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

DELTA AIR LINES, INC\.

Consolidated Statements of Stockholders' Equity

|                                                                                |                                                                                |                                                                                |              |              |              |          |                                  |                         |                                                |                                                |                |                |        |        |        |        |        |        |       |       |       |
|:------------------------------------------------------------------------------------------------------------------------------------------------------------- |:------------------------------------------------------------------------------------------------------------------------------------------------------------- |:------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------:| ------------:| ------------:| --------:| --------------------------------:| -----------------------:| ----------------------------------------------:| ----------------------------------------------:| --------------:| --------------:|:------:|:------:|:------:|:------:|:------:|:------:|:-----:|:-----:|:-----:|
|                                                                                |                                                                                |                                                                                | Common Stock | Common Stock | Common Stock |          | Additional
Paid\-In Capital |  Retained
Earnings | Accumulated
Other
Comprehensive Loss | Accumulated
Other
Comprehensive Loss | Treasury Stock | Treasury Stock |        |        |        |        |        |        |
| (in millions, except per share data)                                                                                | (in millions, except per share data)                                                                                | (in millions, except per share data)                                                                                |       Shares |       Shares |       Amount |          | Additional
Paid\-In Capital |  Retained
Earnings | Accumulated
Other
Comprehensive Loss | Accumulated
Other
Comprehensive Loss |                |                | Shares | Shares | Shares | Amount | Amount | Amount | Total | Total | Total |
| Balance at January 1, 2017                                                                                | Balance at January 1, 2017                                                                                | Balance at January 1, 2017                                                                                |          745 |          745 |          $ — | $ 12,294 |                          $ 6,895 |               $ (7,636) |                                             14 |                                             14 |        $ (274) |       $ 11,279 |
| Net income                                                                                | Net income                                                                                | Net income                                                                                |           —  |           —  |           —  |       —  |                            3,205 |                      —  |                                             —  |                                             —  |             —  |          3,205 |
| Dividends declared                                                                                | Dividends declared                                                                                | Dividends declared                                                                                |           —  |           —  |           —  |       —  |                            (731) |                      —  |                                             —  |                                             —  |             —  |          (731) |
| Other comprehensive income                                                                                | Other comprehensive income                                                                                | Other comprehensive income                                                                                |           —  |           —  |           —  |       —  |                               —  |                      15 |                                             —  |                                             —  |             —  |             15 |
| Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $48\.31^(1)^  per share) | Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $48\.31^(1)^  per share) | Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $48\.31^(1)^  per share) |            1 |            1 |           —  |      107 |                               —  |                      —  |                                              1 |                                              1 |           (39) |             68 |
| Stock options exercised                                                                                | Stock options exercised                                                                                | Stock options exercised                                                                                |            2 |            2 |           —  |       28 |                               —  |                      —  |                                             —  |                                             —  |             —  |             28 |
| Treasury stock, net, contributed to our qualified defined benefit pension plans                                                                               | Treasury stock, net, contributed to our qualified defined benefit pension plans                                                                               | Treasury stock, net, contributed to our qualified defined benefit pension plans                                                                               |           —  |           —  |           —  |      188 |                               —  |                      —  |                                            (8) |                                            (8) |            155 |            343 |
| Stock purchased and retired                                                                                | Stock purchased and retired                                                                                | Stock purchased and retired                                                                                |         (33) |         (33) |           —  |    (564) |                          (1,113) |                      —  |                                             —  |                                             —  |             —  |        (1,677) |
| Balance at December 31, 2017                                                                                | Balance at December 31, 2017                                                                                | Balance at December 31, 2017                                                                                |          715 |          715 |            — |   12,053 |                            8,256 |                 (7,621) |                                              7 |                                              7 |          (158) |         12,530 |
| Net income                                                                                | Net income                                                                                | Net income                                                                                |           —  |           —  |           —  |       —  |                            3,935 |                      —  |                                             —  |                                             —  |             —  |          3,935 |
| Change in accounting principle and other                                                                                | Change in accounting principle and other                                                                                | Change in accounting principle and other                                                                                |           —  |           —  |           —  |       —  |                            (154) |                   (106) |                                             —  |                                             —  |             —  |          (260) |
| Dividends declared                                                                                | Dividends declared                                                                                | Dividends declared                                                                                |           —  |           —  |           —  |       —  |                            (909) |                      —  |                                             —  |                                             —  |             —  |          (909) |
| Other comprehensive loss                                                                                | Other comprehensive loss                                                                                | Other comprehensive loss                                                                                |           —  |           —  |           —  |       —  |                               —  |                    (98) |                                             —  |                                             —  |             —  |           (98) |
| Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $54\.90^(1)^  per share) | Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $54\.90^(1)^  per share) | Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $54\.90^(1)^  per share) |            1 |            1 |           —  |       91 |                               —  |                      —  |                                              1 |                                              1 |           (40) |             51 |
| Stock options exercised                                                                                | Stock options exercised                                                                                | Stock options exercised                                                                                |            1 |            1 |           —  |       13 |                               —  |                      —  |                                             —  |                                             —  |             —  |             13 |
| Stock purchased and retired                                                                                | Stock purchased and retired                                                                                | Stock purchased and retired                                                                                |         (29) |         (29) |           —  |    (486) |                          (1,089) |                      —  |                                             —  |                                             —  |             —  |        (1,575) |
| Balance at December 31, 2018                                                                                | Balance at December 31, 2018                                                                                | Balance at December 31, 2018                                                                                |          688 |          688 |            — |   11,671 |                           10,039 |                 (7,825) |                                              8 |                                              8 |          (198) |         13,687 |
| Net income                                                                                | Net income                                                                                | Net income                                                                                |           —  |           —  |           —  |       —  |                            4,767 |                      —  |                                             —  |                                             —  |             —  |          4,767 |
| Dividends declared                                                                                | Dividends declared                                                                                | Dividends declared                                                                                |           —  |           —  |           —  |       —  |                            (981) |                      —  |                                             —  |                                             —  |             —  |          (981) |
| Other comprehensive loss                                                                                | Other comprehensive loss                                                                                | Other comprehensive loss                                                                                |           —  |           —  |           —  |       —  |                               —  |                   (164) |                                             —  |                                             —  |             —  |          (164) |
| Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $50\.20^(1)^  per share) | Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $50\.20^(1)^  per share) | Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $50\.20^(1)^  per share) |            2 |            2 |           —  |      114 |                               —  |                      —  |                                              1 |                                              1 |           (38) |             76 |
| Stock purchased and retired                                                                                | Stock purchased and retired                                                                                | Stock purchased and retired                                                                                |         (38) |         (38) |           —  |    (656) |                          (1,371) |                      —  |                                             —  |                                             —  |             —  |        (2,027) |
| Balance at December 31, 2019                                                                                | Balance at December 31, 2019                                                                                | Balance at December 31, 2019                                                                                |          652 |          652 |          $ — | $ 11,129 |                         $ 12,454 |               $ (7,989) |                                              9 |                                              9 |        $ (236) |       $ 15,358 |

^(1)^ Weighted average price per share\.

