                    December 31, 2019 |                    December 31, 2018 |  |  |  | December 31, 2019 |                                 December 31, 2018 |
| Current maturities of debt and finance leases | Current maturities of debt and finance leases | Current maturities of debt and finance leases |                               $ (19) |                               $ (11) |  |  |  |               $ 8 |                                               $ 7 |
| Debt and finance leases                       | Debt and finance leases                       | Debt and finance leases                       |                              (1,783) |                              (1,870) |  |  |  |                53 |                                               (8) |

Offsetting Assets and Liabilities

We have master netting arrangements with our counterparties giving us the right to offset hedge assets and liabilities\. However, we have elected not to offset the fair value positions recorded on our balance sheets\. The following table shows the net fair value of our counterparty positions had we elected to offset\.

|                          |                          |                          |                            |                         |                           |                              |                        |
|:------------------------ |:------------------------ |:------------------------ | --------------------------:| -----------------------:| -------------------------:| ----------------------------:| ----------------------:|
| (in millions)            | (in millions)            | (in millions)            | Prepaid Expenses and Other | Other Noncurrent Assets | Other Accrued Liabilities | Other Noncurrent Liabilities | Hedge Derivatives, Net |
| December 31, 2019        | December 31, 2019        | December 31, 2019        |                            |                         |                           |                              |                        |
| Net derivative contracts | Net derivative contracts | Net derivative contracts |                       $ 24 |                    $ 53 |                     $ (5) |                        $ (4) |                   $ 68 |
| December 31, 2018        | December 31, 2018        | December 31, 2018        |                            |                         |                           |                              |                        |
| Net derivative contracts | Net derivative contracts | Net derivative contracts |                       $ 35 |                     $ — |                    $ (13) |                        $ (9) |                   $ 13 |

71


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

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the  23rd day of  February, 2018 \.

|                        |                         |
| ---------------------- | ----------------------- |
| DELTA AIR LINES, INC\. | DELTA AIR LINES, INC\.  |
| By:                    | /s/ Edward H\. Bastian  |
|                        | Edward H\. Bastian      |
|                        | Chief Executive Officer |

 97


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

Covenants

We were in compliance with the covenants in our financing agreements at December 31, 2019\.

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2019 that we expect will be paid in cash\. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax positions and amounts payable under collective bargaining arrangements, among others\. In addition, the table does not include expected significant cash payments representing obligations that arise in the ordinary course of business that do not include contractual commitments\.

The amounts presented are based on various estimates, including estimates regarding the timing of payments, prevailing interest rates, volumes purchased, the occurrence of certain events and other factors\. Accordingly, the actual results may vary materially from the amounts presented in the table\.

|                                             |                                             |                                             |                                      |                                      |                                      |                                      |                                      |                                      |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|:------------------------------------------- |:------------------------------------------- |:------------------------------------------- | ------------------------------------:| ------------------------------------:| ------------------------------------:| ------------------------------------:| ------------------------------------:| ------------------------------------:| ------------------------------------:|:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |
|                                             |                                             |                                             | Contractual Obligations by Year^(1)^ | Contractual Obligations by Year^(1)^ | Contractual Obligations by Year^(1)^ | Contractual Obligations by Year^(1)^ | Contractual Obligations by Year^(1)^ | Contractual Obligations by Year^(1)^ | Contractual Obligations by Year^(1)^ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| (in millions)                               | (in millions)                               | (in millions)                               |                                 2020 |                                 2021 |                                 2022 |                                 2023 |                                 2024 |                           Thereafter |                                Total |
| Debt (see Note 7)                           | Debt (see Note 7)                           | Debt (see Note 7)                           |                                      |                                      |                                      |                                      |                                      |                                      |                                      |
| Principal amount                            | Principal amount                            | Principal amount                            |                              $2,060  |                              $1,094  |                              $1,708  |                                $932  |                              $1,508  |                              $2,689  |                              $9,991  |
| Interest payments                           | Interest payments                           | Interest payments                           |                                 307  |                                 295  |                                 246  |                                 185  |                                 154  |                                 635  |                               1,822  |
| Finance lease obligations (see Note 8)      | Finance lease obligations (see Note 8)      | Finance lease obligations (see Note 8)      |                                      |                                      |                                      |                                      |                                      |                                      |                                      |
| Principal amount                            | Principal amount                            | Principal amount                            |                                 233  |                                 213  |                                 156  |                                 111  |                                 171  |                                 169  |                               1,053  |
| Interest payments                           | Interest payments                           | Interest payments                           |                                  31  |                                  26  |                                  18  |                                  13  |                                   9  |                                  10  |                                 107  |
| Operating lease obligations (see Note 8)    | Operating lease obligations (see Note 8)    | Operating lease obligations (see Note 8)    |                               1,031  |                                 913  |                                 825  |                                 803  |                                 738  |                               4,293  |                               8,603  |
| Aircraft purchase commitments (see Note 11) | Aircraft purchase commitments (see Note 11) | Aircraft purchase commitments (see Note 11) |                               2,980  |                               3,740  |                               3,390  |                               1,640  |                                 500  |                               1,440  |                              13,690  |
| Contract carrier obligations (see Note 11)  | Contract carrier obligations (see Note 11)  | Contract carrier obligations (see Note 11)  |                               1,750  |                               1,432  |                               1,377  |                               1,132  |                               1,002  |                               2,349  |                               9,042  |
| Employee benefit obligations (see Note 10)  | Employee benefit obligations (see Note 10)  | Employee benefit obligations (see Note 10)  |                                 134  |                                 133  |                                 119  |                                 110  |                                 102  |                               4,650  |                               5,248  |
| Other obligations                           | Other obligations                           | Other obligations                           |                               2,993  |                                 919  |                               1,137  |                                 807  |                                 596  |                               5,904  |                              12,356  |
| Total                                       | Total                                       | Total                                       |                             $11,519  |                              $8,765  |                              $8,976  |                              $5,733  |                              $4,780  |                             $22,139  |                             $61,912  |

