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

We believe that analysis of specific financial and operational results on a combined basis provides more meaningful year\-over\-year comparisons\. The discussion below includes "Combined Comparative" results for 2016, determined as the sumof the historical consolidated results of Air Group and Virgin America\. Virgin America's financial information has been conformed to reflect Air Group's historical financial statement presentation\. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented\.

**COMBINED COMPARATIVE OPERATING STATISTICS**

|                             |                                      |                                      |                                      |                                      |                                      |
| --------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                             | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                             | **2017**                             | **2016 as Reported**                 | **2016 Virgin America**              | **2016 Combined**                    | **Change**                           |
| **Consolidated:**           |                                      |                                      |                                      |                                      |                                      |
| Revenue passengers (in 000) | **44,034**                           | 34,289                               | 7,658                                | 41,947                               | 5\.0%                                |
| RPMs (in 000,000)           | **52,338**                           | 37,209                               | 11,545                               | 48,754                               | 7\.4%                                |
| ASMs (in 000,000)           | **62,072**                           | 44,135                               | 13,818                               | 57,953                               | 7\.1%                                |
| Load Factor                 | **84\.3%**                           | 84\.3%                               | (a)                                  | 84\.1%                               | 0\.2 pts                             |
| PRASM                       | **10\.98¢**                          | 11\.34¢                              | (a)                                  | 11\.08¢                              | (0\.9)%                              |
| RASM                        | **12\.78¢**                          | 13\.44¢                              | (a)                                  | 12\.93¢                              | (1\.2)%                              |
| CASMex                      | **8\.23¢**                           | 8\.23¢                               | (a)                                  | 8\.04¢                               | 2\.4%                                |
| FTEs                        | **20,183**                           | 14,760                               | 2,618                                | 17,378                               | 16\.1%                               |
| **Mainline:**               |                                      |                                      |                                      |                                      |                                      |
| RPMs (in 000,000)           | **48,238**                           | 33,489                               | 11,545                               | 45,034                               | 7\.1%                                |
| ASMs (in 000,000)           | **56,945**                           | 39,473                               | 13,818                               | 53,291                               | 6\.9%                                |
| Load Factor                 | **84\.7%**                           | 84\.8%                               | (a)                                  | 84\.5%                               | 0\.2 pts                             |
| PRASM                       | **10\.29¢**                          | 10\.38¢                              | (a)                                  | 10\.34¢                              | (0\.5)%                              |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------- |
| ^(a)^ | 2016 Combined operating statistics have been recalculated using the combined results\. |

***OPERATING REVENUES***

Total operating revenues increased$2\.0 billion, or 34%, during 2017 compared to the same period in 2016\. On a Combined Comparative basis, total operating revenues increased$438 million or 6%\. The changes, including the reconciliation of the impact of Virgin America on the comparative results, are summarized in the following table:

|                          |                                      |                                      |                                          |                                      |                |                |
| ------------------------ | ------------------------------------ | ------------------------------------ | ---------------------------------------- | ------------------------------------ | -------------- | -------------- |
|                          | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,**     | **Twelve Months Ended December 31,** | **Change**     | **Change**     |
| ***(in millions)***      | **2017**                             | **2016 as Reported**                 | **2016 Pre\-Acquisition Virgin America** | **2016 Combined**                    | **$ Combined** | **% Combined** |
| Passenger                |                                      |                                      |                                          |                                      |                |                |
| Mainline                 | **$5,858**                           | $4,098                               | $1,414                                   | $5,512                               | $346           | 6\.3%          |
| Regional                 | **960**                              | 908                                  | —                                        | 908                                  | 52             | 5\.7%          |
| Total passenger revenue  | **$6,818**                           | $5,006                               | $1,414                                   | $6,420                               | $398           | 6\.2%          |
| Freight and mail         | **114**                              | 108                                  | —                                        | 108                                  | 6              | 5\.6%          |
| Other—net                | **1,001**                            | 817                                  | 150                                      | 967                                  | 34             | 3\.5%          |
| Total operating revenues | **$7,933**                           | $5,931                               | $1,564                                   | $7,495                               | $438           | 5\.8%          |

***Passenger Revenue***—***Mainline***

On a consolidated basis, Mainline passenger revenue for 2017increased by $1\.8 billion, or 43% on a 44%increase in capacity driven by the acquisition of Virgin America, partially offset by a 1%decrease in unit revenues compared to 2016\. On a Combined Comparative basis, Mainline passenger revenue increased by $346 million or 6%, due to a 7% increase in capacity, partially offset by a 1% decrease in unit revenue compared to the combined Mainline results for 2016\. The increase in capacity was driven by our continued network expansion and aircraft added to our fleet in the current year\. The decrease in PRASM was

 40


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

Legal Contingencies

We are involved in various legal proceedings related to employment practices, environmental issues, antitrust matters and other matters concerning our business\. We record liabilities for losses from legal proceedings when we determine that it is probable that the outcome in a legal proceeding will be unfavorable and the amount of loss can be reasonably estimated\. Although the outcome of the legal proceedings in which we are involved cannot be predicted with certainty, we believe that the resolution of current matters will not have a material adverse effect on our Consolidated Financial Statements\.

Credit Card Processing Agreements

Our VISA/MasterCard and American Express credit card processing agreements provide that no cash reserve ("Reserve") is required, and no withholding of payment related to receivables collected will occur, except in certain circumstances, including when we do not maintain a required level of liquidity as outlined in the merchant processing agreements\. In circumstances in which the credit card processor can establish a Reserve or withhold payments, the amount of the Reserve or payments that may be withheld would be equal to the potential liability of the credit card processor for tickets purchased with VISA/MasterCard or American Express credit cards, as applicable, that had not yet been used for travel\. We did not have a Reserve or an amount withheld as of December 31, 2019 or 2018\.