The accompanying notes are an integral part of these Consolidated Financial Statements\.

57


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

competitors since there will be a common global regulatory regime\. CORSIA is expected to be implemented in phases, with information collection and sharing beginning in 2019, a pilot phase beginning in 2021, and the first phase beginning in 2024\. Certain details still need to be developed and the impact of CORSIA cannot be fully predicted\. While we do not anticipate any significant emissions allowance expenditures in 2019, compliance with CORSIA or similar emissions\-related requirements could significantly increase our operating costs beginning in 2021 and beyond\. Separately, the EU has established the ETS to regulate GHG emissions in the EU\. The EU adopted a directive in 2008 under which each EU member state is required to extend the ETS to aviation operations\. However, the EU ETS has never fully been imposed, in large part due to the effort to adopt CORSIA\. The EU has extended its stay on the extra\-territorial application of the EU ETS as applied to international flights to/from the EEA through year\-end 2023, contingent on successful implementation of CORSIA\. Thereafter, the EU will assess CORSIA implementation and decide the future status of the EU ETS as applied to international aviation to/from the EEA\. The potential impact of CORSIA or other emissions\-related requirements on our costs will ultimately depend on a number of factors, including baseline emissions, the price of emission allowances or offsets that American would need to acquire, the GHG efficiency of the American fleet, and the number of future American flights subject to such emissions\-related requirements\. These costs have not been completely defined and could fluctuate\.

In 2019, the EPA could finalize a rule implementing aircraft engine GHG emission standards developed initially through ICAO\. It is anticipated that the EPA rule will closely align with recent ICAO carbon dioxide emission standards\. The new standards, which were supported by the airline industry and manufacturers, would apply to new type aircraft certified beginning in 2020, and would be phased in for newly manufactured existing aircraft type designs starting in 2023\.

In addition, several states have adopted or are considering initiatives to regulate GHG emissions, primarily through the planned development of GHG emissions inventories, regional GHG cap and trade programs or low carbon fuels programs\. Depending on the scope of such regulation, certain of our facilities and operations, or the operations of our suppliers, may be subject to additional operating and other permit requirements, likely resulting in increased operating costs\.

In addition, in December 2015, at the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change, over 190 countries, including the United States, reached an agreement (the Paris Agreement) to reduce GHG emissions\. While the United States has since announced that it will withdraw from the Paris Agreement and there is no express reference to aviation in the Paris Agreement, to the extent countries implement the Paris Agreement or impose other climate change regulations, either with respect to the aviation industry or with respect to related industries such as the aviation fuel industry, it could have an adverse direct or indirect effect on our business\.

These regulatory efforts, both internationally and in the U\.S\. at the federal and state levels, are still developing, and we cannot yet determine what the final regulatory programs or their impact will be in the U\.S\., the EU or in other areas in which we do business\. However, such climate change\-related regulatory activity in the future may adversely affect our business and financial results by requiring us to reduce our emissions, purchase allowances or otherwise pay for our emissions\. Such activity may also impact us indirectly by increasing our operating costs, including fuel costs\.

***Any damage to our reputation or brand image could adversely affect our business or financial results\.***

Maintaining a good reputation globally is critical to our business\. Our reputation or brand image could be adversely impacted by any failure to maintain high ethical, social and environmental sustainability practices for all of our operations and activities, our impact on the environment, public pressure from investors or policy groups to change our policies, such as movements to institute a “living wage,” customer perceptions of our advertising campaigns, sponsorship arrangements or marketing programs, customer perceptions of our use of social media, or customer perceptions of statements made by us, our employees and executives, agents or other third parties\. Damage to our reputation or brand image or loss of customer confidence in our services could adversely affect our business and financial results, as well as require additional resources to rebuild our reputation\.

29


Annual Report of Southwest Airlines Co\. for year 2018

hedge in place for a particular period, that hedge may not produce any hedging gains at settlement and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments\.

For 2018, the Company had fuel derivative instruments in place for up to 79 percent of its fuel consumption\. As of December 31, 2018, the Company also had fuel derivative instruments in place to provide coverage at varying price levels, but up to a maximum of approximately 70 percent of its 2019 estimated fuel consumption, depending on where market prices settle\. The following table provides information about the Company’s volume of fuel hedging on an economic basis considering current market prices:

|                      |                               |                                                |
| -------------------- | ----------------------------- | ---------------------------------------------- |
|                      | **Maximum fuel hedged as of** |                                                |
|                      | **December 31, 2018**         | **Derivative underlying commodity type as of** |
| **Period (by year)** | **(gallons in millions) (a)** | **December 31, 2018**                          |
| 2019                 | 1,519                         | WTI crude and Brent crude oil                  |
| 2020                 | 1,207                         | WTI crude and Brent crude oil                  |
| 2021                 | 466                           | WTI crude and Brent crude oil                  |
| 2022                 | 88                            | WTI crude oil                                  |

(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in place and may vary significantly as market prices fluctuate\.

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges\. The Company adopted the New Hedging Standard as of January 1, 2018\. See Note 2 for further information on this adoption\. Under the New Hedging Standard, all periodic changes in fair value of the derivatives designated as hedges are recorded in AOCI until the underlying jet fuel is consumed\. See Note 12\. Prior to the adoption of the New Hedging Standard, ineffectiveness resulted when the change in the fair value of the derivative instrument exceeded the change in the value of the Company’s expected future cash outlay to purchase and consume jet fuel\. Prior to 2018, those expected future cash outlays represented forecasted forward jet fuel prices, which were estimated through utilization of a statistical–based regression equation with data from market forward prices of like commodities\. This equation was then adjusted for certain items, such as transportation costs, that are stated in the Company’s fuel purchasing contracts with its vendors\. To the extent that the periodic changes in the fair value of the derivatives were ineffective, the ineffective portion was recorded to Other (gains) losses, net, in the Consolidated Statement of Income in the period of the change\.

The Company's results are subject to the possibility that the derivatives will no longer qualify for hedge accounting, in which case any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the Consolidated Statement of Income in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense\. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging\. Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results\. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs\. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings\. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de\-designated as hedges are concurrently marked to market through earnings\. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs\. In a situation where it becomes probable that a fuel hedged forecasted

98


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

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

Certain domestic airport slots and airport gate leasehold rights are amortized on a straight\-line basis over 25 years\. The customer relationships and marketing agreements were identified as intangible assets subject to amortization and are amortized on a straight\-line basis over approximately nine years and 30 years, respectively\. Tradenames are fully amortized\.

We recorded amortization expense related to these intangible assets of $44 million, $76 million and $55 million for the years ended December 31, 2017, 2016 and 2015, respectively\. We expect to record annual amortization expense for these intangible assets as follows (in millions):

|                     |      |
| ------------------- | ---- |
| 2018                | $41  |
| 2019                | 41   |
| 2020                | 41   |
| 2021                | 41   |
| 2022                | 41   |
| 2023 and thereafter | 115  |
| Total               | $320 |

*Indefinite\-Lived Intangible Assets*

Indefinite\-lived intangible assets include certain domestic airport slots at our hubs and international slots and route authorities\. Indefinite\-lived intangible assets are not amortized but instead are assessed for impairment annually on October 1^st^ or more frequently if events or circumstances indicate that the asset may be impaired\. As of December 31, 2017 and 2016, we had $1\.9 billion and $1\.8 billion, respectively, of indefinite\-lived intangible assets on our consolidated balance sheets\.