^(1)^ For additional information, see the Notes to the Consolidated Financial Statements referenced in the table above\.

Debt, Principal Amount\.  Represents scheduled principal payments on debt\.

Debt, Interest Payments\.  Represents estimated interest payments based on interest rates specified in our applicable debt agreements\. Interest payments on variable interest rate debt were calculated using LIBOR at December 31, 2019\.

Finance and Operating Lease Obligations\.  Refer to Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding finance and operating leases\.

Aircraft Purchase Commitments\.  Refer to the aircraft purchase commitments table in Item 2 for additional information about our future aircraft purchases\.

Contract Carrier Obligations\.  Represents our estimated minimum fixed obligations under capacity purchase agreements with third\-party regional carriers\. The reported amounts are based on (1) the required minimum levels of flying by our contract carriers under the applicable agreements and (2) assumptions regarding the costs associated with such minimum levels of flying\.

Employee Benefit Obligations\.  Represents primarily (1) projected future benefit payments from our unfunded postretirement and postemployment plans and (2) our estimated minimum required funding for our qualified defined benefit pension plans based on actuarially determined estimates\. For additional information about our defined benefit pension plan obligations, see "Critical Accounting Policies and Estimates\."

Other Obligations\.  Represents estimated purchase obligations under which we are required to make minimum payments for goods and services, including, but not limited to, aviation\-related, maintenance, professional security, insurance, marketing, technology, sponsorships and other third\-party services and products\. This also includes obligations related to our investment in and planned strategic alliance with LATAM\.

40


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

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

***Assumptions***

The following actuarial assumptions were used to determine American’s benefit obligations and net periodic benefit cost for the periods presented:

|                                |                      |                      |                                                                  |                                                                  |
| ------------------------------ | -------------------- | -------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- |
|                                | **Pension Benefits** | **Pension Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** |
|                                | **2017**             | **2016**             | **2017**                                                         | **2016**                                                         |
| Benefit obligations:           |                      |                      |                                                                  |                                                                  |
| Weighted average discount rate | 3\.80%               | 4\.30%               | 3\.60%                                                           | 4\.10%                                                           |

|                                                                           |                      |                      |                      |                                                                  |                                                                  |                                                                  |
| ------------------------------------------------------------------------- | -------------------- | -------------------- | -------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- |
|                                                                           | **Pension Benefits** | **Pension Benefits** | **Pension Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** |
|                                                                           | **2017**             | **2016**             | **2015**             | **2017**                                                         | **2016**                                                         | **2015**                                                         |
| Net periodic benefit cost:                                                |                      |                      |                      |                                                                  |                                                                  |                                                                  |
| Weighted average discount rate                                            | 4\.30%               | 4\.70%               | 4\.30%               | 4\.10%                                                           | 4\.42%                                                           | 4\.00%                                                           |
| Weighted average expected rate of return on plan assets                   | 8\.00%               | 8\.00%               | 8\.00%               | 8\.00%                                                           | 8\.00%                                                           | 8\.00%                                                           |
| Weighted average health care cost trend rate assumed for next year  ^(1)^ | N/A                  | N/A                  | N/A                  | 4\.19%                                                           | 4\.25%                                                           | 5\.21%                                                           |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | The weighted average health care cost trend rate at  December 31, 2017  is assumed to decline gradually to  3\.76%  by 2025 and remain level thereafter\. |

As of December 31, 2017, American’s estimate of the long\-term rate of return on plan assets was 8% based on the target asset allocation\. Expected returns on long duration bonds are based on yields to maturity of the bonds held at year\-end\. Expected returns on other assets are based on a combination of long\-term historical returns, actual returns on plan assets achieved over the last ten years, current and expected market conditions, and expected value to be generated through active management, currency overlay and securities lending programs\.

