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

to support the pace of our operations, it is unlikely that we will be able to capture all security\-related costs through increased fares\. In addition, we cannot forecast what new security requirements may be imposed in the future, or their impact on our business\.

***We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control\.***

We operate a global business with significant operations outside of the U\.S\. Our current international activities and prospects have been and in the future could be adversely affected by government policies, reversals or delays in the opening of foreign markets, increased competition in international markets, the performance of our alliance, joint business and codeshare partners in a given market, exchange controls or other restrictions on repatriation of funds, currency and political risks (including changes in exchange rates and currency devaluations), environmental regulation, increases in taxes and fees and changes in international government regulation of our operations, including the inability to obtain or retain needed route authorities and/or slots\. Fluctuations in foreign currencies, including devaluations, exchange controls and other restrictions on the repatriation of funds, have significantly affected and may continue to significantly affect our operating performance, liquidity and the value of any cash held outside the U\.S\. in local currency\. Such fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States\. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition\.

More generally, much of the demand for international air travel is the result of business travel in support of global trade\. Should protectionist governmental policies, such as increased tariff barriers, travel limitation and other actions, have the effect of reducing global commercial activity, the result could be a material decrease in the demand for international air travel\.

The United Kingdom held a referendum in June 2016 regarding its membership in the EU in which a majority of the United Kingdom electorate voted in favor of the British government taking the necessary action for the United Kingdom to leave the EU, an event commonly referred to as Brexit\. In March 2017, the United Kingdom served notice of its decision to withdraw from the EU, formally initiating the withdrawal process\. Serving this notice began the two\-year period for the United Kingdom to negotiate the terms for its withdrawal from the EU, currently scheduled to occur on March 29, 2019\. We face risks associated with the uncertainty following the referendum and the consequences that may flow from the decision to exit the EU, notably given the extent of our passenger and cargo traffic and that of our joint business partners that flows through LHR in the United Kingdom\. Absent an approved withdrawal agreement between the United Kingdom and the EU (resulting in the so\-called “No Deal Brexit” scenario), our expectation is that air services (including those involving our joint business and code share partners) will continue substantially as we currently conduct them, at least for a transition period, in reliance on reciprocal “basic connectivity” traffic rights proposed by the EU and the United Kingdom and the new air services agreements between the U\.S\. and United Kingdom concluded on November 29, 2018\. However, the precise scope of traffic rights between the EU and the United Kingdom remains uncertain and therefore the continuation is not assured and could be subject to disruption\. If Brexit is accomplished pursuant to a withdrawal agreement consistent with the agreement presently being discussed between the United Kingdom and the EU, but which has yet to be approved by the United Kingdom, our current air services would continue as we currently conduct them during a transition period running through the end of 2020, with a potential extension of up to two years\. During that transition period, the United Kingdom and the EU would seek to implement a new air services agreement\. We cannot predict the terms of any such successor air services agreement or whether changes in the relationship between the United Kingdom and the EU, including whether or not the United Kingdom withdraws from the EU with or without an agreement, could materially adversely affect our business, results of operations and financial condition\.

Moreover, the exit of the United Kingdom from the EU could adversely affect European or worldwide economic or market conditions and could contribute to further instability in global financial markets\. In addition, the exit of the United Kingdom from the EU has created uncertainty as to the future trade relationship between the EU and the United Kingdom, including air traffic services\. LHR is presently a very important element of our international network, however it may become less desirable as a destination or as a hub location after Brexit when compared to other airports in Europe\. The exit of the United Kingdom from the EU could also lead to legal and regulatory uncertainty such as the identity of the relevant regulators, new regulatory action and/or potentially divergent treaties, laws and regulations as the United Kingdom determines which EU treaties, laws and regulations to replace or replicate, including those governing aviation, labor, environmental, data protection/privacy, competition and other matters applicable to the provision of air transportation services by us or our alliance, joint business or codeshare partners\. For example, in light of Brexit and the related possibility that the EC would no longer have regulatory responsibility for the United Kingdom when existing regulatory commitments are scheduled to expire in 2020, the United Kingdom CMA in October 2018 opened an investigation into our transatlantic JBA\. We are cooperating fully with the CMA\. The impact on our business of any treaties, laws and regulations that replace the existing EU counterparts, or other

27


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

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

This Annual Report on Form 10\-K ("Form 10\-K") contains various "forward\-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")\. Forward\-looking statements represent our expectations and beliefs concerning future results or events, based on information available to us on the date of the filing of this Form 10\-K, and are subject to various risks and uncertainties\. Factors that could cause actual results or events to differ materially from those referenced in the forward\-looking statements are listed in Part I, Item 1A\. Risk Factors and in Part II, Item 7\. Management's Discussion and Analysis of Financial Condition and Results of Operations\. We disclaim any intent or obligation to update or revise any of the forward\-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise, except as required by applicable law\.

PART I

ITEM 1\. BUSINESS\.

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\.

UAL was incorporated under the laws of the State of Delaware on December 30, 1968\. Effective June 27, 2019, UAL amended its Certificate of Incorporation to change its name to "United Airlines Holdings, Inc\." Our principal executive office is located at 233 South Wacker Drive, Chicago, Illinois 60606 (telephone number (872) 825\-4000)\.

The Company's website is located at www\.united\.com and its investor relations website is located at ir\.united\.com\. The information contained on or connected to the Company's websites is not incorporated by reference into this Annual Report on Form 10\-K and should not be considered part of this or any other report filed with the U\.S\. Securities and Exchange Commission ("SEC")\. The Company's filings with the SEC, including annual reports on Form 10\-K, quarterly reports on Form 10\-Q, current reports on Form 8\-K, and all amendments to those reports, as well as UAL's proxy statement for its annual meeting of stockholders, are accessible without charge on the Company's investor relations website, as soon as reasonably practicable, after such material is electronically filed with, or furnished to, the SEC\. Such filings are also available on the SEC's website at www\.sec\.gov\.

Operations

The Company transports people and cargo throughout North America and to destinations in Asia, Europe, Africa, the Pacific, the Middle East and Latin America\. UAL, through United and its regional carriers, operates more than 4,900 flights a day to 362 airports across six continents, with hubs at Newark Liberty International Airport ("Newark"), Chicago O'Hare International Airport ("Chicago O'Hare"), Denver International Airport ("Denver"), George Bush Intercontinental Airport ("Houston Bush"), Los Angeles International Airport ("LAX"), A\.B\. Won Pat International Airport ("Guam"), San Francisco International Airport ("SFO") and Washington Dulles International Airport ("Washington Dulles")\.

All of the Company's domestic hubs are located in large business and population centers, contributing to a large amount of "origin and destination" traffic\. The hub and spoke system allows us to transport passengers between a large number of destinations with substantially more frequent service than if each route were served directly\. The hub system also allows us to add service to a new destination from a large number of cities using only one or a limited number of aircraft\. As discussed under  Alliances  below, United is a member of Star Alliance, the world's largest alliance network\.