Indefinite\-lived intangible assets are assessed for impairment by initially performing a qualitative assessment to determine whether we believe it is more likely than not that an asset has been impaired\. If we believe impairment has occurred, we then evaluate for impairment by comparing the estimated fair value of assets to the carrying value\. An impairment charge is recognized if the asset’s estimated fair value is less than its carrying value\. Based upon our annual assessment, there was no indefinite\-lived intangible asset impairment in 2017\.

***(i) Loyalty Program***

We currently operate the loyalty program, AAdvantage\. This program awards mileage credits to passengers who fly on American, any **one**world airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclaycard US co\-branded credit cards, hotels and car rental companies\. Mileage credits can be redeemed for travel on American or other participating partner airlines\.

Through December 31, 2017, we used the incremental cost method to account for the portion of our loyalty program liability incurred when AAdvantage members earn mileage credits by flying on American, any **one**world airline or other partner airlines\. We have an obligation to provide future travel when these mileage credits are redeemed and therefore have recorded a liability for mileage credits outstanding\.

The incremental cost liability includes all mileage credits, even mileage credits for members whose account balances have not yet reached the minimum level required to redeem an award\. Mileage credits are subject to expiration\. The liability for outstanding mileage credits is valued based on the estimated incremental cost of carrying one additional passenger\. The estimated incremental cost primarily includes unit costs incurred for fuel, food and insurance as well as fees incurred when travel awards are redeemed on partner airlines\. In calculating the liability, we estimate how many mileage credits will never be redeemed for travel and exclude those mileage credits from the estimate of the liability\. Estimates are also made for the number of miles that will be used per award redemption and the number of travel awards that will be redeemed on partner airlines\. These costs and estimates are based on our historical program experience as well as consideration of enacted program changes, as applicable\. Changes in the liability resulting from members earning additional mileage credits or changes in estimates are recorded in the consolidated statements of operations as a part of passenger revenue\.

88


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

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

Contract Balances

Our significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non\-air travel awards, reported as loyalty program liability on our consolidated balance sheets and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on our consolidated balance sheets\.

|                           |                   |                   |
| ------------------------- | ----------------- | ----------------- |
|                           | **December 31,**  | **December 31,**  |
|                           | **2019**          | **2018**          |
|                           | **(in millions)** | **(in millions)** |
| Loyalty program liability | $8,615            | $8,539            |
| Air traffic liability     | 4,808             | 4,339             |
| Total                     | $13,423           | $12,878           |

The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co\-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue)\. Changes in loyalty program liability are as follows (in millions):

|                                     |                 |
| ----------------------------------- | --------------- |
| Balance at December 31, 2018        | $8,539          |
| Deferral of revenue                 | 3,438           |
| Recognition of revenue  ^(1)^       | (3,362

) |
| Balance at December 31, 2019  ^(2)^ | $8,615          |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Principally relates to revenue recognized from the redemption of mileage credits for both air and non\-air travel awards\. Mileage credits are combined in one homogenous pool and are not separately identifiable\. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(2)^ | Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every   18 months \. As of  December 31, 2019 , our current loyalty program liability was   $3\.2 billion  and represents our current estimate of revenue expected to be recognized in the next 12 months based on historical trends, with the balance reflected in long\-term loyalty program liability expected to be recognized as revenue in periods thereafter\. |

The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel\. The balance in our air traffic liability also fluctuates with seasonal travel patterns\. The contract duration of passenger tickets is   one year \. Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months\. For  2019 ,   $3\.3 billion  of revenue was recognized in passenger revenue that was included in our air traffic liability at  December 31, 2018 \.

With respect to contract receivables, reflected as accounts receivable, net on the accompanying consolidated balance sheets, these primarily include receivables for tickets sold to individual passengers through the use of major credit cards\. These receivables are short\-term, mostly settled within   seven days  after sale\. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts\.

(l) Maintenance, Materials and Repairs

Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists\.

(m) Selling Expenses

Selling expenses include credit card fees, commissions, computerized reservations systems fees and advertising\. Selling expenses associated with passenger revenue are expensed when the transportation or service is provided\. Advertising costs are expensed as incurred\. Advertising expense was   $129 million ,   $128 million  and   $135 million  for the years ended  December 31, 2019 ,  2018  and  2017 , respectively\.

83


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

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

*Passenger Taxes and Fees*

Various taxes and fees assessed on the sale of tickets to end customers are collected by us as an agent and remitted to taxing authorities\. These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority\.

*Cargo Revenue*

Cargo revenue is recognized when we provide the transportation\.

*Other Revenue*

Other revenue includes revenue associated with marketing services provided to our business partners as part of our loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services\. The accounting and recognition for the loyalty program marketing services are discussed in Note 1(i) above\. Baggage fees, ticketing change fees, airport clubs and inflight service revenues are recognized when we provide the service\.

Effective January 1, 2018, we are adopting ASU 2014\-09: Revenue from Contracts with Customers (Topic 606)\. See Recent Accounting Pronouncements in Note 1(r) below for further discussion\.

***(k) Maintenance, Materials and Repairs***

Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists\.

***(l) Selling Expenses***

Selling expenses include credit card fees, commissions, computerized reservations systems fees and advertising\. Advertising costs are expensed as incurred\. Advertising expense was $135 million, $116 million and $110 million for the years ended December 31, 2017, 2016 and 2015, respectively\.

***(m) Share\-based Compensation***

We account for our share\-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award\. Certain awards have performance conditions that must be achieved prior to vesting and are expensed based on the expected achievement at each reporting period\. The fair value of stock appreciation rights is estimated using a Black\-Scholes option pricing model\. The fair value of restricted stock units is based on the market price of the underlying shares of common stock on the date of grant\. See Note 14 for further discussion of share\-based compensation\.

***(n) Deferred Gains and Credits, Net***

Included within deferred gains and credits, net are amounts deferred and amortized into future periods associated with the adjustment of leases to fair value in connection with the application of acquisition accounting, deferred gains on the sale\-leaseback of aircraft and certain vendor incentives\. We periodically receive vendor incentives in connection with acquisition of aircraft and engines\. These credits are deferred until aircraft and engines are delivered and then applied as a reduction to the cost of the related equipment\.

***(o) Foreign Currency Gains and Losses***

Foreign currency gains and losses are recorded as part of other nonoperating expense, net in our consolidated statements of operations\. Foreign currency losses for 2017 were $4 million\. Foreign currency gains were $1 million for 2016\. For 2015, foreign currency losses were $751 million and included a $592 million nonoperating special charge to write off all of the value of Venezuelan bolivars held by us due to continued lack of repatriations and deterioration of economic conditions in Venezuela\.