A one percentage point change in the assumed health care cost trend rates would have the following effects on American’s retiree medical and other postretirement benefits plans (in millions):

|                                                                   |                 |                 |
| ----------------------------------------------------------------- | --------------- | --------------- |
|                                                                   | **1% Increase** | **1% Decrease** |
| Increase (decrease) on 2017 service and interest cost             | $2              | $(2)            |
| Increase (decrease) on benefit obligation as of December 31, 2017 | 54              | (51)            |

***Minimum Contributions***

American is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and various other laws for U\.S\. based plans as well as under funding rules specific to countries where American maintains defined benefit plans\. Based on current funding assumptions, American has minimum required contributions of $39 million for 2018\. American expects to make supplemental contributions of $425 million to its U\.S\. based defined benefit pension plans in 2018\. The minimum funding obligation for American’s U\.S\. based defined benefit pension plans was subject to temporary favorable rules that expired at the end of 2017\. American’s pension funding obligations are likely to increase materially beginning in 2019, when American will be required to make contributions relating to the 2018 fiscal year\. The amount of these obligations will depend on the performance of American’s investments held in trust by the pension plans, interest rates for determining liabilities, the amount of and timing of any supplemental contributions and American’s actuarial experience\.

154


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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1\. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

***Organization and Basis of Presentation***

The consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska, Horizon, and Virgin America\. Our consolidated financial statements also include McGee Air Services, a subsidiary of Alaska\. The Company conducts substantially all of its operations through these subsidiaries\. All significant intercompany balances and transactions have been eliminated\. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and their preparation requires the use of management’s estimates\. Actual results may differ from these estimates\.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year\.

***Cash and Cash Equivalents***

Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit\. They are carried at cost, which approximates market value\. The Company reduces cash balances when funds are disbursed\. Due to the time delay in funds clearing the banks, the Company normally maintains a negative balance in its cash disbursement accounts, which is reported as a current liability\. The amount of the negative cash balance was $10 million and $15 million at December 31, 2017 and 2016 respectively, and is included in accounts payable, with the change in the balance during the year included in other financing activities in the consolidated statements of cash flows\.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self\-insurance programs or other contractual rights\. Restricted cash consists of highly liquid securities with original maturities of three months or less\. They are carried at cost, which approximates fair value\.

***Marketable Securities***

Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short\-term investments\. Investments with maturities beyond one year may be classified as short\-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations\. All cash equivalents and short\-term investments are classified as available\-for\-sale and realized gains and losses are recorded using the specific identification method\. Changes in market value, excluding other\-than\-temporary impairments, are reflected in accumulated other comprehensive loss (AOCL)\.

Investments are considered to be impaired when a decline in fair value is judged to be other\-than\-temporary\. The Company uses a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment\. If the cost of an investment exceeds its fair value, management evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, the Company's intent and ability to hold, or plans to sell, the investment\. Once a decline in fair value is determined to be other\-than\-temporary, an impairment charge is recorded to Other—net in the consolidated statements of operations and a new cost basis in the investment is established\.

***Inventories and Supplies—net***

Expendable aircraft parts, materials and supplies are stated at average cost and are included in inventories and supplies***—***net\. An obsolescence allowance for expendable parts is accrued based on estimated lives of the corresponding fleet type and salvage values\. The allowance for expendable inventories was $38 million and $36 million at December 31, 2017 and 2016, respectively\. Inventory and supplies***—***net also includes fuel inventory of $23 million and $16 million at December 31, 2017 and 2016, respectively\. Repairable and rotable aircraft parts inventories are included in flight equipment\.