Other Contingencies

General Indemnifications

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

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

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

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

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

88


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

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

|         |                   |                                                                                |
| ------- | ----------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 4\.3    | UAL

United | [Second Supplemental Indenture, dated as of September 13, 2013, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as trustee, to the Amended and Restated Indenture, dated as of January 11, 2013 (filed as Exhibit 4\.1 to UAL's Form 8\-K filed September 19, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015513000046/e62572234ex4_1.htm) |
|  4\.4   | UAL

United | [Indenture, dated as of May 7, 2013, among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as Trustee (filed as Exhibit 4\.1 to UAL's Form 8\-K filed on May 10, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015513000024/e62332806ex4_1.htm)                                                                                |
|  4\.5   | UAL

United | [First Supplemental Indenture, dated as of May 7, 2013, among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as Trustee, providing for the issuance of 6\.375% Senior Notes due 2018 (filed as Exhibit 4\.2 to UAL's Form 8\-K filed on May 10, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015513000024/e62332806ex4_2.htm)                           |
|  4\.6   | UAL

United | [Form of 6\.375% Senior Notes due 2018 (filed as Exhibit A to Exhibit 4\.2 to UAL's Form 8\-K filed on May 10, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015513000024/e62332806ex4_2.htm#a)                                                                                |
|  4\.7   | UAL

United | [Form of Notation of Note Guarantee (filed as Exhibit B to Exhibit 4\.2 to UAL's Form 8\-K filed on May 10, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015513000024/e62332806ex4_2.htm#b)                                                                                |
|  4\.8   | UAL

United | [Second Supplemental Indenture, dated as of November 8, 2013, among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as Trustee, providing for the issuance of 6\.000% Senior Notes due 2020 (filed as Exhibit 4\.2 to UAL's Form 8\-K filed on November 12, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015513000051/e62651277ex4_2.htm)                |
|  4\.9   | UAL

United | [Form of 6\.000% Senior Notes due 2020 (filed as Exhibit 4\.3 to UAL's Form 8\-K filed on November 12, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015513000051/e62651277ex4_3.htm)                                                                                |
|  4\.10  | UAL

United | [Form of Notation of Note Guarantee (filed as Exhibit 4\.4 to UAL's Form 8\-K filed on November 12, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015513000051/e62651277ex4_4.htm)                                                                                |
|  4\.11  | UAL
United   | [Third Supplemental Indenture, dated as of January 26, 2017, among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as Trustee, providing for the issuance of 5\.000% Senior Notes due 2024 (filed as Exhibit 4\.2 to UAL's Form 8\-K filed January 27, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015517000004/e75742257ex4_2.htm)                     |
|  4\.12  | UAL
United   | [Form of 5\.000% Senior Notes due 2024 (filed as Exhibit A to Exhibit 4\.2 to UAL's Form 8\-K filed January 27, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015517000004/e75742257ex4_2.htm)                                                                                |
|  4\.13  | UAL
United   | [Form of Notation of Note Guarantee (filed as Exhibit B to Exhibit 4\.2 to UAL's Form 8\-K filed January 27, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015517000004/e75742257ex4_2.htm)                                                                                |
|  4\.14  | UAL
United   | [Fourth Supplemental Indenture, dated as of September 29, 2017, among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as Trustee, providing for the issuance of 4\.250% Senior Notes due 2022 (filed as Exhibit 4\.2 to UAL's Form 8\-K filed October 4, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312517302468/d463744dex42.htm)                     |
|  4\.15  | UAL
United   | [Form of 4\.250% Senior Notes due 2022 (filed as Exhibit A to Exhibit 4\.2 to UAL's Form 8\-K filed October 4, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312517302468/d463744dex42.htm)                                                                                |
|  4\.16  | UAL
United   | [Form of Notation of Note Guarantee (filed as Exhibit B to Exhibit 4\.2 to UAL's Form 8\-K filed October 4, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312517302468/d463744dex42.htm)                                                                                |
|         |                   | **Material Contracts**                                                                                |
|  †10\.1 | UAL               | [Agreement, dated April 19, 2016, by and among PAR Capital Management, Inc\., Altimeter Capital Management, LP, United Continental Holdings, Inc\. and the other signatories listed on the signature page thereto (filed as Exhibit 10\.1 to UAL's Form 8\-K filed April 20, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000110465916112937/a16-8741_2ex10d1.htm)                                                               |
|  †10\.2 | UAL               | [United Continental Holdings, Inc\. Profit Sharing Plan (amended and restated effective January 1, 2016) (Filed as Exhibit 10\.2 to UAL's Form 10\-K for the year ended December 31, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312517054129/d300268dex102.htm)                                                                                |

97


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

**Report of Independent Registered Public Accounting Firm**

To the Stockholders and Board of Directors

American Airlines Group Inc\.:

*Opinion on Internal Control Over Financial Reporting*

We have audited American Airlines Group Inc\.’s and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in *Internal Control \- Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission\. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in *Internal Control \- Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2019 expressed an unqualified opinion on those consolidated financial statements\.

*Basis for Opinion*

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

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

*Definition and Limitations of Internal Control Over Financial Reporting*

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

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

/s/ KPMG LLP

Dallas, Texas

February 25, 2019

176


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

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

contributing at least $420 million to our pension plans\. The fair value of the plans’ assets was $3\.9 billion at December 31, 2017\.

When calculating pension expense for 2018, the Company assumed that its plans’ assets would generate a long\-term rate of return of approximately 7\.3%\. The expected long\-term rate of return assumption was developed based on historical experience and input from the trustee managing the plans’ assets\. The expected long\-term rate of return on plan assets is based on a target allocation of assets, which is based on a goal of earning the highest rate of return while maintaining risk at acceptable levels\. Our projected long\-term rate of return reflects the active management of our plans’ assets\. The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio\. Plan fiduciaries regularly review actual asset allocation and the pension plans’ investments are periodically rebalanced to the targeted allocation when considered appropriate\.

The defined benefit pension plans’ assets consist of return generating investments and risk mitigating investments which are held through direct ownership or through interests in common collective trusts\. Return generating investments include primarily equity securities, fixed\-income securities and alternative investments (e\.g\. private equity and hedge funds)\. Risk mitigating investments include primarily U\.S\. government and investment grade corporate fixed\-income securities\. The allocation of assets was as follows at December 31, 2017:

|                           |                  |                                         |
|:------------------------- | ----------------:| ---------------------------------------:|
|                           | Percent of Total | Expected Long\-Term  <br>Rate of Return |
|  Equity securities        |             36 % |                                  9\.5 % |
|  Fixed\-income securities |              37  |                                   5\.5  |
|  Alternatives             |              16  |                                   7\.3  |
|  Other                    |              11  |                                   7\.3  |

Pension expense increases as the expected rate of return on plan assets decreases\. Lowering the expected long\-term rate of return on plan assets by 50 basis points (from 7\.3% to 6\.8%) would increase estimated 2018 pension expense by approximately $20 million\. Future pension obligations for United’s plans were discounted using a weighted average rate of 3\.65% at December 31, 2017\. The Company selected the discount rate for substantially all of its plans by using a hypothetical portfolio of high quality bonds at December 31, 2017 that would provide the necessary cash flows to match the projected benefit payments\. The pension liability and future pension expense both increase as the discount rate is reduced\. Lowering the discount rate by 50 basis points (from 3\.65% to 3\.15%) would increase the pension liability at December 31, 2017 by approximately $651 million and increase the estimated 2018 pension expense by approximately $80 million\. Future changes in plan asset returns, plan provisions, assumed discount rates, pension funding law and various other factors related to the participants in our pension plans will impact our future pension expense and liabilities\. We cannot predict with certainty what these factors will be in the future\.

Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions\. Under the applicable accounting standards for defined benefit pension plans, those gains and losses are not required to be recognized currently as pension benefit expense, but instead may be deferred as part of accumulated other comprehensive income and amortized into expense over the average remaining service life of the covered active employees\. All gains and losses in accumulated other comprehensive income are amortized to expense over the remaining years of service of the covered active employees\. At December 31, 2017 and 2016, the Company had unrecognized actuarial losses for pension benefit plans of $1\.6 billion and $1\.5 billion, respectively, recorded in accumulated other comprehensive income\.

***Other Postretirement Benefit Plan Accounting\.*** United’s postretirement plan provides certain health care benefits, primarily in the United States, to retirees and eligible dependents, as well as certain life insurance benefits to certain retirees reflected as “Other Benefits\.” United also has retiree medical programs that permit retirees who meet certain age and service requirements to continue medical coverage between retirement and

43


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

In addition to investing in our fleet, we have also increased our technology investments in an effort to enhance interactions with our customers and allow us to deliver more personalized service, further enhancing the customer experience and strengthening our brand and competitive position\. During 2018, we delivered several capabilities that enable our front\-line employees to personalize their interactions with our customers, added self\-service features on both the mobile app and delta\.com and launched the first facial recognition biometric terminal for international travelers at the Atlanta airport\.

Ancillary Businesses and Refinery\.  Ancillary businesses and refinery includes expenses associated with aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties\. Expenses related to refinery sales to third parties, which are at or near cost, increased  $46 million  compared to the prior year, primarily resulting from higher sales volume\. The remainder of the increase in ancillary businesses and refinery primarily resulted from growth in our aircraft maintenance business\.

In December 2018, we sold our staffing services business, DGS, to a subsidiary of Argenbright Holdings, LLC\. Therefore, in 2019, this business will no longer be reflected within ancillary businesses and refinery\. During 2018 and 2017, DGS incurred expenses of approximately $200 million per year related to services performed for third parties\.

In addition, during 2018 and 2017, DGS incurred expenses of approximately $350 million related to internal Delta services that were primarily recorded in salaries and related costs\. After the sale of DGS to a third party, Delta will record these expenses and our portion of the new entity's financial results under the equity method of accounting, in contracted services\.

Profit Sharing\.  Profit sharing expense increased  $236 million  to  $1\.3 billion , marking the fifth consecutive year that Delta employees will receive over $1 billion in recognition of their contributions to the company's performance\. The increase in profit sharing is related to the alignment of our profit sharing programs under a single formula, which was implemented October 1, 2017\. Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2\.5 billion of annual profit (as defined by the terms of the program) and 20% of annual profit above $2\.5 billion\. Prior to October 1, 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit and, if we exceeded our prior\-year results, the program paid 20% of the year\-over\-year increase in profit to eligible employees\.

 31


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

Cash Equivalents\.  These investments primarily consist of high\-quality, short\-term obligations that are a part of institutional money market mutual funds that are valued using current market quotations or an appropriate substitute that reflects current market conditions\.

Fixed Income and Fixed Income\-Related Instruments\.  These investments include corporate bonds, government bonds, collateralized mortgage obligations and other asset\-backed securities, and are generally valued at the bid price or the average of the bid and ask price\. Prices are based on pricing models, quoted prices of securities with similar characteristics or broker quotes\. Fixed income\-related instruments include investments in securities traded on exchanges, including listed futures and options, which are valued at the last reported sale prices on the last business day of the year, or if not available, the last reported bid prices\. Over\-the\-counter securities are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes\.

The following table summarizes investments measured at fair value based on NAV per share as a practical expedient:

|                                                                               |                                                                               |                                                                               |                   |                      |                      |                      |                          |                          |  |  |  |            |                      |                      |                      |                          |                          |                   |                   |                   |                   |                   |                   |  |  |  |  |  |  |
|:----------------------------------------------------------------------------- |:----------------------------------------------------------------------------- |:----------------------------------------------------------------------------- | -----------------:|:--------------------:|:--------------------:|:--------------------:|:------------------------:|:------------------------:|:- |:- |:- | ----------:|:--------------------:|:--------------------:|:--------------------:|:------------------------:|:------------------------:|:-----------------:|:-----------------:|:-----------------:|:-----------------:|:-----------------:|:-----------------:|:- |:- |:- |:- |:- |:- |
|                                                                               |                                                                               |                                                                               | December 31, 2019 |  December 31, 2019   |  December 31, 2019   |  December 31, 2019   |    December 31, 2019     |    December 31, 2019     |  |  |  |            |                      |                      |                      |    December 31, 2018     |    December 31, 2018     | December 31, 2018 | December 31, 2018 | December 31, 2018 | December 31, 2018 | December 31, 2018 | December 31, 2018 |  |  |  |  |  |  |
| (in millions)                                                                 | (in millions)                                                                 | (in millions)                                                                 |        Fair Value | Redemption Frequency | Redemption Frequency | Redemption Frequency | Redemption Notice Period | Redemption Notice Period |  |  |  | Fair Value | Redemption Frequency | Redemption Frequency | Redemption Frequency | Redemption Notice Period | Redemption Notice Period |
| Hedge funds and hedge fund\-related strategies^(5)^                           | Hedge funds and hedge fund\-related strategies^(5)^                           | Hedge funds and hedge fund\-related strategies^(5)^                           |           $ 5,588 |         (4)          |         (4)          |         (4)          |       2\-180 Days        |       2\-180 Days        |  |  |  |    $ 5,264 |         (4)          |         (4)          |         (4)          |       2\-180 Days        |       2\-180 Days        |
| Commingled funds, private equity and private equity\-related instruments^(5)^ | Commingled funds, private equity and private equity\-related instruments^(5)^ | Commingled funds, private equity and private equity\-related instruments^(5)^ |             1,834 |         (4)          |         (4)          |         (4)          |        2\-30 Days        |        2\-30 Days        |  |  |  |      1,591 |         (4)          |         (4)          |         (4)          |        2\-30 Days        |        2\-30 Days        |
| Fixed income and fixed income\-related instruments^(5)^                       | Fixed income and fixed income\-related instruments^(5)^                       | Fixed income and fixed income\-related instruments^(5)^                       |               958 |         (4)          |         (4)          |         (4)          |       15\-90 Days        |       15\-90 Days        |  |  |  |        769 |         (2)          |         (2)          |         (2)          |       15\-90 Days        |       15\-90 Days        |
| Real assets^(5)^                                                              | Real assets^(5)^                                                              | Real assets^(5)^                                                              |               758 |         (3)          |         (3)          |         (3)          |           N/A            |           N/A            |  |  |  |        807 |         (3)          |         (3)          |         (3)          |           N/A            |           N/A            |
| Other                                                                         | Other                                                                         | Other                                                                         |               716 |       (1) (2)        |       (1) (2)        |       (1) (2)        |        2\-90 Days        |        2\-90 Days        |  |  |  |        705 |       (1) (2)        |       (1) (2)        |       (1) (2)        |        2\-90 Days        |        2\-90 Days        |
| Total investments measured at NAV                                             | Total investments measured at NAV                                             | Total investments measured at NAV                                             |           $ 9,854 |                      |                      |                      |                          |                          |  |  |  |    $ 9,136 |                      |                      |                      |                          |                          |

^(1)^ Monthly

^(2)^ Semi\-monthly

^(3)^ Semi\-annually and annually

^(4)^ Various\. Includes funds with weekly, monthly, semi\-monthly, quarterly and custom redemption frequencies as well as funds with a redemption window following the anniversary of the initial investment\.