***(p) Other Operating Expenses***

Other operating expenses includes costs associated with ground and cargo handling, crew travel, aircraft food and catering, passenger accommodation, airport security, international navigation fees and certain general and administrative expenses\.

90


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

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

Healthcare Cost Trend Rate\.  Assumed healthcare cost trend rates have an effect on the amounts reported for the other postretirement benefit plans\. A   1%  change in the healthcare cost trend rate used in measuring the plan benefit obligation for these plans would have the following effects:

|                                                                |                 |                      |
| -------------------------------------------------------------- | --------------- | -------------------- |
| **(in millions)**                                              | **1% Increase** | **1% (Decrease)**    |
| Increase (decrease) in total service and interest cost         | $1              | $

(1

) |
| Increase (decrease) in the accumulated plan benefit obligation | 9               | (30

)         |

Expected Long\-Term Rate of Return\.  Our expected long\-term rate of return on plan assets is based primarily on plan\-specific investment studies using historical market return and volatility data\.  Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically\. We also expect to receive a premium for investing in less liquid private markets\.  We review our rate of return on plan assets assumptions annually\.  Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation\.  The investment strategy for our defined benefit pension plan assets is to earn a long\-term return that meets or exceeds our annualized return target while taking an acceptable level of risk and maintaining sufficient liquidity to pay current benefits and other cash obligations of the plan\. This is achieved by investing in a globally diversified mix of public and private equity, fixed income, real assets, hedge funds and other assets and instruments\.  Our expected long\-term rate of return on assets for net periodic pension benefit cost for the year ended  December 31, 2017  was   8\.96% \.

Life Expectancy \.  Changes in life expectancy may significantly change our benefit obligations and future expense\. We use the Society of Actuaries ("SOA") published mortality data, other publicly available information and our own perspective of future longevity to develop our best estimate of life expectancy\. The SOA publishes annual updated mortality tables for U\.S\. plans and updated improvement scale\. Each year we consider updates by the SOA in setting our mortality assumptions for purposes of measuring pension and other postretirement and postemployment benefit obligations\.

Benefit Payments

Benefit payments in the table below are based on the same assumptions used to measure the related benefit obligations\. Actual benefit payments may vary significantly from these estimates\. Benefits earned under our pension plans and certain postemployment benefit plans are expected to be paid from funded benefit plan trusts, while our other postretirement benefits are funded from current assets\.

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

|                   |                      |                                                      |
| ----------------- | -------------------- | ---------------------------------------------------- |
| **(in millions)** | **Pension Benefits** | **Other Postretirement and Postemployment Benefits** |
| 2018              | $1,170               | $284                                                 |
| 2019              | 1,177                | 291                                                  |
| 2020              | 1,201                | 296                                                  |
| 2021              | 1,220                | 297                                                  |
| 2022              | 1,238                | 296                                                  |
| 2023\-2027        | 6,351                | 1,417                                                |

Plan Assets

We have adopted and implemented investment policies for our defined benefit pension plans that incorporate strategic asset allocation mixes intended to best meet the plans' long\-term obligations, while maintaining an appropriate level of risk and liquidity\. These asset portfolios employ a diversified mix of investments, which are reviewed periodically\. Active management strategies are utilized where feasible in an effort to realize investment returns in excess of market indices\. Derivatives in the plans are primarily used to manage risk and gain asset class exposure while still maintaining liquidity\. As part of these strategies, the plans are required to hold cash collateral associated with certain derivatives\. Our investment strategies target a mix of   40 \-  50%  growth\-seeking assets,   20 \-  30%  income\-generating assets and   25 \-  30%  risk\-diversifying assets\. Risk diversifying assets include hedged mandates implementing long\-short, market neutral and relative value strategies that invest primarily in publicly\-traded equity, fixed income, foreign currency and commodity securities and are used to improve the impact of active management on the plans\.

 76


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

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

ASU 2016\-13: Financial Instruments  –  Credit Losses (Topic 326)

This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates\. For trade receivables, loans and held\-to \- maturity debt securities, an estimate of lifetime expected credit losses is required\. For available\-for\-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset\. This standard is effective for interim and annual reporting periods beginning after December 15, 2019\. While we have not completed our evaluation of the impact of adoption of this standard, we do not expect it to have a material impact on our consolidated financial statements\.

(c) Short\-term Investments

Short\-term investments are classified as available\-for\-sale and stated at fair value\. Realized gains and losses are recorded in nonoperating expense on our consolidated statements of operations\. Unrealized gains and losses are recorded in accumulated other comprehensive loss on our consolidated balance sheets\.

(d) Restricted Cash and Short\-term Investments

We have restricted cash and short\-term investments related primarily to collateral held to support workers’ compensation obligations\.

(e) Aircraft Fuel, Spare Parts and Supplies, Net

Aircraft fuel is recorded on a first\-in, first\-out basis\. Spare parts and supplies are recorded at average costs less an allowance for obsolescence\. These items are expensed when used\.

(f) Operating Property and Equipment

Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or the lease term, whichever is less, using the straight\-line method\. Residual values for aircraft, engines and related rotable parts are generally   5%  to   10%  of original cost\. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated or amortized over the estimated useful life of the asset or the lease term, whichever is less\. The estimated useful lives for the principal property and equipment classifications are as follows:

|                                                     |                           |
| --------------------------------------------------- | ------------------------- |
| **Principal Property and Equipment Classification** | **Estimated Useful Life** |
| Aircraft, engines and related rotable parts         | 20 – 30 years             |
| Buildings and improvements                          | 5 – 30 years              |
| Furniture, fixtures and other equipment             | 3 – 10 years              |
| Capitalized software                                | 5 – 10 years              |

We assess impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired\. An asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the carrying amount of the assets and the net book value of the assets exceeds their estimated fair value\. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets\. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell\.

Total depreciation and amortization expense was   $2\.6 billion ,   $2\.4 billion  and   $2\.2 billion  for the years ended  December 31, 2019 ,  2018  and  2017 , respectively\.

(g) Leases

We determine if an arrangement is a lease at inception\. Operating leases are included in operating lease right\-of\-use (ROU) assets, current operating lease liabilities and noncurrent operating lease liabilities in our consolidated balance sheet\. Finance leases are included in property and equipment, current maturities of long\-term debt and finance leases and long\-term debt and finance leases, net of current maturities, in our consolidated balance sheets\.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease\. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term\.