Regional\.  The Company  has contractual relationships with various regional carriers to provide regional aircraft service branded as United Express\.  This regional service complements our operations by carrying traffic that connects to our hubs and allows flights to smaller cities that cannot be provided economically with mainline aircraft\. Champlain Enterprises, LLC d/b/a CommutAir ("CommutAir"), Republic Airline Inc\. ("Republic"), ExpressJet Airlines LLC ("ExpressJet"), GoJet Airlines LLC ("GoJet"), Mesa Airlines, Inc\. ("Mesa"), SkyWest Airlines, Inc\. ("SkyWest"), Air Wisconsin Airlines LLC ("Air Wisconsin"), and Trans States Airlines, LLC ("Trans States") are all regional carriers that operate with capacity contracted to United under capacity purchase agreements ("CPAs")\.  Under these CPAs, the Company pays the regional carriers contractually agreed fees

3


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

**PART II**

|              |                                                                                |
| ------------ | ---------------------------------------------------------------------------------------------------------------------------- |
| **ITEM 5\.** | **MARKET FOR AMERICAN AIRLINES GROUP’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |

**Stock Exchange Listing**

Our common stock is listed on the NASDAQ Global Select Market (NASDAQ) under the symbol “AAL\.” There is no trading market for the common stock of American, which is a wholly\-owned subsidiary of AAG\.

As of February 20, 2019, the closing price of our common stock was $35\.06 and there were 13,685 holders of record\. However, because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe there are substantially more beneficial holders of our common stock than record holders\.

Information on securities authorized for issuance under our equity compensation plans will be set forth in our Proxy Statement for the 2019 Annual Meeting of Stockholders of American Airlines Group Inc\. (the Proxy Statement) under the caption “Equity Compensation Plan Information” and is incorporated by reference into this Annual Report on Form 10\-K\.

**Dividends of Common Stock**

In January 2019, we announced that our Board of Directors declared a $0\.10 per share cash dividend for stockholders of record on February 6, 2019, and payable on February 20, 2019\.

The total cash payment for dividends during the years ended December 31, 2018 and 2017 was $186 million and $198 million, respectively\. Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors\. We are not obligated to continue a dividend for any fixed period, and the payment of dividends may be suspended or discontinued at any time at our discretion and without prior notice\.

**Stock Performance Graph**

*The following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Exchange Act, each as amended, except to the extent that we specifically incorporate it by reference into such filing\.*

The following stock performance graph compares the cumulative total stockholder returns during the period from December 31, 2013 to December 31, 2018 of our common stock to the Standard and Poor’s (S&P) 500 Stock Index and the New York Stock Exchange (NYSE) ARCA Airline Index\. The comparison assumes $100 was invested on December 31, 2013 in our common stock and in each of the foregoing indices and assumes that all dividends were reinvested\. The stock performance shown on the following graph represents historical stock performance and is not necessarily indicative of future stock price performance\.

40


Annual Report of Southwest Airlines Co\. for year 2019

decrease in spoilage would have resulted in a decrease in revenue)\. Given that Member behavior will continue to develop as the program matures, the Company expects the current estimates may change in future periods\. However, the Company believes its current estimates are reasonable given current facts and circumstances\.

Item 7A\.  Quantitative and Qualitative Disclosures About Market Risk

The Company has interest rate risk in its floating\-rate debt obligations and interest rate swaps, commodity price risk in jet fuel required to operate its aircraft fleet, and market risk in the derivatives used to manage its fuel hedging program and in the form of fixed\-rate debt instruments\. As of  December 31, 2019 , the Company operated a total of  122  aircraft under operating and finance leases\. However, except for a small number of aircraft that have lease payments that fluctuate based in part on changes in market interest rates, the remainder of the leases are not considered market sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below\. The Company also has  67  aircraft under operating and finance lease that have been subleased to another carrier\. Further information about these leases is disclosed in Note  7  to the Consolidated Financial Statements\. The Company does not purchase or hold any derivative financial instruments for trading purposes\. See  Note 10  to the Consolidated Financial Statements for information on the Company’s accounting for its hedging program and for further details on the Company’s financial derivative instruments\.

Hedging

The Company purchases jet fuel at prevailing market prices, but seeks to manage market risk through execution of a documented hedging strategy\. The Company utilizes financial derivative instruments, on both a short\-term and a long\-term basis, as a form of insurance against the potential for significant increases in fuel prices\. The Company believes there can be significant risk in not hedging against the possibility of such fuel price increases, especially in energy markets in which prices are high and/or rising\. The Company expects to consume approximately  2\.2 billion  gallons of jet fuel in  2020 \. Based on this anticipated usage, a change in jet fuel prices of just  one cent  per gallon would impact the Company’s Fuel and oil expense by approximately  $22 million  for  2020 , excluding any impact associated with fuel derivative instruments held\.

As of  December 31, 2019 , the Company held a net position of fuel derivative instruments that represented a hedge for a portion of its anticipated jet fuel purchases for future periods\. See  Note 10  to the Consolidated Financial Statements for further information\. The Company may increase or decrease the size of its fuel hedge based on its expectation of future market prices, as well as its perceived exposure to cash collateral requirements contained in the agreements it has signed with various counterparties, while considering the significant cost that can be associated with different types of hedging strategies\. The gross fair value of outstanding financial derivative instruments related to the Company’s jet fuel market price risk at  December 31, 2019 , was an  asset  of  $110 million \. In addition,  $25 million  in cash collateral deposits were held by the Company in connection with these instruments based on their fair value as of  December 31, 2019 \. The fair values of the derivative instruments, depending on the type of instrument, were determined by use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets\. An immediate  10 percent  increase or decrease in underlying fuel\-related commodity prices from the  December 31, 2019 , prices would correspondingly change the fair value of the commodity derivative instruments in place by approximately  $143 million \. Fluctuations in the related commodity derivative instrument cash flows may change by more or less than this amount based upon further fluctuations in futures prices, as well as related income tax effects\. In addition, this does not consider changes in cash, aircraft, or letters of credit utilized as collateral provided to or by counterparties, which would fluctuate in an amount equal to or less than this amount, depending on the type of collateral arrangement in place with each counterparty\. This sensitivity analysis uses industry standard valuation models and holds all inputs constant at  December 31, 2019 , levels, except underlying futures prices\.

The Company’s credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are in an asset position to the Company\. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements\. As of  December 31, 2019 , the Company had  nine  counterparties in which the derivatives held were an asset\. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and

60


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

As qualifying cash flow hedges, the interest rate swaps are recognized at fair value on the balance sheet, and changes in the fair value are recognized in accumulated other comprehensive loss\. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item\. To the extent the change in fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is recognized in interest expense, if material\.

***Fair Values of Derivative Instruments***

Fair values of derivative instruments on the consolidated balance sheet (in millions):

|                                                       |          |          |
| ----------------------------------------------------- | -------- | -------- |
|                                                       | **2018** | **2017** |
| Fuel hedge contracts (not designated as hedges)       |          |          |
| Prepaid expenses and other current assets             | **$2**   | $19      |
| Other assets                                          | **2**    | 3        |
| Interest rate swaps (designated as hedges)            |          |          |
| Prepaid expenses and other current assets             | **3**    | 1        |
| Other noncurrent assets                               | **7**    | 8        |
| Other accrued liabilities                             | **(3)**  | (3)      |
| Other liabilities                                     | **(4)**  | (5)      |
| Losses in accumulated other comprehensive loss (AOCL) | **(1)**  | (2)      |

The net cash paid for new fuel hedge positions and received from settlements was $21 million, $12 million and $19 million during 2018, 2017, and 2016, respectively\.