^(5)^ Unfunded commitments were $393 million for commingled funds, private equity and private equity\-related instruments, $254 million for fixed income and fixed income\-related instruments, $203 million for real assets and $76 million for hedge funds and hedge fund\-related strategies at December 31, 2019\.

Hedge Funds and Hedge Fund\-Related Strategies\.  These investments are primarily made through shares of limited partnerships or similar structures for which a liquid secondary market does not exist\. Investments in these strategies are typically valued monthly by third\-party administrators or valuation agents with an annual audit performed by an independent third party\.

Commingled Funds, Private Equity and Private Equity\-Related Instruments\.  These investments include commingled funds invested in common stock, as well as private equity and private equity\-related instruments\. Commingled funds are valued based on quoted market prices of the underlying assets owned by the fund\. Private equity and private equity\-related strategies are typically valued quarterly by the fund managers using valuation models where one or more of the significant inputs into the model cannot be observed and which require the development of assumptions\. There is an annual audit performed by an independent third party\.

Fixed Income and Fixed Income\-Related Instruments\.  These investments include commingled funds invested in debt obligations\. Commingled funds are valued based on quoted market prices of the underlying assets owned by the fund\. Private fixed income strategies are typically valued monthly or quarterly by the fund managers or third\-party valuation agents using valuation models where one or more of significant inputs into the model cannot be observed and which require the development of assumptions\. There is an annual audit performed by an independent third party\.

Real Assets\.  These investments include real estate, energy, timberland, agriculture and infrastructure\. The valuation of real assets requires significant judgment due to the absence of quoted market prices as well as the inherent lack of liquidity and the long\-term nature of these assets\. Real assets are typically valued quarterly by the fund managers using valuation models where one or more of the significant inputs into the model cannot be observed and which require the development of assumptions\. There is an annual audit performed by an independent third party\.

85


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

were enplaned by third\-party regional carriers\. All American Eagle carriers use logos, service marks, aircraft paint schemes and uniforms similar to our mainline operations\.

Our regional carrier arrangements are principally in the form of capacity purchase agreements\. The capacity purchase agreements provide that all revenues, including passenger, in\-flight, ancillary, mail and freight revenues, go to us\. In return, we agree to pay predetermined fees to these airlines for operating an agreed\-upon number of aircraft, without regard to the number of passengers on board\. In addition, these agreements provide that we reimburse 100% of certain variable costs, such as airport landing fees and passenger liability insurance\. We control marketing, scheduling, ticketing, pricing and seat inventories\.

***Cargo***

Our cargo division provides a wide range of freight and mail services, with facilities and interline connections available across the globe\. In 2017, we were named the Cargo Airline of the Year for the third consecutive year and Best Cargo Airline from the Americas for the tenth consecutive year by *Air Cargo News*\.

**Ticket Distribution and Marketing Agreements**

Passengers can purchase tickets for travel on American through several distribution channels, including our website (*www\.aa\.com*), our reservations centers and third\-party distribution channels, including those provided by or through global distribution systems (e\.g\., Amadeus, Sabre and Travelport), conventional travel agents and online travel agents (e\.g\., Expedia, Orbitz and Travelocity)\. To remain competitive, we need to successfully manage our distribution costs and rights, increase our distribution flexibility and improve the functionality of third\-party distribution channels, while maintaining an industry\-competitive cost structure\. For more discussion, see Part I, Item 1A\. Risk Factors – “*We rely on third\-party distribution channels and must manage effectively the costs, rights and functionality of these channels*\.”

In general, beyond nonstop city pairs, carriers that have the greatest ability to seamlessly connect passengers to and from markets have a competitive advantage\. In some cases, however, foreign governments limit U\.S\. air carriers’ rights to transport passengers beyond designated gateway cities in foreign countries\. In order to improve access to domestic and foreign markets, we have arrangements with other airlines including the **one**world alliance, other cooperation agreements, joint business agreements (JBAs), and marketing relationships, as further discussed below\.

***Member of oneworld Alliance***

American is a founding member of the **one**world alliance, which includes British Airways, Cathay Pacific Airways, Finnair, Iberia, Japan Airlines, LATAM Airlines Group, Malaysia Airlines, Qantas Airways, Qatar Airways, Royal Jordanian, S7 Airlines and SriLankan Airlines\. The **one**world alliance links the networks of the member carriers to enhance customer service and smooth connections to the destinations served by the alliance, including linking the carriers’ loyalty programs and access to the carriers’ airport lounge facilities\.

***Cooperation and Joint Business Agreements***

American has established antitrust\-immunized JBAs with British Airways, Iberia and Finnair, and separately with Japan Airlines, that enable the carriers to cooperate on flights between particular destinations and allow pooling and sharing of certain revenues and costs, enhanced loyalty program reciprocity and cooperation in other areas\. American and its joint business partners received regulatory approval to enter into these JBAs and cooperation agreements\.

In October 2017, American and its transatlantic partners executed an amended and restated JBA which, among other things, extends the term of the agreement\. Also, we had previously signed a revised JBA with Qantas Airways and applied for antitrust immunity with the U\.S\. Department of Transportation (DOT) for the revised relationship, but we withdrew that application in November 2016 after it was tentatively denied by the DOT\. We intend to file a new application for antitrust immunity with the DOT this year, which, if granted, would allow us to further expand our relationship with Qantas Airways\. In addition, we have signed JBAs with certain air carriers of the LATAM Airlines Group and have applied for antitrust immunity in the relevant jurisdictions affected by such agreements, which applications have been approved in some jurisdictions, but are still pending in other jurisdictions, including the United States and Chile\.

In the third quarter of 2017, we acquired 2\.7% of the outstanding shares of China Southern Airlines Company Limited (China Southern Airlines) for $203 million in order to begin a strategic relationship with the largest airline in China\.

6


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

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

Inventories

Spare Parts\.  Inventories of expendable parts related to flight equipment, which cannot be economically repaired, reconditioned or reused after removal from the aircraft, are carried at moving average cost and charged to operations as consumed\. An allowance for obsolescence is provided over the remaining useful life of the related fleet\. We also provide allowances for parts identified as excess or obsolete to reduce the carrying costs to the lower of cost or net realizable value\. These parts are assumed to have an estimated residual value of   5%  of the original cost\.