 68


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

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

The table below summarizes UAL's unearned compensation and weighted\-average remaining period to recognize costs for all outstanding share\-based awards that are probable of being achieved as of December 31, 2018 (in millions, except as noted):

|               |                           |                                                                                |
| ------------- | ------------------------- | ------------------------------------------------------------------------------------ |
|               | **Unearned Compensation** | **Weighted\-**

**Average**

**Remaining Period**

**(in years)** |
| RSUs          | $66                       | 1\.6                                                                                |
| Stock options | 2                         | 2\.6                                                                                |
| Total         | $68                       |                                                                                |

RSUs and Restricted Stock\. All performance\-based RSUs, as well as a portion of the outstanding time\-vested RSUs, will be settled in cash\. As of December 31, 2018, UAL had recorded a liability of $51 million related to its RSUs\. UAL paid $28 million, $50 million and $69 million related to its RSUs during 2018, 2017 and 2016, respectively\.

The table below summarizes UAL's RSUs and restricted stock activity for the years ended December 31 (shares in millions):

|                                  |                      |                    |                                                          |                                  |                                                          |
| -------------------------------- | -------------------- | ------------------ | -------------------------------------------------------- | -------------------------------- | -------------------------------------------------------- |
|                                  | **Liability Awards** | **Equity Awards**  | **Equity Awards**                                        | **Equity Awards**                | **Equity Awards**                                        |
|                                  | **RSUs**             |

**RSUs** | **Weighted\-**

**Average**

**Grant Price** | **Restricted**

**Stock** | **Weighted\-**

**Average**

**Grant Price** |
| Outstanding at December 31, 2015 | 2\.6                 | —                  | $—                                                       | 0\.3                             | $48\.68                                                  |
| Granted                          | 1\.0                 | 0\.9               | 51\.60                                                   | 0\.4                             | 50\.63                                                   |
| Vested                           | (1\.4)               | —                  | —                                                        | (0\.1)                           | 41\.47                                                   |
| Forfeited                        | (0\.1)               | (0\.1)             | 50\.57                                                   | (0\.1)                           | 53\.42                                                   |
| Outstanding at December 31, 2016 | 2\.1                 | 0\.8               | 51\.67                                                   | 0\.5                             | 52\.00                                                   |
| Granted                          | 0\.6                 | 1\.0               | 71\.68                                                   | —                                | —                                                        |
| Vested                           | (0\.7)               | (0\.3)             | 51\.81                                                   | (0\.2)                           | 51\.60                                                   |
| Forfeited                        | (0\.2)               | (0\.1)             | 57\.49                                                   | —                                | —                                                        |
| Outstanding at December 31, 2017 | 1\.8                 | 1\.4               | 63\.99                                                   | 0\.3                             | 52\.30                                                   |
| Granted                          | 0\.7                 | 1\.1               | 67\.74                                                   | —                                | —                                                        |
| Vested                           | (0\.5)               | (0\.5)             | 63\.02                                                   | (0\.2)                           | 53\.24                                                   |
| Forfeited                        | (0\.1)               | (0\.2)             | 67\.34                                                   | —                                | —                                                        |
| Outstanding at December 31, 2018 | 1\.9                 | 1\.8               | 66\.29                                                   | 0\.1                             | 51\.17                                                   |

The fair value of RSUs and restricted stock that vested in 2018, 2017 and 2016 was $70 million, $76 million and $80 million, respectively\. The fair value of the restricted stock and the stock\-settled RSUs was based upon the UAL common stock price on the date of grant\. These awards are accounted for as equity awards\. The fair value of the cash\-settled RSUs was based on the UAL common stock price as of the last day preceding the settlement date\. These awards are accounted for as liability awards\. Restricted stock vesting and the recognition of the expense is similar to the stock option vesting described below\.

Stock Options\. During 2018, UAL did not grant any stock option awards\. In 2017, UAL granted approximately 36,000 stock options with exercise prices equal to the fair market value of UAL's common stock on the date of grant with a weighted\-average exercise price of $77\.56 and a weighted\-average grant date fair value of approximately $0\.7 million\. In 2016, UAL granted approximately 0\.1 million stock options with exercise prices equal to the fair market value of UAL's common stock on the date of grant and an additional approximately 0\.3 million stock options with exercise prices at a 25% premium of the grant date fair market value resulting in a weighted\-average exercise price of $56\.19 and a weighted\-average grant date fair value of approximately $2\.3 million\. Expense related to each portion of an option grant is recognized on a straight\-line basis over the specific vesting period for those options\.