Pretax effect of derivative instruments on earnings and AOCL (in millions):

|                                                      |          |          |          |
| ---------------------------------------------------- | -------- | -------- | -------- |
|                                                      | **2018** | **2017** | **2016** |
| Fuel hedge contracts (not designated as hedges)      |          |          |          |
| Gains (losses) recognized in Aircraft fuel           | **$1**   | $(6)     | $(3)     |
| Interest rate swaps (designated as hedges)           |          |          |          |
| Losses recognized in Aircraft rent                   | **(3)**  | (5)      | (6)      |
| Gains recognized in other comprehensive income (OCI) | **—**    | 1        | 8        |

The amounts shown as recognized in aircraft rent for cash flow hedges (interest rate swaps) represent the realized losses transferred out of AOCL to aircraft rent\. No gains or losses related to interest rate swaps on variable rate debt have been recognized in interest expense during 2018\. The amounts shown as recognized in OCI are prior to the losses recognized in aircraft rent during the period\. The Company expects $2 million to be reclassified from OCI to aircraft rent and $3 million to interest income within the next twelve months\.

 74


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

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

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

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

**Other Postretirement Benefits** |
|                                                  | **2017**             | **2016**             | **2017**                                                         | **2016**                                                         |
|                                                  | **(In millions)**    | **(In millions)**    | **(In millions)**                                                | **(In millions)**                                                |
| Fair value of plan assets at beginning of period | $9,968               | $9,660               | $266                                                             | $253                                                             |
| Actual return on plan assets                     | 1,788                | 911                  | 37                                                               | 22                                                               |
| Employer contributions  ^(3)^                    | 286                  | 32                   | 72                                                               | 83                                                               |
| Settlements                                      | (4)                  | (2)                  | —                                                                | —                                                                |
| Benefit payments                                 | (723)                | (633)                | (80)                                                             | (92)                                                             |
| Other                                            | 25                   | —                    | —                                                                | —                                                                |
| Fair value of plan assets at end of period       | $11,340              | $9,968               | $295                                                             | $266                                                             |
| Funded status at end of period                   | $(6,835)             | $(7,180)             | $(715)                                                           | $(724)                                                           |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | The  December 31, 2017  and  2016  pension actuarial loss primarily relates to weighted average discount rate assumption changes and changes to American’s mortality assumptions\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | The  December 31, 2017  retiree medical and other postretirement benefits actuarial (gain) loss primarily relates to plan experience adjustments, weighted average discount rate assumption changes and changes to American’s mortality assumptions and as of  December 31, 2016 , also includes medical trend and cost assumption changes\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | During 2017, American contributed  $286 million  to its defined benefit pension plans, including supplemental contributions of  $261 million  in addition to a  $25 million  minimum required cash contribution\. |

***Balance Sheet Position***

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

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

**Other Postretirement Benefits** |
|                      | **2017**             | **2016**             | **2017**                                                         | **2016**                                                         |
|                      | **(In millions)**    | **(In millions)**    | **(In millions)**                                                | **(In millions)**                                                |
| As of December 31,   |                      |                      |                                                                  |                                                                  |
| Current liability    | $10                  | $7                   | $88                                                              | $97                                                              |
| Noncurrent liability | 6,825                | 7,173                | 627                                                              | 627                                                              |
| Total liabilities    | $6,835               | $7,180               | $715                                                             | $724                                                             |

|                                                               |        |        |        |          |
| ------------------------------------------------------------- | ------ | ------ | ------ | -------- |
| Net actuarial loss (gain)                                     | $5,337 | $5,472 | $(388) | $(429)   |
| Prior service cost (benefit)                                  | 159    | 188    | (600)  | (837)    |
| Total accumulated other comprehensive loss (income), pre\-tax | $5,496 | $5,660 | $(988) | $(1,266) |

152


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

**OPERATING STATISTICS SUMMARY (unaudited)**

**Alaska Air Group, Inc\.**

Below are operating statistics we use to measure performance\. As the acquisition of Virgin America closed on December 14, 2016, Consolidated and Mainline amounts presented below include Virgin America results for the twelve months ended December 31, 2017, but only for the period December 14, 2016 through December 31, 2016 in the twelve months ended December 31, 2016 results below\. We often refer to unit revenues and adjusted unit costs, which is a non\-GAAP measure\.

|                                                          |                                      |                                      |                                      |                                      |                                      |
| -------------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                          | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                          | **2017**                             | **2016**                             | **Change**                           | **2015**                             | **Change**                           |
| **Consolidated Operating Statistics:** **^(a)^**         |                                      |                                      |                                      |                                      |                                      |
| Revenue passengers (000)                                 | **44,034**                           | 34,289                               | 28\.4%                               | 31,883                               | 7\.5%                                |
| RPMs (000,000) "traffic"                                 | **52,338**                           | 37,209                               | 40\.7%                               | 33,578                               | 10\.8%                               |
| ASMs (000,000) "capacity"                                | **62,072**                           | 44,135                               | 40\.6%                               | 39,914                               | 10\.6%                               |
| Load factor                                              | **84\.3%**                           | 84\.3%                               | —                                    | 84\.1%                               | 0\.2 pts                             |
| Yield                                                    | **13\.03¢**                          | 13\.45¢                              | (3\.1)%                              | 14\.27¢                              | (5\.7)%                              |
| PRASM                                                    | **10\.98¢**                          | 11\.34¢                              | (3\.2)%                              | 12\.01¢                              | (5\.6)%                              |
| RASM                                                     | **12\.78¢**                          | 13\.44¢                              | (4\.9)%                              | 14\.03¢                              | (4\.2)%                              |
| CASM excluding fuel and special items ^(b)^              | **8\.23¢**                           | 8\.23¢                               | —%                                   | 8\.30¢                               | (0\.8)%                              |
| Economic fuel cost per gallon ^(b)^                      | **$1\.82**                           | $1\.52                               | 19\.7%                               | $1\.88                               | (19\.1)%                             |
| Fuel gallons (000,000)                                   | **797**                              | 554                                  | 43\.9%                               | 508                                  | 9\.1%                                |
| ASM's per gallon                                         | **77\.9**                            | 79\.7                                | (2\.3)%                              | 78\.6                                | 1\.4%                                |
| Average number of full\-time equivalent employees (FTEs) | **20,183**                           | 14,760                               | 36\.7%                               | 13,858                               | 6\.5%                                |
| **Mainline Operating Statistics:**                       |                                      |                                      |                                      |                                      |                                      |
| Revenue passengers (000)                                 | **34,539**                           | 24,838                               | 39\.1%                               | 22,869                               | 8\.6%                                |
| RPMs (000,000) "traffic"                                 | **48,238**                           | 33,489                               | 44\.0%                               | 30,340                               | 10\.4%                               |
| ASMs (000,000) "capacity"                                | **56,945**                           | 39,473                               | 44\.3%                               | 35,912                               | 9\.9%                                |
| Load factor                                              | **84\.7%**                           | 84\.8%                               | (0\.1) pts                           | 84\.5%                               | 0\.3 pts                             |
| Yield                                                    | **12\.14¢**                          | 12\.24¢                              | (0\.8)%                              | 12\.98¢                              | (5\.7)%                              |
| PRASM                                                    | **10\.29¢**                          | 10\.38¢                              | (0\.9)%                              | 10\.97¢                              | (5\.4)%                              |
| CASM excluding fuel and special items ^(b)^              | **7\.47¢**                           | 7\.30¢                               | 2\.3%                                | 7\.39¢                               | (1\.2)%                              |
| Economic fuel cost per gallon ^(b)^                      | **$1\.82**                           | $1\.52                               | 19\.7%                               | $1\.87                               | (18\.7)%                             |
| Fuel gallons (000,000)                                   | **706**                              | 474                                  | 48\.9%                               | 439                                  | 8\.0%                                |
| ASM's per gallon                                         | **80\.7**                            | 83\.3                                | (3\.1)%                              | 81\.8                                | 1\.8%                                |
| Average number of FTEs                                   | **15,653**                           | 11,447                               | 36\.7%                               | 10,750                               | 6\.5%                                |
| Aircraft utilization                                     | **11\.2**                            | 10\.5                                | 6\.7%                                | 10\.8                                | (2\.8)%                              |
| Average aircraft stage length                            | **1,301**                            | 1,225                                | 6\.2%                                | 1,195                                | 2\.5%                                |
| Mainline operating fleet at period\-end                  | **221 a/c**                          | 218 a/c                              | 3 a/c                                | 147 a/c                              | 71 a/c                               |
| **Regional Operating Statistics:** **^(c)^**             |                                      |                                      |                                      |                                      |                                      |
| Revenue passengers (000)                                 | **9,495**                            | 9,452                                | 0\.5%                                | 9,015                                | 4\.8%                                |
| RPMs (000,000) "traffic"                                 | **4,101**                            | 3,720                                | 10\.2%                               | 3,238                                | 14\.9%                               |
| ASMs (000,000) "capacity"                                | **5,127**                            | 4,662                                | 10\.0%                               | 4,002                                | 16\.5%                               |
| Load factor                                              | **80\.0%**                           | 79\.8%                               | 0\.2 pts                             | 80\.9%                               | (1\.1) pts                           |
| Yield                                                    | **23\.41¢**                          | 24\.42¢                              | (4\.1)%                              | 26\.37¢                              | (7\.4)%                              |
| PRASM                                                    | **18\.72¢**                          | 19\.49¢                              | (4\.0)%                              | 21\.34¢                              | (8\.7)%                              |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------ |
| ^(a)^ | Except for FTEs, data includes information related to regional CPA flying with Horizon, SkyWest and PenAir\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------- |
| ^(b)^ | See reconciliation of this measure to the most directly related GAAP measure in the "Results of Operations" section\. |