78


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

Loyalty Program \- Mileage Breakage

|                                            |                                            |                                            |                                                                                |                                                                                |                                                                                |
| ------------------------------------------ | ------------------------------------------ | ------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| *Description of the Matter*                | *Description of the Matter*                | *Description of the Matter*                | At December 31, 2019 the Company’s aggregate current and noncurrent loyalty program deferred revenue balance was $6\.7 billion\. For the year ended December 31, 2019, the Company recognized revenue of $2\.9 billion classified as travel miles redeemed within passenger revenue and revenue of $2\.0 billion classified as loyalty program revenue within other revenue in the consolidated statement of operations\. As disclosed in Note 2 to the consolidated financial statements, the Company defers revenue for mileage credits earned and recognizes loyalty travel awards in passenger revenue as the miles are redeemed and services are provided\. In determining the value of mileage credits earned, the Company applies an estimate of mileage credits earned that are not expected to be redeemed (“breakage”)\. The Company recognizes breakage proportionally during the period in which the remaining mileage credits are actually redeemed\. Under the Company’s loyalty program, mileage credits do not expire\. Therefore, the Company uses statistical models to estimate breakage based on historical redemption patterns\. | At December 31, 2019 the Company’s aggregate current and noncurrent loyalty program deferred revenue balance was $6\.7 billion\. For the year ended December 31, 2019, the Company recognized revenue of $2\.9 billion classified as travel miles redeemed within passenger revenue and revenue of $2\.0 billion classified as loyalty program revenue within other revenue in the consolidated statement of operations\. As disclosed in Note 2 to the consolidated financial statements, the Company defers revenue for mileage credits earned and recognizes loyalty travel awards in passenger revenue as the miles are redeemed and services are provided\. In determining the value of mileage credits earned, the Company applies an estimate of mileage credits earned that are not expected to be redeemed (“breakage”)\. The Company recognizes breakage proportionally during the period in which the remaining mileage credits are actually redeemed\. Under the Company’s loyalty program, mileage credits do not expire\. Therefore, the Company uses statistical models to estimate breakage based on historical redemption patterns\. | At December 31, 2019 the Company’s aggregate current and noncurrent loyalty program deferred revenue balance was $6\.7 billion\. For the year ended December 31, 2019, the Company recognized revenue of $2\.9 billion classified as travel miles redeemed within passenger revenue and revenue of $2\.0 billion classified as loyalty program revenue within other revenue in the consolidated statement of operations\. As disclosed in Note 2 to the consolidated financial statements, the Company defers revenue for mileage credits earned and recognizes loyalty travel awards in passenger revenue as the miles are redeemed and services are provided\. In determining the value of mileage credits earned, the Company applies an estimate of mileage credits earned that are not expected to be redeemed (“breakage”)\. The Company recognizes breakage proportionally during the period in which the remaining mileage credits are actually redeemed\. Under the Company’s loyalty program, mileage credits do not expire\. Therefore, the Company uses statistical models to estimate breakage based on historical redemption patterns\. |
|                                            |                                            |                                            | Auditing the Company’s accounting for its loyalty program required significant estimation in determining the breakage estimate for mileage credits\. In particular, there is complexity and subjectivity in estimating breakage based on expectations of future redemption patterns due to the absence of historical expirations as the Company’s mileage credits do not expire\.                                                                                | Auditing the Company’s accounting for its loyalty program required significant estimation in determining the breakage estimate for mileage credits\. In particular, there is complexity and subjectivity in estimating breakage based on expectations of future redemption patterns due to the absence of historical expirations as the Company’s mileage credits do not expire\.                                                                                | Auditing the Company’s accounting for its loyalty program required significant estimation in determining the breakage estimate for mileage credits\. In particular, there is complexity and subjectivity in estimating breakage based on expectations of future redemption patterns due to the absence of historical expirations as the Company’s mileage credits do not expire\.                                                                                |
| *How We Addressed the Matter in Our Audit* | *How We Addressed the Matter in Our Audit* | *How We Addressed the Matter in Our Audit* | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for its loyalty program, including controls over management’s review of the estimation of the mileage breakage and the completeness and accuracy of the data underlying the breakage estimate\.                                                                                | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for its loyalty program, including controls over management’s review of the estimation of the mileage breakage and the completeness and accuracy of the data underlying the breakage estimate\.                                                                                | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for its loyalty program, including controls over management’s review of the estimation of the mileage breakage and the completeness and accuracy of the data underlying the breakage estimate\.                                                                                |
|                                            |                                            |                                            | To test the estimate of breakage of mileage credits, our audit procedures included, among others, involving an actuarial specialist to assist in assessing the method used to develop the breakage estimate and independently developing a range of breakage estimates and comparing them to the Company's estimates\. Additionally, we tested the completeness and accuracy of the underlying mileage data used in the Company’s statistical models and performed sensitivity analyses to evaluate the changes to the Company’s deferred revenue that would result from changes in the breakage estimate\.                                                                                | To test the estimate of breakage of mileage credits, our audit procedures included, among others, involving an actuarial specialist to assist in assessing the method used to develop the breakage estimate and independently developing a range of breakage estimates and comparing them to the Company's estimates\. Additionally, we tested the completeness and accuracy of the underlying mileage data used in the Company’s statistical models and performed sensitivity analyses to evaluate the changes to the Company’s deferred revenue that would result from changes in the breakage estimate\.                                                                                | To test the estimate of breakage of mileage credits, our audit procedures included, among others, involving an actuarial specialist to assist in assessing the method used to develop the breakage estimate and independently developing a range of breakage estimates and comparing them to the Company's estimates\. Additionally, we tested the completeness and accuracy of the underlying mileage data used in the Company’s statistical models and performed sensitivity analyses to evaluate the changes to the Company’s deferred revenue that would result from changes in the breakage estimate\.                                                                                |