The Company determined the grant date fair value of stock options using a Black\-Scholes option pricing model, which requires the use of several assumptions\. The risk\-free interest rate is based on the U\.S\. treasury yield curve in effect for the expected term of the option at the time of grant\. The dividend yield on UAL's common stock was assumed to be zero since UAL did not have any plans to pay dividends at the time of the option grants\. The volatility assumptions were based upon historical volatilities of UAL using daily stock price returns equivalent to the expected term of the option\. The expected term of the

66


Annual Report of Southwest Airlines Co\. for year 2017

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (g) | Calculated as operating revenues divided by available seat miles\. Also referred to as "operating unit revenues" or "RASM," this is a measure of operating revenue production based on the total available seat miles flown during a particular period\. Year ended 2015 RASM excludes a $172 million one\-time special revenue adjustment\. Including the special revenue adjustment, RASM would have been 14\.11 cents for the year ended 2015\. Additional information regarding this special item is provided in the  Note Regarding Use of Non\-GAAP Financial Measures \. |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (h) | Calculated as passenger revenue divided by available seat miles\. Also referred to as "passenger unit revenues," this is a measure of passenger revenue production based on the total available seat miles flown during a particular period\. |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (i) | Calculated as operating expenses divided by available seat miles\. Also referred to as "unit costs" or "cost per available seat mile," this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies\. |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (j) | Refer to Note 1 to the Consolidated Financial Statements for additional information regarding the impact from the Company's July 2015 amended co\-branded credit card agreement with Chase Bank USA, N\.A\. |

38


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

***Wages and Benefits***

Wages and benefits increased during 2016 by $128 million, or 10%, compared to 2015\. The primary components of wages and benefits are shown in the following table:

|                               |                                      |                                      |                                      |
| ----------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                               | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
| ***(in millions)***           | **2016**                             | **2015**                             | **% Change**                         |
| Wages                         | **$1,022**                           | $945                                 | 8\.1 %                               |
| Medical and other benefits    | **192**                              | 153                                  | 25\.5 %                              |
| Defined contribution plans    | **67**                               | 60                                   | 11\.6 %                              |
| Pension—defined benefit plans | **25**                               | 28                                   | (10\.7)%                             |
| Payroll taxes                 | **76**                               | 68                                   | 11\.8 %                              |
| Total wages and benefits      | **$1,382**                           | $1,254                               | 10\.2 %                              |

Wages increased8% on a 7% increase in FTEs\. The increase in wages was primarily attributable to FTE growth to support our growth and an increase in the average wages per employee\.

Medical and other benefits increased 25% compared to the prior year\. The increase was primarily due to an increase in the number of employees and high\-cost medical claims\.

Defined contribution plans increased 12% due to FTE growth and increased participation throughout all labor groups\.

Pension expense decreased 11%, compared to the same period in the prior year\. The decrease was due to a change in several assumptions used at December 31, 2015, including a higher discount rate, updated retirement age assumptions, future salary increase assumptions and others that resulted in lower expense recognition in 2016\.

***Variable Incentive Pay***

Variable incentive pay expense increased to $127 million in 2016 from $120 million in 2015\. The increase was primarily due to a higher wage base\.

***Aircraft Fuel***

Aircraft fuel expense decreased$123 million, or 13%, compared to 2015\. The elements of the change are summarized in the following table:

|                                                    |                                      |                                      |                                      |                                      |
| -------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                    | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                    | **2016**                             | **2016**                             | **2015**                             | **2015**                             |
| ***(in millions, except for per gallon amounts)*** | **Dollars**                          | **Cost/Gal**                         | **Dollars**                          | **Cost/Gal**                         |
| Raw or "into\-plane" fuel cost                     | **$828**                             | **$1\.49**                           | $935                                 | $1\.84                               |
| Losses on settled hedges                           | **16**                               | **0\.03**                            | 19                                   | 0\.04                                |
| Consolidated economic fuel expense                 | **$844**                             | **$1\.52**                           | $954                                 | $1\.88                               |
| Mark\-to\-mark fuel hedge adjustments              | **(13)**                             | **(0\.02)**                          | —                                    | —                                    |
| GAAP fuel expense                                  | **$831**                             | **$1\.50**                           | $954                                 | $1\.88                               |
| Fuel gallons                                       | **554**                              |                                      | 508                                  |                                      |

Fuel gallons consumed increased 9% in line with the 11% increase capacity, partially offset by a 1% improvement in fuel efficiency as measured by ASMs per gallon\.

The raw fuel price per gallon decreased 19% as a result of lower West Coast jet fuel prices\. West Coast jet fuel prices are impacted by both the price of crude oil and the refining margins associated with the conversion of crude oil to jet fuel\. The decrease in raw fuel price per gallon during 2016 was due to a decline in crude oil prices of 11% and a decrease in refining margins of 36%, when compared to the prior year\.