|       |                                                                |
| ----- | -------------------------------------------------------------- |
| ^(c)^ | Data presented includes information related to regional CPAs\. |

 39


Annual Report of Southwest Airlines Co\. for year 2018

***2018*** ***Compared with*** ***2017***

**Operating Revenues**

Passenger revenues for 2018increased by $692 million, or 3\.5 percent, compared with 2017\. The increase was largely due to a 3\.9 percentincrease in capacity, as strong demand enabled the Company to fill the majority of the additional seats offered\. Passenger revenues for 2018 included an estimated $130 million negative impact to revenue due to temporarily lower passenger yields from an aggressive May 2018 fare sale for June through October 2018 travel, which was offered in conjunction with the Company’s broad marketing efforts following the Flight 1380 accident\. On April 17, 2018, Southwest Airlines Flight 1380 from New York\-LaGuardia to Dallas Love Field suffered an uncontained failure of its port CFM56\-7B engine, resulting in a Customer fatality\. On a unit basis, Passenger revenues decreased 0\.4 percent, year\-over\-year, driven by a slight decrease in Load factor to 83\.4 percent, partially offset by a 0\.1 percentincrease in Passenger revenue yield\. The increase in yield was largely due to the successful deployment of several revenue management enhancements enabled by the Company's new reservation system, an improved fare environment in second half 2018, and strong passenger demand for low fares\.

Freight revenues for 2018increased by $2 million, or 1\.2 percent, compared with 2017, primarily due to increased capacity\. Based on current trends, the Company currently expects Freight revenues in first quarter 2019 to increase, compared with first quarter 2018\.

Other revenues for 2018increased by $125 million, or 10\.3 percent, compared with 2017, primarily due to an increase in revenues associated with cardholder spend on the Company's co\-branded Chase® Visa credit card\. The Company currently expects Other revenues in first quarter 2019 to increase, compared with first quarter 2018\.

Operating unit revenues for 2018 were flat compared with 2017\. Based on revenue and booking trends thus far in first quarter 2019, and assuming no further significant impact on bookings from the recent government shutdown, the Company currently estimates first quarter 2019 operating unit revenues to increase in the four to five percent range, compared with first quarter 2018\.

**Operating Expenses**

Operating expenses for 2018increased by $1\.0 billion, or 5\.8 percent, compared with 2017, while capacity increased 3\.9 percent over the same period\. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs\. The following table presents the Company's Operating expenses per ASM for 2018 and 2017, followed by explanations of these changes on a per ASM basis and dollar basis:

|                                    |                             |                             |             |             |
| ---------------------------------- | --------------------------- | --------------------------- | ----------- | ----------- |
|                                    | **Year ended December 31,** | **Year ended December 31,** |             |             |
|                                    | **2018**                    | **2017**                    | **Per ASM** | **Percent** |
| (in cents, except for percentages) |                             | **As Recast**               | **change**  | **change**  |
| Salaries, wages, and benefits      | 4\.79¢                      | 4\.74¢                      | 0\.05¢      | 1\.1 %      |
| Fuel and oil                       | 2\.89                       | 2\.65                       | 0\.24       | 9\.1        |
| Maintenance materials and repairs  | 0\.69                       | 0\.65                       | 0\.04       | 6\.2        |
| Landing fees and airport rentals   | 0\.83                       | 0\.84                       | (0\.01)     | (1\.2)      |
| Depreciation and amortization      | 0\.75                       | 0\.79                       | (0\.04)     | (5\.1)      |
| Other operating expenses           | 1\.79                       | 1\.86                       | (0\.07)     | (3\.8)      |
| Total                              | 11\.74¢                     | 11\.53¢                     | 0\.21¢      | 1\.8 %      |

Operating expenses per ASM for 2018increased by 1\.8 percent, compared with 2017, primarily due to increases in market jet fuel prices\. Operating expenses per ASM for 2018, excluding Fuel and oil expense and special items (a non\-GAAP financial measure), increased 0\.6 percent year\-over\-year, primarily due to wage rate increases\. See Note

41


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

Long\-term debt principal payments for the next five years and thereafter (in millions):

|                          |                          |                          |         |
|:------------------------ |:------------------------ |:------------------------ | -------:|
|                          |                          |                          |   Total |
| 2020                     | 2020                     | 2020                     |   $ 235 |
| 2021                     | 2021                     | 2021                     |     281 |
| 2022                     | 2022                     | 2022                     |     243 |
| 2023                     | 2023                     | 2023                     |     173 |
| 2024                     | 2024                     | 2024                     |     153 |
| Thereafter               | Thereafter               | Thereafter               |     420 |
| Total principal payments | Total principal payments | Total principal payments | $ 1,505 |

Bank Line of Credit

The Company has three credit facilities with availability totaling $516 million\. All three facilities have variable interest rates based on LIBOR plus a specified margin\. One credit facility for $250 million expires in June 2021 and is secured by aircraft\. A second credit facility for $116 million expires in July 2020, with a mechanism for annual renewal, and is secured by aircraft\. A third credit facility for $150 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment\. The Company has secured letters of credit against the $116 million facility, but has no plans to borrow using either of the two other facilities\. All three credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million\. The Company was in compliance with this covenant at December 31, 2019\.

NOTE 6\. LEASES

In 2016, the FASB issued ASU 2016\-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for certain operating leases\. Under the new standard, a lessee must recognize a liability on the balance sheet representing the lease payments owed, and a lease asset representing its right to use the underlying asset for the lease term\. In 2018, the FASB issued ASU 2018\-11, "Targeted Improvements \- Leases (Topic 842)," which amended Topic 842 to provide a transition method that would not require adjusting comparative period financial information\.