Refinery\.  Refined product, feedstock and blendstock inventories, all of which are finished goods, are carried at recoverable cost\. We use jet fuel in our airline operations that is produced by the refinery and procured through the exchange with third parties of gasoline, diesel and other refined products ("non\-jet fuel products") the refinery produces\. Cost is determined using the first\-in, first\-out method\. Costs include the raw material consumed plus direct manufacturing costs (such as labor, utilities and supplies) incurred and an applicable portion of manufacturing overhead\.

Accounting for Refinery Related Buy/Sell Agreements

To the extent that we receive jet fuel for non\-jet fuel products exchanged under buy/sell agreements, we account for these transactions as nonmonetary exchanges\. We have recorded these nonmonetary exchanges at the carrying amount of the non\-jet fuel products transferred within aircraft fuel and related taxes on the Consolidated Statements of Operations\.

Derivatives

Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations\.  In an effort to manage our exposure to these risks, we may enter into derivative contracts and adjust our derivative portfolio as market conditions change\.  We recognize derivative contracts at fair value on our Consolidated Balance Sheets\.

Not Designated as Accounting Hedges\.  We do not designate our fuel derivative contracts as accounting hedges\. We recorded changes in the fair value of our fuel hedges in aircraft fuel and related taxes\. These changes in fair value include settled gains and losses as well as mark\-to\-market adjustments ("MTM adjustments")\. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period\. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period\.

Designated as Cash Flow Hedges\.  For derivative contracts designated as cash flow hedges (interest rate contracts and foreign currency exchange contracts), the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period in which the hedged transaction affects earnings\. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item\. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in non\-operating expense\.

Designated as Fair Value Hedges\.  For derivative contracts designated as fair value hedges (interest rate contracts), the gain or loss on the derivative is reported in earnings and an equivalent amount is reflected as a change in the carrying value of long\-term debt and capital leases, with an offsetting loss or gain recognized in current earnings\. We include the gain or loss on the hedged item in the same account as the offsetting loss or gain on the related derivative contract, resulting in no impact to our Consolidated Statements of Operations\.

The following table summarizes the risk each type of derivative contract is hedging and the classification of related gains and losses on our Consolidated Statements of Operations:

|                                     |                                                 |                                        |
| ----------------------------------- | ----------------------------------------------- | -------------------------------------- |
| **Derivative Type**                 |  **Hedged Risk**                                | **Classification of Gains and Losses** |
| Fuel hedge contracts                | Fluctuations in fuel prices                     | Aircraft fuel and related taxes        |
| Interest rate contracts             | Increases in interest rates                     | Interest expense, net                  |
| Foreign currency exchange contracts | Fluctuations in foreign currency exchange rates | Passenger revenue                      |

 57


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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 12th day of February, 2020 by the following persons on behalf of the registrant and in the capacities indicated\.

|                              |                              |                              |  |  |  |                                                                                |                                                                                |                                                                                |  |  |  |
|:----------------------------:|:----------------------------:|:----------------------------:|:- |:- |:- |:---------------------------------------------------------------------------------------:|:---------------------------------------------------------------------------------------:|:---------------------------------------------------------------------------------------:|:- |:- |:- |
|          Signature           |          Signature           |          Signature           |  |  |  |                                          Title                                          |                                          Title                                          |                                          Title                                          |
|    /s/ Edward H\. Bastian    |    /s/ Edward H\. Bastian    |    /s/ Edward H\. Bastian    |  |  |  |         Chief Executive Officer and Director
(Principal Executive Officer)         |         Chief Executive Officer and Director
(Principal Executive Officer)         |         Chief Executive Officer and Director
(Principal Executive Officer)         |
|      Edward H\. Bastian      |      Edward H\. Bastian      |      Edward H\. Bastian      |  |  |  |         Chief Executive Officer and Director
(Principal Executive Officer)         |         Chief Executive Officer and Director
(Principal Executive Officer)         |         Chief Executive Officer and Director
(Principal Executive Officer)         |  |  |  |
|    /s/ Paul A\. Jacobson     |    /s/ Paul A\. Jacobson     |    /s/ Paul A\. Jacobson     |  |  |  | Executive Vice President and Chief Financial Officer
(Principal Financial Officer) | Executive Vice President and Chief Financial Officer
(Principal Financial Officer) | Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
|      Paul A\. Jacobson       |      Paul A\. Jacobson       |      Paul A\. Jacobson       |  |  |  | Executive Vice President and Chief Financial Officer
(Principal Financial Officer) | Executive Vice President and Chief Financial Officer
(Principal Financial Officer) | Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |  |  |  |
|   /s/ William C\. Carroll    |   /s/ William C\. Carroll    |   /s/ William C\. Carroll    |  |  |  |   Senior Vice President \- Finance and Controller
(Principal Accounting Officer)   |   Senior Vice President \- Finance and Controller
(Principal Accounting Officer)   |   Senior Vice President \- Finance and Controller
(Principal Accounting Officer)   |
|     William C\. Carroll      |     William C\. Carroll      |     William C\. Carroll      |  |  |  |   Senior Vice President \- Finance and Controller
(Principal Accounting Officer)   |   Senior Vice President \- Finance and Controller
(Principal Accounting Officer)   |   Senior Vice President \- Finance and Controller
(Principal Accounting Officer)   |  |  |  |
|    /s/ Francis S\. Blake     |    /s/ Francis S\. Blake     |    /s/ Francis S\. Blake     |  |  |  |                                  Chairman of the Board                                  |                                  Chairman of the Board                                  |                                  Chairman of the Board                                  |
|      Francis S\. Blake       |      Francis S\. Blake       |      Francis S\. Blake       |  |  |  |                                  Chairman of the Board                                  |                                  Chairman of the Board                                  |                                  Chairman of the Board                                  |  |  |  |
|     /s/ Daniel A\. Carp      |     /s/ Daniel A\. Carp      |     /s/ Daniel A\. Carp      |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|       Daniel A\. Carp        |       Daniel A\. Carp        |       Daniel A\. Carp        |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
|    /s/ Ashton B\. Carter     |    /s/ Ashton B\. Carter     |    /s/ Ashton B\. Carter     |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|      Ashton B\. Carter       |      Ashton B\. Carter       |      Ashton B\. Carter       |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
|     /s/ David G\. DeWalt     |     /s/ David G\. DeWalt     |     /s/ David G\. DeWalt     |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|       David G\. DeWalt       |       David G\. DeWalt       |       David G\. DeWalt       |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
|  /s/ William H\. Easter III  |  /s/ William H\. Easter III  |  /s/ William H\. Easter III  |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|    William H\. Easter III    |    William H\. Easter III    |    William H\. Easter III    |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
| /s/ Christopher A\. Hazleton | /s/ Christopher A\. Hazleton | /s/ Christopher A\. Hazleton |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|   Christopher A\. Hazleton   |   Christopher A\. Hazleton   |   Christopher A\. Hazleton   |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
|    /s/ Michael P\. Huerta    |    /s/ Michael P\. Huerta    |    /s/ Michael P\. Huerta    |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|      Michael P\. Huerta      |      Michael P\. Huerta      |      Michael P\. Huerta      |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
|    /s/ Jeanne P\. Jackson    |    /s/ Jeanne P\. Jackson    |    /s/ Jeanne P\. Jackson    |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|      Jeanne P\. Jackson      |      Jeanne P\. Jackson      |      Jeanne P\. Jackson      |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
|    /s/ George N\. Mattson    |    /s/ George N\. Mattson    |    /s/ George N\. Mattson    |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|      George N\. Mattson      |      George N\. Mattson      |      George N\. Mattson      |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
|    /s/ Sergio A\.L\. Rial    |    /s/ Sergio A\.L\. Rial    |    /s/ Sergio A\.L\. Rial    |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|      Sergio A\.L\. Rial      |      Sergio A\.L\. Rial      |      Sergio A\.L\. Rial      |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
|     /s/ David S\. Taylor     |     /s/ David S\. Taylor     |     /s/ David S\. Taylor     |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|       David S\. Taylor       |       David S\. Taylor       |       David S\. Taylor       |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |
|     /s/ Kathy N\. Waller     |     /s/ Kathy N\. Waller     |     /s/ Kathy N\. Waller     |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |
|       Kathy N\. Waller       |       Kathy N\. Waller       |       Kathy N\. Waller       |  |  |  |                                        Director                                         |                                        Director                                         |                                        Director                                         |  |  |  |