 49


Annual Report of Southwest Airlines Co\. for year 2019

The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Income for the year ended  December 31, 2019  and  2018 :

|                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |
| ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- |
| **Location and amount recognized in income on cash flow and fair value hedging relationships** | **Location and amount recognized in income on cash flow and fair value hedging relationships** | **Location and amount recognized in income on cash flow and fair value hedging relationships** | **Location and amount recognized in income on cash flow and fair value hedging relationships** | **Location and amount recognized in income on cash flow and fair value hedging relationships** |
|                                                                                | **Year ended December 31, 2019**                                                               | **Year ended December 31, 2019**                                                               | **Year ended December 31, 2018**                                                               | **Year ended December 31, 2018**                                                               |
| **(in millions)**                                                                              | **Fuel and oil**                                                                               | **Interest expense**                                                                           | **Fuel and oil**                                                                               | **Interest expense**                                                                           |
| Total                                                                                | $48                                                                                | $29                                                                                | $

(33

)                                                                          | $37                                                                                |
| (Gain) loss on cash flow hedging relationships:                                                |                                                                                |                                                                                |                                                                                |                                                                                |
|  Commodity contracts:                                                                          |                                                                                |                                                                                |                                                                                |                                                                                |
|  Amount of (gain) loss reclassified from AOCI into income                                      | 48                                                                                | —                                                                                | (33

)                                                                                | —                                                                                |
|  Interest contracts:                                                                           |                                                                                |                                                                                |                                                                                |                                                                                |
|  Amount of loss reclassified from AOCI into income                                             | —                                                                                | 5                                                                                | —                                                                                | 6                                                                                |
| Impact of fair value hedging relationships:                                                    |                                                                                |                                                                                |                                                                                |                                                                                |
|  Interest contracts:                                                                           |                                                                                |                                                                                |                                                                                |                                                                                |
|  Hedged items                                                                                | —                                                                                | 22                                                                                | —                                                                                | 23                                                                                |
|  Derivatives designated as hedging instruments                                                 | —                                                                                | 2                                                                                | —                                                                                | 8                                                                                |

|                                                                             |                                                                |                                                                |
| --------------------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------- |
| **Derivatives designated and qualified in cash flow hedging relationships** |                                                                |                                                                |
|                                                                             | **(Gain) loss recognized in AOCI on derivatives, net of tax**  | **(Gain) loss recognized in AOCI on derivatives, net of tax**  |
|                                                                             | **Year ended**                                                 | **Year ended**                                                 |
|                                                                             | **December 31,**                                               | **December 31,**                                               |
| **(in millions)**                                                           | **2019**                                                       | **2018**                                                       |
| Fuel derivative contracts                                                   | $90                                                            | $1                                                             |
| Interest rate derivatives                                                   | 29                                                             | (1

)                                                    |
| Total                                                                       | $119                                                           | $—                                                             |

|                                          |                                          |                                          |                                          |
| ---------------------------------------- | ---------------------------------------- | ---------------------------------------- | ---------------------------------------- |
| **Derivatives not designated as hedges** | **Derivatives not designated as hedges** | **Derivatives not designated as hedges** | **Derivatives not designated as hedges** |
|                                          | **(Gain) loss**                          | **(Gain) loss**                          |                                          |
|                                          | **recognized in income on**              | **recognized in income on**              |                                          |
|                                          | **derivatives**                          | **derivatives**                          |                                          |
|                                          | **Year ended**                           | **Year ended**                           | **Location of (gain) loss**              |
|                                          | **December 31,**                         | **December 31,**                         | **recognized in income**                 |
| **(in millions)**                        | **2019**                                 | **2018**                                 | **on derivatives**                       |
| Interest rate derivatives                | $—                                       | $

(2

)                     | Interest Expense                         |

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during  2019 ,  2018 , and  2017  of $  95 million , $  135 million , and $  136 million , respectively\. These amounts are recognized through changes in fair value within AOCI for designated hedges, and are ultimately recorded as a component of Fuel and oil in the Consolidated Statement of Income during the period the contracts settle\.

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in

96


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

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

UNITED AIRLINES HOLDINGS, INC\.

UNITED AIRLINES, INC\.

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Overview

United Airlines Holdings, Inc\. (together with its consolidated subsidiaries, "UAL" or the "Company") is a holding company and its principal, wholly\-owned subsidiary is United Airlines, Inc\. (together with its consolidated subsidiaries, "United")\. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL, unless otherwise noted\. United's operating revenues and operating expenses comprise nearly 100% of UAL's revenues and operating expenses\. In addition, United comprises approximately the entire balance of UAL's assets, liabilities and operating cash flows\. When appropriate, UAL and United are named specifically for their individual contractual obligations and related disclosures and any significant differences between the operations and results of UAL and United are separately disclosed and explained\. We sometimes use the words "we," "our," "us," and the "Company" in this report for disclosures that relate to all of UAL and United\.