The Company transitioned to the new lease accounting standard effective January 1, 2019 utilizing the alternative transition method\. Upon transition, the Company recorded a cumulative\-effect adjustment to the opening balance of retained earnings of $3 million\. The new standard eliminated build\-to\-suit lease accounting guidance and resulted in the derecognition of build\-to\-suit assets and liabilities of approximately $150 million each\.

The Company elected certain practical expedients under the standard, including the practical expedient allowing a policy election to exclude from recognition short\-term lease assets and lease liabilities for leases with an initial term of 12 months or less\. Such expense was not material for the twelve months ended December 31, 2019\. Additionally, the Company elected the available package of practical expedients allowing for no reassessment of lease classification for existing leases, no reassessment of expired contracts, and no reassessments of initial direct costs for existing leases\.

The Company has five asset classes for operating leases: aircraft, capacity purchase arrangements for aircraft operated by third\-party carriers (CPA aircraft), airport and terminal facilities, corporate real estate and other equipment\. All capitalized lease assets have been recorded on the consolidated balance sheet as of December 31, 2019 as Operating lease assets, with the corresponding liabilities recorded as Operating lease liabilities\. Consistent with past accounting, operating rent expense is recognized on a straight\-line basis over the term of the lease\.

At December 31, 2019, the Operating lease assets balance by asset class was as follows (in millions):

|                                 |                                 |                                 |                   |
|:------------------------------- |:------------------------------- |:------------------------------- | -----------------:|
|                                 |                                 |                                 | December 31, 2019 |
| Aircraft                        | Aircraft                        | Aircraft                        |           $ 1,049 |
| CPA Aircraft                    | CPA Aircraft                    | CPA Aircraft                    |               596 |
| Airport and terminal facilities | Airport and terminal facilities | Airport and terminal facilities |                18 |
| Corporate real estate and other | Corporate real estate and other | Corporate real estate and other |                48 |
| Total Operating lease assets    | Total Operating lease assets    | Total Operating lease assets    |           $ 1,711 |

67


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

*Level 2* \- Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities\.

*Level 3* \- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities\.

The Company has elected not to use the fair value option provided in the accounting standards for non\-financial instruments\. Accordingly, those assets and liabilities are carried at amortized cost\. For financial instruments, the assets and liabilities are carried at fair value, which is determined based on the market approach or income approach, depending upon the level of inputs used\.

Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as property, plant and equipment, goodwill, intangible assets and certain other assets and liabilities\. The Company determines the fair value of these items using Level 3 inputs, as described in Note 2 and Note 4\.

***Income Taxes***

The Company uses the asset and liability approach for accounting for and reporting income taxes\. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and for operating loss and tax credit carryforwards\. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled\. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date\. A valuation allowance would be established, if necessary, for the amount of any tax benefits that, based on available evidence, are not expected to be realized\. As of December 31, 2017, there is no valuation allowance against net deferred tax assets\. The Company accounts for unrecognized tax benefits in accordance with the applicable accounting standards\.

Virgin America has substantial federal and state net operating losses (NOLs) for income tax purposes\. The Company's ability to utilize Virgin America's NOLs could be limited if Virgin America had an “ownership change,” as defined in Section 382 of the Internal Revenue Code and similar state provisions\. In general terms, an ownership change can occur whenever there is a collective shift in the ownership of a company by more than 50% by one or more “5% stockholders” within a three\-year period\. The occurrence of such a change generally limits the amount of NOL carryforwards a company could utilize in a given year to the aggregate fair market value of the company's common stock immediately prior to the ownership change, multiplied by the long\-term tax\-exempt interest rate in effect for the month of the ownership change\. The acquisition constituted an ownership change and the potential for further limitations following the acquisition\. See Note 6 to the consolidated financial statements for more discussion of the calculation\.

***Stock\-Based Compensation***

Accounting standards require companies to recognize as expense the fair value of stock options and other equity\-based compensation issued to employees as of the grant date\. These standards apply to all stock awards that the Company grants to employees as well as the Company’s Employee Stock Purchase Plan (ESPP), which features a look\-back provision and allows employees to purchase stock at a 15% discount\. All stock\-based compensation expense is recorded in wages and benefits in the consolidated statements of operations\.

***Earnings Per Share (EPS)***

Diluted EPS is calculated by dividing net income by the average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of in\-the\-money stock options and restricted stock units, using the treasury\-stock method\. In 2017, 2016, and 2015, antidilutive stock options excluded from the calculation of EPS were not material\.

***Recently Issued Accounting Pronouncements***

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014\-09, "Revenue from Contracts with Customers"(Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers\. This comprehensive new standard will

 72


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

The following table presents the principal reasons for the difference between the effective tax rate and the U\.S\. federal statutory income tax rate:

|                                          |                             |                             |                             |
| ---------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                          | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                          | **2018**                    | **2017**                    | **2016**                    |
| U\.S\. federal statutory income tax rate | 21\.0 %                     | 35\.0 %                     | 35\.0 %                     |
| State taxes, net of federal benefit      | 2\.5                        | 1\.8                        | 1\.8                        |
| Foreign tax rate differential            | 0\.1                        | (2\.2

)              | (2\.1

)              |
| Tax Cuts and Jobs Act adjustment         | (0\.5

)              | 7\.2                        | —                           |
| Other                                    | 0\.5                        | —                           | (0\.7

)              |
| Effective income tax rate                | 23\.6 %                     | 41\.8 %                     | 34\.0 %                     |

Following the enactment of the Tax Cuts and Jobs Act of 2017 ("2017 tax reform"), we recorded a provisional tax expense estimate of   $395 million  resulting in a   7\.2%  increase in our effective tax rate during 2017\. The provisional estimate included recognition of tax expense related to certain of our undistributed foreign earnings and tax expense to decrease our federal net deferred tax asset to a  21%  statutory tax rate\. During 2018 we recognized a   $26 million  benefit resulting in a   0\.5%  reduction to our 2018 effective tax rate after finalizing the impact of the 2017 tax reform\.

As a result of the 2017 tax reform, we assessed tax on   $522 million  of foreign earnings which would have been indefinitely reinvested outside the United States and therefore not taxable prior to the 2017 tax reform\. At  December 31, 2018 , we had a basis difference in our investments in foreign subsidiaries of   $160 million  which is considered to be indefinitely reinvested\.

Deferred Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes\. The following table shows significant components of our deferred tax assets and liabilities:

|                                             |                  |                  |
| ------------------------------------------- | ---------------- | ---------------- |
|                                             | **December 31,** | **December 31,** |
| **(in millions)**                           | **2018**         | **2017**         |
| **Deferred tax assets:**                    |                  |                  |
| Net operating loss carryforwards            | $674             | $1,297           |
| Pension, postretirement and other benefits  | 2,435            | 2,544            |
| Alternative minimum tax credit carryforward | 189              | 379              |
| Deferred revenue                            | 1,620            | 1,416            |
| Operating lease liabilities                 | 1,579            | —                |
| Other                                       | 357              | 728              |
| Valuation allowance                         | (13

)     | (15

)     |
| Total deferred tax assets                   | $6,841           | $6,349           |
| **Deferred tax liabilities:**               |                  |                  |
| Depreciation                                | $4,185           | $3,847           |
| Operating lease right\-of\-use assets       | 1,388            | —                |
| Intangible assets                           | 1,052            | 1,043            |
| Other                                       | 137              | 105              |
| Total deferred tax liabilities              | $6,762           | $4,995           |
| Net deferred tax assets ^(1)^               | $79              | $1,354           |

|        |                                                                                |
| ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^  | At  December 31, 2018 , the net deferred tax assets of   $79 million  included   $242 million  of net state deferred tax assets, which are recorded in deferred income taxes, net, and   $163 million  of net federal deferred tax liabilities, which are recorded in other noncurrent liabilities\. |

At  December 31, 2018 , we had   $189 million  of federal alternative minimum tax credit carryforwards\. As a result of the Tax Cuts and Jobs Act of 2017, this credit becomes refundable to us if not used by 2021\. We have   $2\.2 billion  of federal pre\-tax net operating loss carryforwards, which will not begin to expire until  2027 \.