104


Annual Report of Southwest Airlines Co\. for year 2019

|        |                                                                                |
| ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.14 | [Southwest Airlines Co\. Amended and Restated 2007 Equity Incentive Plan Form of Notice of Grant and Terms and Conditions for Restricted Stock Unit grants (incorporated by reference to Exhibit 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238014000117/luv-6302014xex103.htm)  (2) |

|            |                                                                                |
| ---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.15     | [$1,000,000,000 Revolving Credit Facility Agreement among the Company, the Banks party thereto, Barclays Bank PLC, as Syndication Agent, Bank of America, N\.A\., BNP Paribas, Goldman Sachs Bank USA, Morgan Stanley Senior Funding, Inc\., U\.S\. Bank National Association, and Wells Fargo Bank, N\.A\., as Documentation Agents, JPMorgan Chase Bank, N\.A\. and Citibank, N\.A\., as Co\-Administrative Agents, and JPMorgan Chase Bank, N\.A\., as Paying Agent, dated as of August 3, 2016 (incorporated by reference to Exhibit 10\.1 to the Company’s Current Report on Form 8\-K filed August 9, 2016 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312516676282/d223237dex101.htm)                                                                                |
| 10\.16     | [Purchase Agreement No\. 3729 and Aircraft General Terms Agreement, dated December 13, 2011, between The Boeing Company and the Company (incorporated by reference to Exhibit 10\.28 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2011 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000119312512049647/d293991dex1028.htm) [Supplemental Agreement No\. 1 (incorporated by reference to Exhibits 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238013000097/sa-1topa3729_redacted.htm) [Supplemental Agreement No\. 2 (incorporated by reference to Exhibit 10\.4 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238013000097/sa-2topa3792_redacted.htm) [Supplemental Agreement No\. 3 (incorporated by reference to Exhibit 10\.27(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238014000010/luv-12312013xex1027a.htm) [Supplemental Agreement No\. 4 (incorporated by reference to Exhibit 10\.18(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2015 (File No\. 1\-7259)); ](http://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015xex1018a.htm)[Supplemental Agreement No\. 5 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2016 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238016000252/luv-6302016xex102.htm) ; [Supplemental Agreement No\. 6 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex102.htm) [Supplemental Agreement No\. 7 (incorporated by reference to Exhibit 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex103.htm) ; [Supplemental Letter Agreement No\. 6\-1162\-KLK\-0059R3 (incorporated by reference to Exhibit 10\.4 to the Company's Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex104.htm) ; [Supplemental Agreement No\. 8 (incorporated by reference to Exhibit 10\.16(a) to the Company's Annual Report on Form 10\-K for the year ended December 31, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238018000031/luv-12312017xex101.htm) ; [Supplemental Agreement No\. 9 (incorporated by reference to Exhibit 10\.2 to the Company's Quarterly Report on Form 10\-Q for the quarter ended March 31, 2018 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238018000073/luv-3312018xex102.htm) [Supplemental Agreement No\. 10 (incorporated by reference to Exhibit 10\.3 to the Company's Quarterly Report on Form 10\-Q for the quarter ended March 31, 2018 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238018000073/luv-3312018xex103.htm) ; [Supplemental Letter Agreement No\. 03729\-LA\-1808800 (incorporated by reference to Exhibit 10\.16(a) to the Company's Annual Report on Form 10\-K for the year ended December 31, 2018 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238019000022/luv-12312018xex1016a.htm)  (1) |
| 10\.16 (a) | [Supplemental Agreement No\. 11 to Purchase Agreement No\. 3729, dated December 13, 2011, between The Boeing Company and the Company\.](https://www.example.com/luv-12312019xex1016a.htm)  (1)                                                                                |
| 10\.17     | [Southwest Airlines Co\. Senior Executive Short Term Incentive Plan (incorporated by reference to Exhibit 99\.1 to the Company’s Current Report on Form 8\-K filed January 30, 2013 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312513030183/d476691dex991.htm)  (2)                                                                                |
| 10\.18     | [Southwest Airlines Co\. Deferred Compensation Plan for Senior Leadership and Non\-Employee Members of the Southwest Airlines Co\. Board of Directors (as amended and restated, effective as of January 1, 2018) (incorporated by reference to Exhibit 10\.6 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017ex106.htm)  (2)<br><br>  <br>                                                                                |
| 10\.19     | [Southwest Airlines Co\. Amended and Restated 2007 Equity Incentive Plan Form of Notice of Grant and Terms and Conditions for Performance\-Based Restricted Stock Unit grants (incorporated by reference to Exhibit 10\.4 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000009238014000117/luv-6302014xex104.htm) (2)<br><br>  <br>                                                                                |