Loyalty Program \- American Express Contract Brand Value

|                                            |                                            |                                            |                                                                                |                                                                                |                                                                                |
| ------------------------------------------ | ------------------------------------------ | ------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| *Description of the Matter*                | *Description of the Matter*                | *Description of the Matter*                | At December 31, 2019 the Company’s aggregate current and noncurrent loyalty program deferred revenue balance was $6\.7 billion\. For the year ended December 31, 2019, the Company recognized revenue of $2\.9 billion classified as loyalty travel awards within passenger revenue and revenue of $2\.0 billion classified as loyalty program revenue within other revenue in the consolidated statement of operations\. As disclosed in Note 2 to the consolidated financial statements, effective January 1, 2019, the Company amended its co\-brand agreement with American Express\. The Company allocates the consideration received from American Express based on its best estimate of the relative selling price of the products and services delivered, including the use of the Company’s brand\. | At December 31, 2019 the Company’s aggregate current and noncurrent loyalty program deferred revenue balance was $6\.7 billion\. For the year ended December 31, 2019, the Company recognized revenue of $2\.9 billion classified as loyalty travel awards within passenger revenue and revenue of $2\.0 billion classified as loyalty program revenue within other revenue in the consolidated statement of operations\. As disclosed in Note 2 to the consolidated financial statements, effective January 1, 2019, the Company amended its co\-brand agreement with American Express\. The Company allocates the consideration received from American Express based on its best estimate of the relative selling price of the products and services delivered, including the use of the Company’s brand\. | At December 31, 2019 the Company’s aggregate current and noncurrent loyalty program deferred revenue balance was $6\.7 billion\. For the year ended December 31, 2019, the Company recognized revenue of $2\.9 billion classified as loyalty travel awards within passenger revenue and revenue of $2\.0 billion classified as loyalty program revenue within other revenue in the consolidated statement of operations\. As disclosed in Note 2 to the consolidated financial statements, effective January 1, 2019, the Company amended its co\-brand agreement with American Express\. The Company allocates the consideration received from American Express based on its best estimate of the relative selling price of the products and services delivered, including the use of the Company’s brand\. |
|                                            |                                            |                                            | Auditing the Company’s accounting for its co\-brand agreement with American Express was complex and highly judgmental due to the significant estimation required in determining the selling price of the Company’s brand deliverable primarily resulting from the absence of an observable standalone selling price\. A change in the estimated selling price of the brand deliverable could have a material impact on the deferred revenue balance and the timing of revenue recognition\.                                                                                | Auditing the Company’s accounting for its co\-brand agreement with American Express was complex and highly judgmental due to the significant estimation required in determining the selling price of the Company’s brand deliverable primarily resulting from the absence of an observable standalone selling price\. A change in the estimated selling price of the brand deliverable could have a material impact on the deferred revenue balance and the timing of revenue recognition\.                                                                                | Auditing the Company’s accounting for its co\-brand agreement with American Express was complex and highly judgmental due to the significant estimation required in determining the selling price of the Company’s brand deliverable primarily resulting from the absence of an observable standalone selling price\. A change in the estimated selling price of the brand deliverable could have a material impact on the deferred revenue balance and the timing of revenue recognition\.                                                                                |
| *How We Addressed the Matter in Our Audit* | *How We Addressed the Matter in Our Audit* | *How We Addressed the Matter in Our Audit* | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for its co\-brand agreement with American Express, including controls specific to the estimated selling price of the Company’s brand deliverable and the completeness and accuracy of the data underlying the brand deliverable estimate\.                                                                                | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for its co\-brand agreement with American Express, including controls specific to the estimated selling price of the Company’s brand deliverable and the completeness and accuracy of the data underlying the brand deliverable estimate\.                                                                                | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for its co\-brand agreement with American Express, including controls specific to the estimated selling price of the Company’s brand deliverable and the completeness and accuracy of the data underlying the brand deliverable estimate\.                                                                                |
|                                            |                                            |                                            | To test the estimated selling price of the brand deliverable, our audit procedures included, among others, involving a valuation specialist to assist in testing the method used to develop the selling price of the Company’s brand deliverable, and assessing the reasonableness of the inputs used to develop the estimate, which included corroborating those inputs to publicly available data\. Additionally, we performed sensitivity analyses to evaluate the changes to the Company’s deferred revenue that would result from changes in the estimated standalone selling price of the Company’s brand deliverable\.                                                                                | To test the estimated selling price of the brand deliverable, our audit procedures included, among others, involving a valuation specialist to assist in testing the method used to develop the selling price of the Company’s brand deliverable, and assessing the reasonableness of the inputs used to develop the estimate, which included corroborating those inputs to publicly available data\. Additionally, we performed sensitivity analyses to evaluate the changes to the Company’s deferred revenue that would result from changes in the estimated standalone selling price of the Company’s brand deliverable\.                                                                                | To test the estimated selling price of the brand deliverable, our audit procedures included, among others, involving a valuation specialist to assist in testing the method used to develop the selling price of the Company’s brand deliverable, and assessing the reasonableness of the inputs used to develop the estimate, which included corroborating those inputs to publicly available data\. Additionally, we performed sensitivity analyses to evaluate the changes to the Company’s deferred revenue that would result from changes in the estimated standalone selling price of the Company’s brand deliverable\.                                                                                |

51


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

*Nonoperating Results*

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

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

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

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

**Increase**

**(Decrease)** |
|                                 | **2017**                                     | **2016**                                     | **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)**          |
| Interest income                 | $215                                         | $104                                         | $111                                         | nm ^1^                                                |
| Interest expense, net           | (988)                                        | (906)                                        | (82)                                         | 9\.1                                                  |
| Other, net                      | (15)                                         | (59)                                         | 44                                           | (74\.5)                                               |
| Total nonoperating expense, net | $(788)                                       | $(861)                                       | $73                                          | (8\.4)                                                |

|        |                  |
| ------ | ---------------- |
| ^(1)^  | Not meaningful\. |

American’s short\-term investments in each period consisted of highly liquid investments that provided relatively nominal returns\. Interest income increased $111 million due to higher interest\-bearing related party receivables from American’s parent company, AAG, as well as a 50 basis point increase in average yields in 2017 as compared to 2016\.

Interest expense, net increased $82 million, or 9\.1%, in 2017 primarily due to higher outstanding debt as a result of aircraft financings associated with American’s fleet renewal program\.

Other nonoperating expense, net in 2017 and 2016 included $22 million and $49 million, respectively, of net special charges associated with debt refinancings and extinguishments\.

*Income Taxes*

American is part of the AAG consolidated income tax return\.

In 2017 and 2016, American recorded an income tax provision of $1\.3 billion and $1\.7 billion, respectively, at an effective rate of approximately 41% and 37%, respectively\. This tax provision was substantially non\-cash due to utilization of American’s NOLs\. Substantially all of American’s income before income taxes is attributable to the United States\. At December 31, 2017, American had approximately $10\.6 billion of federal NOLs and $3\.2 billion of state NOLs, substantially all of which American expects to be available in 2018 to reduce future federal and state taxable income\.

As a result of the 2017 Tax Act, American recorded a special, non\-cash tax provision of $93 million in 2017 to reflect the impact of lower corporate income tax rates on its deferred tax assets and liabilities\. For 2018, American presently expects to recognize a provision for income taxes at an effective rate of approximately 24% due to the reduction in the corporate tax rate\.

See Note 4 to American’s Consolidated Financial Statements in Part II, Item 8B for additional information on income taxes\.

***Results of Operations –*** ***2016*** ***Compared to*** ***2015***

American realized net income of $2\.8 billion in 2016\. This compares to $8\.1 billion of net income in 2015, which included a special $3\.5 billion non\-cash tax benefit as American reversed the valuation allowance on its deferred tax assets, which include its federal and state NOLs\. As a result of the reversal of the valuation allowance, American recorded a $1\.7 billion provision for income taxes in 2016, which is substantially non\-cash due to the utilization of NOLs\. Accordingly, amounts reported in 2016 for income tax provision and net income are not comparable to 2015\.

American realized pre\-tax income of $4\.4 billion and $4\.7 billion in 2016 and 2015 respectively\. American’s 2016 pre\-tax income was impacted by a decline in revenues due to lower yields\. Salaries, wages and benefits costs were higher in 2016, driven by American’s new labor contracts and the addition of an employee profit sharing program; however, these increases were substantially offset by a year\-over\-year decline in fuel costs\.