 91


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

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

Other Contingencies

General Indemnifications

We are the lessee under many commercial real estate leases\. It is common in these transactions for us, as the lessee, to agree to indemnify the lessor and the lessor's related parties for tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises\. This type of indemnity would typically make us responsible to indemnified parties for liabilities arising out of the conduct of, among others, contractors, licensees and invitees at, or in connection with, the use or occupancy of the leased premises\. This indemnity often extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by either their sole or gross negligence or their willful misconduct\.

Our aircraft and other equipment lease and financing agreements typically contain provisions requiring us, as the lessee or obligor, to indemnify the other parties to those agreements, including certain of those parties' related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or other equipment\.

Certain of our aircraft and other financing transactions include provisions that require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or regulations\. In certain of these financing transactions, we also bear the risk of certain changes in tax laws that would subject payments to non\-U\.S\. lenders to withholding taxes\.

We believe that our insurance would cover most of our exposure to liabilities and related indemnities associated with the commercial real estate leases and aircraft and other equipment lease and financing agreements described above\. While our insurance does not typically cover environmental liabilities, we have certain insurance policies in place as required by applicable environmental laws\.

We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict (1) when and under what circumstances these provisions may be triggered and (2) the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time\.

Employees Under Collective Bargaining Agreements

At  December 31, 2017 , we had approximately   87,000  full\-time equivalent employees\. Approximately   19%  of these employees were represented by unions\. The following table shows our domestic airline employee groups that are represented by unions\.

|                                            |                                                        |           |                                                                     |
| ------------------------------------------ | ------------------------------------------------------ | --------- | ------------------------------------------------------------------- |
| **Employee Group**                         | **Approximate Number of Active Employees Represented** | **Union** | **Date on which Collective Bargaining Agreement Becomes Amendable** |
| Delta Pilots                               | 13,234                                                 | ALPA      | December 31, 2019                                                   |
| Delta Flight Superintendents (Dispatchers) | 420                                                    | PAFCA     | March 31, 2018                                                      |
| Endeavor Air Pilots                        | 1,805                                                  | ALPA      | January 1, 2024                                                     |
| Endeavor Air Flight Attendants             | 1,160                                                  | AFA       | December 31, 2018                                                   |
| Endeavor Air Dispatchers                   | 55                                                     | PAFCA     | December 31, 2018                                                   |

In addition,   192  refinery employees of Monroe are represented by the United Steel Workers under an agreement that expires on February 28, 2019\. This agreement is governed by the National Labor Relations Act , which generally allows either party to engage in self help upon the expiration of the agreement\.

Other

We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase contract\-specific equipment, as defined by each respective contract, if we terminate the contract without cause prior to its expiration date\. Because these obligations are contingent on our termination of the contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs\.

 81


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

ITEM 7A\. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have market risk exposure related to fuel prices, interest rates and foreign currency exchange rates\. Market risk is the potential negative impact of adverse changes in these prices or rates on our Consolidated Financial Statements\. In an effort to manage our exposure to these risks, we may enter into derivative contracts and may adjust our derivative portfolio as market conditions change\. We expect adjustments to the fair value of financial instruments to result in ongoing volatility in earnings and stockholders' equity\.

The following sensitivity analyses do not consider the effects of a change in demand for air travel, the economy as a whole or actions we may take to seek to mitigate our exposure to a particular risk\. For these and other reasons, the actual results of changes in these prices or rates may differ materially from the following hypothetical results\.

Fuel Price Risk

Changes in fuel prices materially impact our results of operations\. A one cent increase in the cost of jet fuel would result in approximately $40 million of additional annual fuel expense\. Our derivative contracts to hedge the financial risk from changing fuel prices are primarily related to Monroe’s inventory\.

Interest Rate Risk

Our exposure to market risk from adverse changes in interest rates is primarily associated with our debt obligations\. Market risk associated with our fixed and variable rate debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates\.

At December 31, 2019, we had $7\.6 billion of fixed\-rate debt and $2\.9 billion of variable\-rate debt\. An increase of 100 basis points in average annual interest rates would have decreased the estimated fair value of our fixed\-rate debt by $300 million at December 31, 2019 and would have increased the annual interest expense on our variable\-rate debt by $29 million\.

The U\.K\. Financial Conduct Authority announced in July 2017 that it intends to no longer compel banks to submit rates for the calculation of the London interbank offered rate ("LIBOR") after 2021\. To mitigate the possible impact, various regulators have proposed alternative reference rates\. The effect of any discontinuation or replacement of LIBOR cannot be predicted at this time, but we believe our risk would be limited to variable rate debt and variable rate finance leases which utilize this rate\. At December 31, 2019 we have approximately $2\.1 billion of variable rate finance leases and variable rate debt maturing after 2021, that include provisions to update the applicable reference rate which are not expected to be materially different from LIBOR\.

Foreign Currency Exchange Risk

We are subject to foreign currency exchange rate risk because we have revenue, expense and equity investments denominated in foreign currencies\. To manage exchange rate risk, we execute both our international revenue and expense transactions in the same foreign currency to the extent practicable\. From time to time, we may also enter into foreign currency option and forward contracts\.

At December 31, 2019, we had open a U\.S\. dollar\-Euro cross currency swap contract totaling a $9 million asset position\. We estimate that a 10% depreciation or appreciation in the price of the Euro in relation to the U\.S\. dollar would have changed the projected cash settlement value of our open hedge contract by $45 million for the year ending December 31, 2019\. At December 31, 2019, we had open a U\.S\. dollar\-South Korean won cross currency swap contract totaling a $3 million liability position\. We estimate that a 10% depreciation or appreciation in the price of the South Korean won in relation to the U\.S\. dollar would have changed the projected cash settlement value of our open hedge contract by $16 million for the year ending December 31, 2019\.

48


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

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

***High and/or volatile fuel prices or significant disruptions in the supply of aircraft fuel could have a material adverse impact on the Company's strategic plans, operating results, financial condition and liquidity\.***

Aircraft fuel is critical to the Company's operations and is our single largest operating expense\. During the year ended December 31, 2018, the Company's fuel expense was $9\.3 billion\. The timely and adequate supply of fuel to meet operational demand depends on the continued availability of reliable fuel supply sources, as well as related service and delivery infrastructure\. Although the Company has some ability to cover short\-term fuel supply and infrastructure disruptions at some major demand locations, it depends significantly on the continued performance of its vendors and service providers to maintain supply integrity\. Consequently, the Company can neither predict nor guarantee the continued timely availability of aircraft fuel throughout the Company's system\.