123


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

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

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

|                                  |          |                      |                                              |
|:-------------------------------- | --------:| --------------------:| --------------------------------------------:|
|                                  | **RSUs** | **Restricted Stock** | **Weighted\-
Average
Grant Price** |
| Outstanding at December 31, 2014 |    3\.8  |                0\.7  |                                     $32\.55  |
| Granted                          |    1\.0  |                0\.2  |                                      66\.53  |
| Vested                           |   (1\.6) |               (0\.4) |                                      31\.14  |
| Forfeited                        |   (0\.6) |               (0\.2) |                                      46\.23  |
| Outstanding at December 31, 2015 |    2\.6  |                0\.3  |                                      48\.68  |
| Granted                          |    1\.9  |                0\.4  |                                      50\.63  |
| Vested                           |   (1\.4) |               (0\.1) |                                      41\.47  |
| Forfeited                        |   (0\.2) |               (0\.1) |                                      53\.42  |
| Outstanding at December 31, 2016 |    2\.9  |                0\.5  |                                      52\.00  |
| Granted                          |    1\.6  |                   —  |                                           —  |
| Vested                           |   (1\.0) |               (0\.2) |                                      51\.60  |
| Forfeited                        |   (0\.3) |                   —  |                                      51\.88  |
| Outstanding at December 31, 2017 |    3\.2  |                0\.3  |                                      52\.30  |

The fair value of RSUs and restricted stock that vested in 2017, 2016 and 2015 was $76 million, $80 million and $92 million, respectively\. The fair value of the restricted stock and the stock\-settled RSUs was based upon the UAL common stock price on the date of grant\. These awards are accounted for as equity awards\. The fair value of the cash\-settled RSUs was based on the UAL common stock price as of the last day preceding the settlement date\. These awards are accounted for as liability awards\. Restricted stock vesting and the recognition of the expense is similar to the stock option vesting described below\.

Stock Options\. During 2017, UAL granted approximately 36,000 stock options with exercise prices equal to the fair market value of UAL’s common stock on the date of grant with a weighted\-average exercise price of $77\.56 and a weighted\-average grant date fair value of approximately $0\.7 million\. In 2016, UAL granted approximately 0\.1 million stock options with exercise prices equal to the fair market value of UAL’s common stock on the date of grant and an additional approximately 0\.3 million stock options with exercise prices at a 25% premium of the grant date fair market value resulting in a weighted\-average exercise price of $56\.19 and a weighted\-average grant date fair value of approximately $2\.3 million\. UAL did not grant any stock options in 2015\. Expense related to each portion of an option grant is recognized on a straight\-line basis over the specific vesting period for those options\.

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

72


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

July 2009 to February 2011 and, subsequently, as Deputy General Counsel and Managing Director of Legal at Alaska Airlines from February 2011 to January 2016\. He was appointed Assistant Corporate Secretary of Horizon Air in August 2017 and was Assistant Corporate Secretary of Virgin America from November 2017 to July 2018, when Virgin America was merged into Alaska\.

Mr\. Minicucci  was elected President of Alaska Airlines in May 2016\. Prior to that he was Executive Vice President/Operations of Alaska Airlines from December 2008 to May 2016, and was Alaska’s Chief Operating Officer from December 2008 until November 2019\. He was Chief Executive Officer of Virgin America Inc\. from December 2016 to July 2018, when Virgin America was merged into Alaska\. He is a member of Air Group’s Management Executive Committee\.

Mr\. Sprague  was elected President of Horizon Air effective November 6, 2019 and is a member of Air Group’s Management Executive Committee\. Mr\. Sprague previously served as Senior Vice President External Relations of Alaska Airlines from May 2014 until his resignation in September 2017\. Mr\. Sprague also served Alaska Airlines as Vice President of Marketing from March 2010 to April 2014 and Vice President of Alaska Air Cargo from April 2008 to March 2010\.

Mr\. Harrison  joined Alaska Airlines in 2003 as the Managing Director of Internal Audit and was elected Vice President of Planning and Revenue Management in 2008\. He was elected Senior Vice President of Planning and Revenue Management in 2014\. He was elected Executive Vice President and Chief Revenue Officer in February 2015 and named Executive Vice President and Chief Commercial Officer in August 2015\. He is a member of Air Group's Management Executive Committee\.

Mr\. Beck  was elected Executive Vice President and Chief Operating Officer of Alaska Airlines effective November 6, 2019 and is a member of Air Group’s Management Executive Committee\. Prior to that he served as President and CEO of Horizon Air from January 2018 – November 2019\. Mr\. Beck previously served as Vice President, Flight Operations at Alaska Airlines, Inc\. until retiring in June 2015\. Following that date, he provided consulting services to Alaska Airlines, Inc\. in connection with the integration to a single operating certificate with Virgin America Inc\.

Mr\. Tackett  was elected Executive Vice President of Planning and Strategy in September 2018 and is a member of Air Group’s Management Executive Committee\. Mr\. Tackett previously served as Senior Vice President of Revenue and E\-commerce from August 2017 to September 2018 and has served a number of capacities since joining Alaska Airlines in 2000, including Managing Director Financial Planning and Analysis, (2008\-2010), Vice President Labor Relations (2010\-2015) and Vice President Revenue Management in 2016\. Mr\. Tackett will assume the role of Chief Financial Officer concurrent with Mr\. Pedersen's retirement in March 2020\.

Ms\. Schneider  was elected Senior Vice President of People at Alaska Airlines in June 2019 and is a member of Air Group’s Management Executive Committee\. Ms\. Schneider was previously Vice President of People at Alaska (August 2017\-May 2019) Vice President of Inflight Services at Alaska (2011\-2017), later also taking responsibility for Call Centers at Alaska (February 2017)\. She began her career at Alaska as Manager of Financial Accounting in 1989\. Since that time, she has held a number of positions\.

Ms\. Birkett\-Rakow  was elected Vice President of External Relations at Alaska Airlines in September 2017 and became a member of Air Group’s Management Executive Committee at that time\.

REGULATION

GENERAL

The airline industry is highly regulated, most notably by the federal government\. The Department of Transportation (DOT), the the Transportation Security Administration (TSA) and the FAA exercise significant regulatory authority over air carriers\.

• DOT:  A domestic airline is required to hold a certificate of public convenience and necessity issued by the DOT in order to provide passenger and cargo air transportation in the U\.S\. Subject to certain individual airport capacity, noise and other restrictions, this certificate permits an air carrier to operate between any two points in the U\.S\. Certificates do not expire, but may be revoked for failure to comply with federal aviation statutes, regulations, orders or the terms of the certificates\. While airlines are permitted to establish their own fares without government regulation,  the DOT has jurisdiction over the approval of international codeshare agreements, marketing alliance agreements between major domestic carriers, international and some domestic route authorities, Essential Air Service market subsidies, carrier liability for personal or property damage, and certain airport rates and charges disputes\. International treaties may also contain restrictions or requirements for flying outside of the U\.S\. and impose different carrier liability limits than those applicable to domestic flights\. The DOT has been active in implementing a variety of “consumer protection” regulations, covering subjects such

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

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

For recurring services, the Audit Committee reviews and pre\-approves the independent registered public accounting firm's annual audit services in conjunction with the annual appointment of the outside auditors\. The reviewed materials include a description of the services along with related fees\. The Audit Committee also reviews and pre\-approves other classes of recurring services along with fee thresholds for pre\-approved services\. In the event that the additional services are required prior to the next scheduled Audit Committee meeting, pre\-approvals of additional services follow the process described below\.