62


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

|                                                |                                                |                                                |
| ---------------------------------------------- | ---------------------------------------------- | ---------------------------------------------- |
| ITEM 6\. SELECTED FINANCIAL AND OPERATING DATA | ITEM 6\. SELECTED FINANCIAL AND OPERATING DATA | ITEM 6\. SELECTED FINANCIAL AND OPERATING DATA |

We have recast our financial information for fiscal years 2017 and 2016 to reflect the impacts of the new revenue recognition accounting standard and retirement benefits accounting standard which both became applicable beginning January 1, 2018\. Fiscal year 2015 was not recast to reflect the impacts of these standards, and is presented as was previously reported\.

|                                                                    |                                                                    |                                                                    |           |  |  |           |  |  |           |  |  |           |  |  |  |           |
|:------------------------------------------------------------------ |:------------------------------------------------------------------ |:------------------------------------------------------------------ |:---------:|:- |:- |:---------:|:- |:- |:---------:|:- |:- |:---------:|:- |:- |:- |:---------:|
| *Year Ended December 31 (in millions, except per\-share amounts):* | *Year Ended December 31 (in millions, except per\-share amounts):* | *Year Ended December 31 (in millions, except per\-share amounts):* |   2019    |  |  |   2018    |  |  |   2017    |  |  |   2016    |  |  |  |   2015    |
| CONSOLIDATED OPERATING RESULTS  *(audited)*                        | CONSOLIDATED OPERATING RESULTS  *(audited)*                        | CONSOLIDATED OPERATING RESULTS  *(audited)*                        |           |  |  |           |  |  |           |  |  |           |  |  |  |           |
| Operating Revenues                                                 | Operating Revenues                                                 | Operating Revenues                                                 |  $8,781   |  |  |  $8,264   |  |  |  $7,894   |  |  |  $5,925   |  |  |  |  $5,598   |
| Operating Expenses                                                 | Operating Expenses                                                 | Operating Expenses                                                 |  7,718    |  |  |  7,621    |  |  |  6,686    |  |  |  4,619    |  |  |  |  4,300    |
| Operating Income                                                   | Operating Income                                                   | Operating Income                                                   |  1,063    |  |  |   643     |  |  |  1,208    |  |  |  1,306    |  |  |  |  1,298    |
| Non\-operating income (expense), net of interest capitalized^(a)^  | Non\-operating income (expense), net of interest capitalized^(a)^  | Non\-operating income (expense), net of interest capitalized^(a)^  |   (47)    |  |  |   (58)    |  |  |   (49)    |  |  |    10     |  |  |  |    14     |
| Income before income tax                                           | Income before income tax                                           | Income before income tax                                           |  1,016    |  |  |   585     |  |  |  1,159    |  |  |  1,316    |  |  |  |  1,312    |
| Net Income                                                         | Net Income                                                         | Net Income                                                         |   $769    |  |  |   $437    |  |  |   $960    |  |  |   $797    |  |  |  |   $848    |
| Average basic shares outstanding                                   | Average basic shares outstanding                                   | Average basic shares outstanding                                   | 123\.279  |  |  | 123\.230  |  |  | 123\.211  |  |  | 123\.557  |  |  |  | 128\.373  |
| Average diluted shares outstanding                                 | Average diluted shares outstanding                                 | Average diluted shares outstanding                                 | 124\.289  |  |  | 123\.975  |  |  | 123\.854  |  |  | 124\.389  |  |  |  | 129\.372  |
| Basic earnings per share                                           | Basic earnings per share                                           | Basic earnings per share                                           |  $6\.24   |  |  |  $3\.55   |  |  |  $7\.79   |  |  |  $6\.45   |  |  |  |  $6\.61   |
| Diluted earnings per share                                         | Diluted earnings per share                                         | Diluted earnings per share                                         |  $6\.19   |  |  |  $3\.52   |  |  |  $7\.75   |  |  |  $6\.41   |  |  |  |  $6\.56   |
| Cash dividends declared per share                                  | Cash dividends declared per share                                  | Cash dividends declared per share                                  |  $1\.40   |  |  |  $1\.28   |  |  |  $1\.20   |  |  |  $1\.10   |  |  |  |  $0\.80   |
| CONSOLIDATED FINANCIAL POSITION  *(audited)*                       | CONSOLIDATED FINANCIAL POSITION  *(audited)*                       | CONSOLIDATED FINANCIAL POSITION  *(audited)*                       |           |  |  |           |  |  |           |  |  |           |  |  |  |           |
| *At End of Period (in millions):*                                  | *At End of Period (in millions):*                                  | *At End of Period (in millions):*                                  |           |  |  |           |  |  |           |  |  |           |  |  |  |           |
| Total assets                                                       | Total assets                                                       | Total assets                                                       | $12,993   |  |  | $10,912   |  |  | $10,746   |  |  |  $9,968   |  |  |  |  $6,530   |
| Long\-term debt, including current portion                         | Long\-term debt, including current portion                         | Long\-term debt, including current portion                         |  $1,499   |  |  |  $2,103   |  |  |  $2,569   |  |  |  $2,964   |  |  |  |   $683    |
| Shareholders' equity                                               | Shareholders' equity                                               | Shareholders' equity                                               |  $4,331   |  |  |  $3,751   |  |  |  $3,460   |  |  |  $2,744   |  |  |  |  $2,411   |
| OPERATING STATISTICS  *(unaudited)*^(d)^                           | OPERATING STATISTICS  *(unaudited)*^(d)^                           | OPERATING STATISTICS  *(unaudited)*^(d)^                           |           |  |  |           |  |  |           |  |  |           |  |  |  |           |
| Consolidated:^(b)^                                                 | Consolidated:^(b)^                                                 | Consolidated:^(b)^                                                 |           |  |  |           |  |  |           |  |  |           |  |  |  |           |
| Revenue passengers (000)                                           | Revenue passengers (000)                                           | Revenue passengers (000)                                           |  46,733   |  |  |  45,802   |  |  |  44,005   |  |  |  34,289   |  |  |  |  31,883   |
| RPMs (000,000) "traffic"                                           | RPMs (000,000) "traffic"                                           | RPMs (000,000) "traffic"                                           |  56,040   |  |  |  54,673   |  |  |  52,338   |  |  |  37,209   |  |  |  |  33,578   |
| ASMs (000,000) "capacity"                                          | ASMs (000,000) "capacity"                                          | ASMs (000,000) "capacity"                                          |  66,654   |  |  |  65,335   |  |  |  62,072   |  |  |  44,135   |  |  |  |  39,914   |
| Load factor                                                        | Load factor                                                        | Load factor                                                        |  84\.1%   |  |  |  83\.7%   |  |  |  84\.3%   |  |  |  84\.3%   |  |  |  |  84\.1%   |
| Yield                                                              | Yield                                                              | Yield                                                              | 14\.45¢   |  |  | 13\.96¢   |  |  | 13\.95¢   |  |  | 14\.49¢   |  |  |  | 14\.27¢   |
| RASM                                                               | RASM                                                               | RASM                                                               | 13\.17¢   |  |  | 12\.65¢   |  |  | 12\.72¢   |  |  | 13\.43¢   |  |  |  | 14\.03¢   |
| CASMex^(c)^                                                        | CASMex^(c)^                                                        | CASMex^(c)^                                                        |  8\.70¢   |  |  |  8\.50¢   |  |  |  8\.25¢   |  |  |  8\.32¢   |  |  |  |  8\.30¢   |
| Mainline:                                                          | Mainline:                                                          | Mainline:                                                          |           |  |  |           |  |  |           |  |  |           |  |  |  |           |
| Revenue passengers (000)                                           | Revenue passengers (000)                                           | Revenue passengers (000)                                           |  35,530   |  |  |  35,603   |  |  |  34,510   |  |  |  24,838   |  |  |  |  22,869   |
| RPMs (000,000) "traffic"                                           | RPMs (000,000) "traffic"                                           | RPMs (000,000) "traffic"                                           |  50,413   |  |  |  49,781   |  |  |  48,236   |  |  |  33,489   |  |  |  |  30,340   |
| ASMs (000,000) "capacity"                                          | ASMs (000,000) "capacity"                                          | ASMs (000,000) "capacity"                                          |  59,711   |  |  |  59,187   |  |  |  56,945   |  |  |  39,473   |  |  |  |  35,912   |
| Load factor                                                        | Load factor                                                        | Load factor                                                        |  84\.4%   |  |  |  84\.1%   |  |  |  84\.7%   |  |  |  84\.8%   |  |  |  |  84\.5%   |
| Yield                                                              | Yield                                                              | Yield                                                              | 13\.39¢   |  |  | 13\.01¢   |  |  | 13\.02¢   |  |  | 13\.18¢   |  |  |  | 12\.98¢   |
| CASMex^(c)^                                                        | CASMex^(c)^                                                        | CASMex^(c)^                                                        |  8\.00¢   |  |  |  7\.73¢   |  |  |  7\.50¢   |  |  |  7\.39¢   |  |  |  |  7\.39¢   |
| Regional ^(b)^ :                                                   | Regional ^(b)^ :                                                   | Regional ^(b)^ :                                                   |           |  |  |           |  |  |           |  |  |           |  |  |  |           |
| Revenue passengers (000)                                           | Revenue passengers (000)                                           | Revenue passengers (000)                                           |  11,203   |  |  |  10,199   |  |  |  9,495    |  |  |  9,452    |  |  |  |  9,015    |
| RPMs (000,000) "traffic"                                           | RPMs (000,000) "traffic"                                           | RPMs (000,000) "traffic"                                           |  5,627    |  |  |  4,892    |  |  |  4,101    |  |  |  3,720    |  |  |  |  3,238    |
| ASMs (000,000) "capacity"                                          | ASMs (000,000) "capacity"                                          | ASMs (000,000) "capacity"                                          |  6,943    |  |  |  6,148    |  |  |  5,127    |  |  |  4,662    |  |  |  |  4,002    |
| Load factor                                                        | Load factor                                                        | Load factor                                                        |  81\.0%   |  |  |  79\.6%   |  |  |  80\.0%   |  |  |  79\.8%   |  |  |  |  80\.9%   |
| Yield                                                              | Yield                                                              | Yield                                                              | 23\.90¢   |  |  | 23\.66¢   |  |  | 24\.96¢   |  |  | 26\.26¢   |  |  |  | 26\.37¢   |