Aircraft fuel has historically been the Company's most volatile operating expense due to the highly unpredictable nature of market prices for fuel\. The Company generally sources fuel at prevailing market prices\. Market prices for aircraft fuel have historically fluctuated substantially in short periods of time and continue to be highly volatile due to a dependence on a multitude of unpredictable factors beyond the Company's control\. These factors include changes in global crude oil prices, the balance between aircraft fuel supply and demand, natural disasters, prevailing inventory levels and fuel production and transportation infrastructure\. Prices of fuel are also impacted by indirect factors, such as geopolitical events, economic growth indicators, fiscal/monetary policies, fuel tax policies, changes in regulations, environmental concerns and financial investments in energy markets\. Both actual changes in these factors, as well as changes in market expectations of these factors, can potentially drive rapid changes in fuel price levels in short periods of time\.

Given the highly competitive nature of the airline industry, the Company may not be able to increase its fares and fees sufficiently to offset the full impact of increases in fuel prices, especially if these increases are significant, rapid and sustained\. Further, any such fare or fee increase may not be sustainable, may reduce the general demand for air travel and may also eventually impact the Company's strategic growth and investment plans for the future\. In addition, decreases in fuel prices for an extended period of time may result in increased industry capacity, increased competitive actions for market share and lower fares or surcharges in general\. If fuel prices were to then subsequently rise quickly, there may be a lag between the rise in fuel prices and any improvement of the revenue environment\.

To protect against increases in the market prices of fuel, the Company may hedge a portion of its future fuel requirements\. The Company does not currently hedge its future fuel requirements\. However, to the extent the Company decides to start a hedging program, such hedging program may not be successful in mitigating higher fuel costs, and any price protection provided may be limited due to choice of hedging instruments and market conditions, including breakdown of correlation between hedging instrument and market price of aircraft fuel and failure of hedge counterparties\. To the extent that the Company decides to hedge a portion of its future fuel requirements and uses hedge contracts that have the potential to create an obligation to pay upon settlement if fuel prices decline significantly, such hedge contracts may limit the Company's ability to benefit fully from lower fuel costs in the future\. If fuel prices decline significantly from the levels existing at the time the Company enters into a hedge contract, the Company may be required to post collateral (margin) beyond certain thresholds\. There can be no assurance that the Company's hedging arrangements, if any, will provide any particular level of protection against rises in fuel prices or that its counterparties will be able to perform under the Company's hedging arrangements\. Additionally, deterioration in the Company's financial condition could negatively affect its ability to enter into new hedge contracts in the future\.

***The Company relies heavily on technology and automated systems to operate its business and any significant failure or disruption of the technology or these systems could materially harm its business\.***

The Company depends on automated systems and technology to operate its business, including, but not limited to, computerized airline reservation systems, demand prediction software, flight operations systems, revenue management systems, accounting systems, technical and business operations systems, telecommunication systems and commercial websites and applications, including www\.united\.com and the United Airlines app\. United's website and other automated systems must be able to accommodate a high volume of traffic, maintain secure information and deliver important flight and schedule information, as well as process critical financial transactions\. These systems could suffer substantial or repeated disruptions due to various events, some of which are beyond the Company's control, including natural disasters, power failures, terrorist attacks, equipment or software failures, computer viruses or cyber security attacks\. Substantial or repeated systems failures or disruptions, including failures or disruptions related to the Company's complex integration of systems, could reduce the attractiveness of the Company's services versus those of its competitors, materially impair its ability to market its services and operate its flights, result in the unauthorized release of confidential or otherwise protected information, result in increased costs, lost revenue and the loss or compromise of important data, and may adversely affect the Company's business, operating results and financial condition\.

10


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

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

periods\. All tickets sold at any given point of time have travel dates extending up to 12 months\. As a result, the balance of the Company's Advance ticket sales liability represents activity that will be recognized in the next 12 months\.

|                                                                                |
| -------------------------------------------------------------------------------------------- |
| *Revenue by Geography\.*  The Company further disaggregates revenue by geographic regions\.  |

Operating segments are defined as components of an enterprise with separate financial information, which are evaluated regularly by the chief operating decision maker and are used in resource allocation and performance assessments\. The Company deploys its aircraft across its route network through a single route scheduling system to maximize its value\. When making resource allocation decisions, the Company's chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics\. The Company's chief operating decision maker makes resource allocation decisions to maximize the Company's consolidated financial results\. Managing the Company as one segment allows management the opportunity to maximize the value of its route network\.

The Company's operating revenue by principal geographic region (as defined by the U\.S\. Department of Transportation) for the years ended December 31 is presented in the table below (in millions):

|                              |          |          |          |
| ---------------------------- | -------- | -------- | -------- |
|                              | **2019** | **2018** | **2017** |
| Domestic (U\.S\. and Canada) | $26,960  | $25,552  | $23,114  |
| Atlantic                     | 7,387    | 7,103    | 6,340    |
| Pacific                      | 5,132    | 5,188    | 4,914    |
| Latin America                | 3,780    | 3,460    | 3,416    |
| Total                        | $43,259  | $41,303  | $37,784  |

The Company attributes revenue among the geographic areas based upon the origin and destination of each flight segment\. The Company's operations involve an insignificant level of dedicated revenue\-producing assets in geographic regions as the overwhelming majority of the Company's revenue\-producing assets (primarily U\.S\. registered aircraft) can be deployed in any of its geographic regions\.

Ancillary Fees\.  The Company charges fees, separately from ticket sales, for certain ancillary services that are directly related to passengers' travel, such as ticket change fees, baggage fees, inflight amenities fees, and other ticket\-related fees\. These ancillary fees are part of the travel performance obligation and, as such, are recognized as passenger revenue when the travel occurs\. The Company recorded   $2\.4 billion ,   $2\.2 billion , and   $2\.0 billion  of ancillary fees within passenger revenue in the years ended December 31,  2019 ,  2018  and  2017 , respectively\.

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

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (d) | **Frequent Flyer Accounting—** United's MileagePlus loyalty program builds customer loyalty by offering awards, benefits and services to program participants\. Members in this program earn miles for travel on United, United Express, Star Alliance members and certain other airlines that participate in the program\. Members can also earn miles by purchasing goods and services from our network of non\-airline partners\. We have contracts to sell miles to these partners with the terms extending from  one  to   nine years \.  These partners include domestic and international credit card issuers, retail merchants, hotels, car rental companies and our participating airline partners\. Miles can be redeemed for free (other than taxes and government\-imposed fees), discounted or upgraded air travel and non\-travel awards\.  |

Miles Earned in Conjunction with Travel\.  When frequent flyers earn miles for flights, the Company recognizes a portion of the ticket sales as revenue when the travel occurs and defers a portion of the ticket sale representing the value of the related miles as a separate performance obligation\. The Company determines the estimated selling price of travel and miles as if each element is sold on a separate basis\. The total consideration from each ticket sale is then allocated to each of these elements, individually, on a pro\-rata basis\. At the time of travel, the Company records the portion allocated to the miles to Frequent flyer deferred revenue on the Company's consolidated balance sheet and subsequently recognizes it into revenue when miles are redeemed for air travel and non\-air travel awards\.