NOTE 1 \- SIGNIFICANT ACCOUNTING POLICIES

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | **Use of Estimates—** The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes\. Actual results could differ from those estimates\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | **Revenue Recognition—** The Company presents Passenger revenue, Cargo revenue and Other operating revenue on its income statement\. Passenger revenue is recognized when transportation is provided and Cargo revenue is recognized when shipments arrive at their destination\. Other operating revenue is recognized as the related performance obligations are satisfied\.  |

Passenger tickets and related ancillary services sold by the Company for mainline and regional flights are purchased primarily via credit card transactions, with payments collected by the Company in advance of the performance of related services\. The Company initially records ticket sales in its Advance ticket sales liability, deferring revenue recognition until the travel occurs\. For travel that has more than one flight segment, the Company deems each segment as a separate performance obligation and recognizes revenue for each segment as travel occurs\. Tickets sold by other airlines where the Company provides the transportation are recognized as passenger revenue at the estimated value to be billed to the other airline when travel is provided\. 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 billings and payables with other airlines based on historical experience\.

The Company sells certain tickets with connecting flights with one or more segments operated by its other airline partners\. For segments operated by its other airline partners, the Company has determined that it is acting as an agent on behalf of the other airlines as they are responsible for their portion of the contract (i\.e\. transportation of the passenger)\. The Company, as the agent, recognizes revenue within Other operating revenue at the time of the travel for the net amount representing commission to be retained by the Company for any segments flown by other airlines\.

Refundable tickets expire after one year from the date of issuance\. Non\-refundable tickets generally expire on the date of the intended travel, unless the date is extended by notification from the customer on or before the intended travel date\.  The Company records breakage revenue on the travel date for its estimate of tickets that will expire unused\. To determine breakage, the Company uses its historical experience with refundable and nonrefundable expired tickets and other facts, such as recent aging trends, program changes and modifications that could affect the ultimate expiration patterns of tickets\. Fees charged in association with changes or extensions to non\-refundable tickets are considered part of the Company's passenger travel obligation\. As such, those fees are deferred at the time of collection and recognized at the time the travel is provided\.

United initially capitalizes the costs of selling airline travel tickets and then recognizes those costs as Distribution expense at the time of travel\. Passenger ticket costs include credit card fees, travel agency and other commissions paid, as well as global distribution systems booking fees\.

Advance Ticket Sales\.  Advance ticket sales represent the Company's liability to provide air transportation in the future\. In the years ended December 31,  2019  and  2018 , the Company recognized approximately   $3\.4 billion  and   $3\.1 billion , respectively, of passenger revenue for tickets that were included in Advance ticket sales at the beginning of those

55


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

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

***(g) Credit Card Processing Agreements***

American has agreements with companies that process customer credit card transactions for the sale of air travel and other services\. American’s agreements allow these credit card processing companies, under certain conditions, to hold an amount of its cash (referred to as a holdback) equal to a portion of advance ticket sales that have been processed by that company, but for which American has not yet provided the air transportation\. Additional holdback requirements in the event of material adverse changes in American’s financial condition will reduce its liquidity in the form of unrestricted cash by the amount of the holdbacks\. These credit card processing companies are not currently entitled to maintain any holdbacks pursuant to these requirements\.

***(h) Labor Negotiations***

As of December 31, 2018, American employed approximately 102,900 active full\-time equivalent employees\. Approximately 84% of employees are covered by collective bargaining agreements (CBAs) with various labor unions and approximately 24% of employees are covered by CBAs that will become amendable within one year\. Negotiations are continuing for joint collective bargaining agreements (JCBAs) covering American’s maintenance, fleet service, stock clerks, maintenance control technicians and maintenance training instructors\. Additionally, the post\-Merger JCBAs covering American’s pilots and flight attendants, while not yet amendable, provide the unions with the right to elect to commence negotiations for new collective bargaining agreements in advance of each JCBA’s amendable date\. Each of the unions has exercised these rights and negotiations are underway for new agreements as described in Part I, Item 1\. Business \- “*Employees and Labor Relations*”\. There is no assurance that a successful or timely resolution of these labor negotiations will be achieved\.