Any requests for audit, audit related, tax and other services not contemplated with the recurring services approval described above must be submitted to the Audit Committee for specific pre\-approval and cannot commence until such approval has been granted\. Normally, pre\-approval is provided at regularly scheduled meetings\. However, the authority to grant specific pre\-approval between meetings, as necessary, has been delegated to the Chair of the Audit Committee\. The Chair must update the Audit Committee at the next regularly scheduled meeting of any services that were granted specific pre\-approval\.

On a periodic basis, the Audit Committee reviews the status of services and fees incurred year\-to\-date and a list of newly pre\-approved services since its last regularly scheduled meeting\. The Audit Committee has considered whether the 2018 and 2017 non\-audit services provided by Ernst & Young LLP, the Company's independent registered public accounting firm, are compatible with maintaining auditor independence\.

All of the services in 2018 and 2017 under the Audit Fees, Audit Related Fees, Tax Fees and All Other Fees categories below have been approved by the Audit Committee pursuant to paragraph (c)(7) of Rule 2\-01 of Regulation S\-X of the Exchange Act\.

The aggregate fees billed for professional services rendered by the Company's independent auditors in 2018 and 2017 are as follows (in thousands):

|                                              |          |          |
| -------------------------------------------- | -------- | -------- |
| **Service**                                  | **2018** | **2017** |
| Audit Fees                                   | $3,992   | $4,548   |
| Audit Related Fees                           | 375      | 565      |
| Tax Fees                                     | 166      | 584      |
| All Other Fees                               | 2        | 2        |
| Total Fees                                   | $4,535   | $5,699   |
| Note: UAL and United amounts are the same\.  |          |          |

***AUDIT FEES***

For 2018 and 2017, audit fees consist primarily of the audit and quarterly reviews of the consolidated financial statements and the audit of the effectiveness of internal control over financial reporting of United Continental Holdings, Inc\. and its wholly\-owned subsidiaries\. Audit fees also include the audit of the consolidated financial statements of United, employee benefit plan audits, attestation services required by statute or regulation, comfort letters, consents, assistance with and review of documents filed with the SEC, and accounting and financial reporting consultations and research work necessary to comply with generally accepted auditing standards\.

***AUDIT RELATED FEES***

For 2018 and 2017, fees for audit related services primarily consisted of professional services related to due diligence and consultations related to the adoption of new accounting standards\.

***TAX FEES***

Tax fees for 2018 and 2017 relate to professional services provided for research and consultations regarding tax accounting and tax compliance matters and review of U\.S\. and international tax impacts of certain transactions, exclusive of tax services rendered in connection with the audit\.

***ALL OTHER FEES***

Fees for all other services billed in 2018 and 2017 consist of subscriptions to Ernst & Young LLP's on\-line accounting research tool\.

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

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

|                                                       |          |              |              |
| ----------------------------------------------------- | -------- | ------------ | ------------ |
| **UAL**                                               | **2018** | **2017 (a)** | **2016 (a)** |
| Income tax provision at statutory rate                | $558     | $1,064       | $1,320       |
| State income taxes, net of federal income tax benefit | 29       | 30           | 38           |
| Foreign tax rate differential                         | (84)     | (43)         | —            |
| Global intangible low\-taxed income                   | 4        | —            | —            |
| Foreign income taxes                                  | 2        | 3            | 3            |
| Nondeductible employee meals                          | 12       | 17           | 16           |
| Impact of Tax Act                                     | (5)      | (179)        | —            |
| Income tax adjustment from AOCI (b)                   | —        | —            | 180          |
| State rate change                                     | 3        | 12           | (12)         |
| Valuation allowance                                   | (3)      | (16)         | 20           |
| Other, net                                            | 13       | 8            | (26)         |
|                                                       | $529     | $896         | $1,539       |
| Current                                               | $14      | $(77)        | $(92)        |
| Deferred                                              | 515      | 973          | 1,631        |
|                                                       | $529     | $896         | $1,539       |
| **United**                                            | **2018** | **2017 (a)** | **2016 (a)** |
| Income tax provision at statutory rate                | $559     | $1,065       | $1,321       |
| State income taxes, net of federal income tax         | 29       | 30           | 38           |
| Foreign tax rate differential                         | (84)     | (43)         | —            |
| Global intangible low\-taxed income                   | 4        | —            | —            |
| Foreign income taxes                                  | 2        | 3            | 3            |
| Nondeductible employee meals                          | 12       | 17           | 16           |
| Impact of Tax Act                                     | (5)      | (196)        | —            |
| Income tax adjustment from AOCI (b)                   | —        | —            | 180          |
| State rate change                                     | 3        | 12           | (12)         |
| Valuation allowance                                   | (3)      | (16)         | 20           |
| Other, net                                            | 12       | 7            | (25)         |
|                                                       | $529     | $879         | $1,541       |
| Current                                               | $14      | $(77)        | $(92)        |
| Deferred                                              | 515      | 956          | 1,633        |
|                                                       | $529     | $879         | $1,541       |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2014\-09, *Revenue from Contracts with Customers (Topic 606)\.* See Note 1 to the financial statements contained in Part II, Item 8 of this report for additional information\.

(b) Prior to the release of the deferred income tax valuation allowance in the third quarter of 2015, the Company recorded approximately $465 million of valuation allowance adjustments in AOCI\. Subsequent to the release of the deferred income tax valuation allowance in 2015, the $465 million debit remained within AOCI, of which $180 million related to losses on fuel hedges designated for hedge accounting and $285 million related to pension and other postretirement liabilities\. Accounting rules required the adjustments to remain in AOCI as long as the Company had fuel derivatives designated for cash flow hedge accounting and the Company continues to provide pension and postretirement benefits\. In 2016, the Company settled all of its fuel hedges and has not entered into any new fuel derivative contracts for hedge accounting\. Accordingly, the Company reclassified the $180 million to income tax expense in 2016\.

The Company's effective tax rate for the year ended December 31, 2018 differed from the federal statutory rate of 21% due to a blend of federal, state and foreign taxes as well as the impact of certain nondeductible items\.

On December 22, 2017, Congress enacted the Tax Act, which made significant changes to U\.S\. federal income tax laws, including reducing the corporate rate from 35% to 21% effective January 1, 2018\. In December 2017, the SEC issued Staff Accounting Bulletin No\. 118 ("SAB 118"), which allowed the Company to record provisional amounts related to the impact of

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