Estimate of Miles Not Expected to be Redeemed \. The Company's estimated selling price of miles is based on an equivalent ticket value less breakage, which incorporates the expected redemption of miles, as the best estimate of selling price for these miles\. The equivalent ticket value is based on the prior 12 months' weighted average equivalent ticket value of similar fares as those used to settle award redemptions while taking into consideration such factors as redemption pattern, cabin class, loyalty status and geographic region\. The estimated selling price of miles is adjusted by breakage that considers a number of factors, including redemption patterns of various customer groups\. The Company's breakage model is based on the assumption that the likelihood that an account will redeem its miles can be estimated

56


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

*Operating Expenses*

|                                    |                                              |                                              |                                              |                                                       |
| ---------------------------------- | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- | ----------------------------------------------------- |
|                                    | **Year Ended**

**December 31,**       | **Year Ended**

**December 31,**       | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                                    | **2018**                                     | **2017**                                     | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                                    | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Aircraft fuel and related taxes    | $8,053                                       | $6,128                                       | $1,925                                       | 31\.4                                                 |
| Salaries, wages and benefits       | 12,240                                       | 11,942                                       | 298                                          | 2\.5                                                  |
| Maintenance, materials and repairs | 2,050                                        | 1,959                                        | 91                                           | 4\.7                                                  |
| Other rent and landing fees        | 1,900                                        | 1,806                                        | 94                                           | 5\.2                                                  |
| Aircraft rent                      | 1,264                                        | 1,197                                        | 67                                           | 5\.6                                                  |
| Selling expenses                   | 1,520                                        | 1,477                                        | 43                                           | 2\.9                                                  |
| Depreciation and amortization      | 1,839                                        | 1,702                                        | 137                                          | 8\.1                                                  |
| Special items, net                 | 787                                          | 712                                          | 75                                           | 10\.5                                                 |
| Other                              | 5,090                                        | 4,910                                        | 180                                          | 3\.6                                                  |
| Regional expenses:                 |                                              |                                              |                                              |                                                       |
| Aircraft fuel and related taxes    | 1,843                                        | 1,382                                        | 461                                          | 33\.4                                                 |
| Other                              | 5,221                                        | 5,190                                        | 31                                           | 0\.6                                                  |
| Total operating expenses           | $41,807                                      | $38,405                                      | $3,402                                       | 8\.9                                                  |

Total operating expenses increased $3\.4 billion, or 8\.9%, in 2018 from 2017\. The increase in operating expenses was primarily driven by an increase in fuel costs\.

Significant changes in the components of American’s total operating expenses are as follows:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Aircraft fuel and related taxes  increase d  31\.4 % primarily due to a  29\.1 %  increase  in the average price per gallon of fuel to  $2\.21  in  2018  from  $1\.71  in  2017 , as well as a  1\.8 %  increase  in gallons of fuel consumed\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Depreciation and amortization  increase d  8\.1 % due in part to American’s fleet renewal program, as American took delivery of eight owned mainline aircraft in  2018 \. The continued rollout of Premium Economy and harmonization of seating configurations across American’s fleet as well as information technology and software development projects associated with its merger integration also drove higher depreciation and amortization expense\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Regional aircraft fuel and related taxes  increase d  33\.4%  primarily due to a  28\.3%  increase  in the average price per gallon of fuel to  $2\.30  in  2018  from  $1\.79  in  2017  as well as a  4\.0%  increase  in gallons of fuel consumed\. |

60


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

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

BRW Notes Receivable\.  The BRW Term Loan, currently in default, is secured by a pledge of BRW's equity, as well as BRW's 516 million common shares of AVH\. In order to protect the value of its collateral, on May 24, 2019, United began to exercise certain remedies available to it under the terms of the BRW Term Loan Agreement and related documents\. In connection with the delivery by United of a notice of default to BRW, Kingsland Holdings Limited ("Kingsland"), AVH's largest minority shareholder, was granted, in accordance with the agreements related to the BRW Term Loan Agreement, authority to manage BRW, which remains the majority shareholder of AVH\. In addition, Kingsland is pursuing a foreclosure process which is expected to result in a judicially supervised sale of the collateral, following the grant of summary judgment by a New York state court on September 26, 2019\.

United evaluated the  $499 million  carrying value of the BRW Term Loan as of  December 31, 2019  using the fair value of the collateral and determined that the value of the collateral is sufficient to recover the carrying value of the BRW Term Loan\. As a result, the Company concluded that the BRW Term Loan is not impaired\. The carrying value of the BRW Term Loan represents the original loan amount plus accrued and unpaid interest and certain expenses associated with the loan origination\.

The fair market value of AVH equity was estimated using an income approach and a market approach with equal weight applied to each approach\. Under the income approach, the value was estimated by discounting expected future cash flows at a weighted average cost of capital to a single present value amount\. Under the market approach, the value was estimated by reference to multiples of enterprise value to earnings before interest, taxes, depreciation, amortization and rent ("EBITDAR") for a group of publicly\-traded market comparable companies, along with AVH's own EBITDAR levels\.

See Note 8 to the financial statements included in Part II, Item 8 of this report for additional information\.

Indefinite\-lived intangible assets\.  The Company has indefinite\-lived intangible assets, including goodwill\. Goodwill and indefinite\-lived intangible assets are not amortized but are reviewed for impairment on an annual basis as of October 1, or on an interim basis whenever a triggering event occurs\. An impairment occurs when the fair value of an intangible asset is less than its carrying value\. The Company determines the fair value using a variation of the income approach known as the excess earnings method, which discounts an asset's projected future net cash flows to determine the current fair value\. Assumptions used in the discounted cash flow methodology include a discount rate, which is based upon the Company's current weighted average cost of capital plus an asset\-specific risk factor, and a projection of sales, expenses, gross margin, tax rates and contributory asset charges for several future years and a terminal growth rate\. The assumptions used for future projections are determined based upon the Company's asset\-specific forecasts along with the Company's strategic plan\. These assumptions are inherently uncertain as they relate to future events and circumstances\. Actual results will be influenced by the competitive environment, fuel costs and other expenses, and potentially other unforeseen events or circumstances that could have a material impact on future results\.

See Note 1 and 14 to the financial statements included in Part II, Item 8 of this report for additional information\.

Forward\-Looking Information

Certain statements throughout Part II, Item 7\. Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report are forward\-looking and thus reflect the Company's current expectations and beliefs with respect to certain current and future events and anticipated financial and operating performance\. Such forward\-looking statements are and will be subject to many risks and uncertainties relating to the Company's operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward\-looking statements\. Words such as "expects," "will," "plans," "anticipates," "indicates," "believes," "estimates," "forecast," "guidance," "outlook," "goals", "targets" and similar expressions are intended to identify forward\-looking statements\.

Additionally, forward\-looking statements include statements that do not relate solely to historical facts, such as statements which identify uncertainties or trends, discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured\. All forward\-looking statements in this report are based upon information available to us on the date of this report\. We undertake no obligation to publicly update or revise any forward\-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable law\.

Our actual results could differ materially from these forward\-looking statements due to numerous factors including, without limitation, the following: our ability to execute our strategic operating plan, including our growth, revenue\-generating and cost\-control initiatives; general economic conditions (including interest rates, foreign currency exchange rates, investment or credit market conditions, crude oil prices, costs of aircraft fuel and energy refining capacity in relevant markets); risks of doing business globally, including instability and political developments that may impact our operations in certain countries; demand for travel and the impact that global economic and political conditions have on customer travel patterns; our capacity decisions and the capacity decisions of our competitors; competitive pressures on pricing and on demand; changes in aircraft fuel prices; disruptions in our supply of aircraft fuel; our ability to cost\-effectively hedge against increases in the price of aircraft fuel, if we decide to do so; the effects of any technology failures, cybersecurity or significant data breaches; disruptions to services provided by third\-party service providers; potential reputational or other impact from adverse events involving our aircraft or operations, the aircraft or operations of our regional carriers or our code share partners or the aircraft or operations of another airline; our ability to attract and retain customers; the effects of any terrorist attacks, international hostilities or other security events, or the fear of such events; the mandatory grounding of aircraft in our fleet; disruptions to our regional network; the

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