**11\. Supplemental Cash Flow Information**

Supplemental disclosure of cash flow information and non\-cash investing and financing activities are as follows (in millions):

|                                               |                             |                             |                             |
| --------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                               | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                               | **2018**                    | **2017**                    | **2016**                    |
| Non\-cash investing and financing activities: |                             |                             |                             |
| Equity investment                             | $—                          | $120                        | $—                          |
| Settlement of bankruptcy obligations          | —                           | 15                          | 3                           |
| Supplemental information:                     |                             |                             |                             |
| Interest paid, net                            | 1,009                       | 942                         | 867                         |
| Income taxes paid                             | 16                          | 18                          | 14                          |

**12\. Operating Segments and Related Disclosures**

American is managed as a single business unit that provides air transportation for passengers and cargo\. This allows it to benefit from an integrated revenue pricing and route network that includes American and AAG’s wholly\-owned and third\-party regional carriers that fly under capacity purchase agreements operating as American Eagle\. The flight equipment of all these carriers is combined to form one fleet that is deployed through a single route scheduling system\. Financial information and annual operational plans and forecasts are prepared and reviewed by the chief operating decision maker at the consolidated level\. When making operational decisions, the chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but is indifferent to the results of the individual regional carriers\. The objective in making operational decisions is to maximize consolidated financial results, not the individual results of American or American Eagle\.

See Note 1(k) for American’s passenger revenues by geographic region\. American’s tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated\.

**13\. Share\-based Compensation**

The 2013 AAG Incentive Award Plan (the 2013 Plan) provides that awards may be in the form of an option, restricted stock award, restricted stock unit award, performance award, dividend equivalent award, deferred stock award, deferred stock unit award, stock payment award or stock appreciation right\. The 2013 Plan initially authorized the grant of awards for the issuance of up to 40 million shares\. Any shares underlying awards granted under the 2013 Plan, or any pre\-existing US Airways Group plan, that are forfeited, terminate or are settled in cash (in whole or in part) without the delivery of shares will again be available for grant\.

170


Annual Report of Southwest Airlines Co\. for year 2018

|                                                                                |                                                                             |                                                                             |
| --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------------- |
| **Fair value measurements using significant unobservable inputs (Level 3)**                                                                                | **Fair value measurements using significant unobservable inputs (Level 3)** | **Fair value measurements using significant unobservable inputs (Level 3)** |
|                                                                                | **Fuel**                                                                    |                                                                             |
| (in millions)                                                                                | **derivatives**                                                             |                                                                             |
| Balance at December 31, 2016                                                                                | $(258)                                                                      |                                                                             |
| Total losses (realized or unrealized)                                                                                |                                                                             |                                                                             |
| Included in earnings                                                                                | (125)                                                                       |                                                                             |
| Included in other comprehensive income                                                                                | (50)                                                                        |                                                                             |
| Purchases                                                                                | 142                                                                         | (a)                                                                         |
| Sales                                                                                | —                                                                           | (a)                                                                         |
| Settlements                                                                                | 539                                                                         |                                                                             |
| Balance at December 31, 2017                                                                                | $248                                                                        |
                                                                      |
| The amount of total losses for the period

 included in earnings attributable to the

 change in unrealized gains or losses relating

 to assets still held at December 31, 2016 | $(42)                                                                       |                                                                             |

(a) The purchase and sale of fuel derivatives are recorded gross based on the structure of the derivative instrument and

 whether a contract with multiple derivatives is purchased as a single instrument or separate instruments\.

The significant unobservable input used in the fair value measurement of the Company’s derivative option contracts is implied volatility\. Holding other inputs constant, an increase (decrease) in implied volatility would result in a higher (lower) fair value measurement, respectively, for the Company’s derivative option contracts\.

The following table presents a range of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at December 31, 2018:

|                                                                    |                                                                    |                                                                    |                                                                    |                                                                    |
| ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ |
| **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** |
|                                                                    | **Valuation technique**                                            | **Unobservable input**                                             | **Period (by year)**                                               | **Range**                                                          |
| Fuel derivatives                                                   | Option model                                                       | Implied volatility                                                 | 2019                                                               | 29\-49%                                                            |
|                                                                    |                                                                    |                                                                    | 2020                                                               | 22\-31%                                                            |
|                                                                    |                                                                    |                                                                    | 2021                                                               | 19\-24%                                                            |
|                                                                    |                                                                    |                                                                    | 2022                                                               | 20\-21%                                                            |

The carrying amounts and estimated fair values of the Company’s long\-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at December 31, 2018, are presented in the table below\. The fair values of the Company’s publicly held long\-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these agreements as Level 2\. Debt under five of the Company’s debt agreements is not publicly held\. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable\. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items\.

108