(a) Capitalized interest was $15 million, $18 million, $17 million, $25 million and $34 million for 2019, 2018, 2017, 2016 and 2015\.

29


Annual Report of Southwest Airlines Co\. for year 2018

EarlyBird Check\-In provides Customers with automatic check\-in and an assigned boarding position before general boarding positions become available, thereby improving Customers' seat selection options (priority boarding privileges are already a benefit of being an "A\-List" tier member under the Company's Rapid Rewards Loyalty Program)\. During 2018, the Company implemented a variable pricing model for EarlyBird Check\-In based on the length of the flight and the historical popularity of EarlyBird Check\-In on the route\.

When available, Southwest sells Upgraded Boarding at the airport\. These are open priority boarding positions in the first 15 positions in its "A" boarding group\.

Southwest’s Pet Policy provides Customers an opportunity to bring a small cat or dog into the aircraft cabin\. Southwest also has an unaccompanied minor travel policy to address the administrative costs and the extra care necessary to safely transport these Customers\.

***Inflight Entertainment Portal and WiFi Service***

Southwest offers inflight entertainment and connectivity service on WiFi\-enabled aircraft on the majority of its fleet\. In 2018, Southwest refreshed its suite of complimentary offerings onboard its inflight entertainment portal to offer Free Movies and Free App Messaging while onboard any WiFi\-enabled aircraft, and Free Music while onboard a majority of WiFi\-enabled aircraft\. The inflight entertainment service allows Customers to enjoy gate\-to\-gate entertainment directly on their personal wireless devices\.

The free inflight entertainment offerings include approximately 30 free movies\-on\-demand per month and free app messaging via iMessage or WhatsApp\. The Company also continues to offer free access to its live and on\-demand television product on most of its flights\. The television product consists of over 15 live channels and up to 75 on\-demand recorded episodes from popular television series\.

The Company’s new collaboration with iHeartRadio brings a free digital music and live streaming radio service to Customers within the onboard entertainment portal on the majority of Southwest domestic flights\. Customers can listen to hundreds of live radio stations, pick from artist radio channels, listen to selected playlists, and listen to podcasts\. Customers may also use their iHeartRadio app while onboard, and existing subscribers to the All Access and Plus products have access to their entire music library and saved playlists\.

Customers can also purchase satellite internet service while on WiFi\-enabled aircraft\. Customers do not have to purchase WiFi to access the free inflight entertainment options including Free Movies, Free App Messaging, Free Television, Free Music, weather, destination guides, a flight tracker, and connecting flights information\. These onboard offerings are currently available as a limited time offer only on WiFi\-enabled aircraft, where available\.

**Rapid Rewards Loyalty Program**

Southwest's Rapid Rewards loyalty program enables program members ("Members") to earn points for every dollar spent on Southwest fares\. The amount of points earned under the program is based on the fare and fare class purchased, with higher fare products (e\.g\., Business Select) earning more points than lower fare products (e\.g\., Wanna Get Away)\. Each fare class is associated with a points earning multiplier, and points for flights are calculated by multiplying the fare for the flight by the fare class multiplier\. Likewise, the amount of points required to be redeemed for a flight is based on the fare purchased\. Under the program (i) Members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates; and (ii) points do not expire so long as the Member has points\-earning activity during the most recent 24 months\.

Under the program, Members continue to accumulate points until the time they decide to redeem them\. As a result, the program provides Members significant flexibility and options for earning and redeeming rewards\. For example, Members can earn more points (and/or achieve tiered status such as A\-List and Companion Pass faster) by purchasing higher fare tickets\. Members also have significant flexibility in redeeming points, such as the opportunity to book in advance to take advantage of a lower fare ticket (including many fare sales) and redeem fewer points or by being able to redeem more points and book at the last minute if seats are still available for sale\. In addition to redeeming points for Southwest flights, Members are also able to redeem their points for items such as international flights on other airlines, cruises, hotel stays, rental cars, gift cards, event tickets, and more\. Members can also earn points through qualifying purchases with Rapid Rewards Partners (which include, for example, car rental agencies, hotels, restaurants, and retailers), as well as by using Southwest's co\-branded Chase^®^ Visa credit card\. In addition to earning points for

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