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

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

Unit revenues increased in Latin America principally resulting from unit revenue improvement in Brazil, related to both improved traffic and higher fares\. This improvement was driven by the strengthening of the Brazilian economy and additional connectivity for our customers provided by our relationship with GOL\. Increased leisure traffic to Mexico and the Caribbean, and the incremental value provided by our alliance with Aeroméxico also contributed to the Latin America unit revenue improvement\. Although unit revenue improved in the Caribbean, hurricane damage in several markets during 2017 resulted in temporary service adjustments\. Finally, we continued to differentiate our product offerings, including expanding Basic Economy and selling Comfort\+ as a separate fare product in Latin America\.

Other Revenue

|                                               |                             |                             |                                    |                                      |
| --------------------------------------------- | --------------------------- | --------------------------- | ---------------------------------- | ------------------------------------ |
|                                               | **Year Ended December 31,** | **Year Ended December 31,** | **Increase**

**(Decrease)** | **% Increase**

**(Decrease)** |
| **(in millions)**                             | **2017**                    | **2016**                    | **Increase**

**(Decrease)** | **% Increase**

**(Decrease)** |
| Loyalty programs                              | $1,952                      | $1,782                      | $170                               | 9\.5 %                               |
| Administrative fees, club and on\-board sales | 1,252                       | 1,205                       | 47                                 | 3\.9 %                               |
| Ancillary businesses and refinery             | 1,412                       | 1,129                       | 283                                | 25\.1 %                              |
| Baggage fees                                  | 908                         | 881                         | 27                                 | 3\.1 %                               |
| Other                                         | 172                         | 197                         | (25)                               | (12\.7)%                             |
| Total                                         | $5,696                      | $5,194                      | $502                               | 9\.7 %                               |

Loyalty programs\.  We sell mileage credits to credit card companies, hotels and car rental agencies under marketing agreements\. We allocate the consideration received from mileage credit sales to the individual products and services bundled with the sale based on their relative selling prices\. We defer the travel component as part of frequent flyer deferred revenue and recognize passenger revenue as the mileage credits are redeemed for travel\. The revenue allocated to the remaining deliverables (such as lounge access, baggage fee waivers and brand usage) is recorded in other revenue\. We recognize the revenue for these services as they are performed\.

The amount of loyalty program revenue changes based on the price paid for mileage credits, the volume of credits sold and our allocation of selling price to the individual products and services\. With the adoption of the new revenue recognition standard in 2018, we will increase the value we use to account for the travel component within mileage credit sales\. This new value for the travel component will cause a re\-allocation of the consideration received from mileage credit sales\. The re\-allocation will result in less revenue recognized for loyalty programs in other revenue and more revenue in passenger revenue as the frequent flyer awards are redeemed\.

Loyalty program revenue increased compared to 2016 related to growth in our co\-brand credit card partnership with American Express\. Additional information about our frequent flyer program accounting policies can be found in Note 1 of the Notes to the Consolidated Financial Statements\.

Administrative fees, club and on\-board sales\.  These revenues primarily relate to travel\-related services such as ticket changes and unaccompanied minors and also include amounts collected for on\-board sales and Sky Club lounge memberships\. We recognize revenue as these services are performed\. A significant portion of these fees are travel\-related and performed in conjunction with the passenger’s flight\. Therefore, the majority of these fees will be reclassified to passenger revenue with our adoption of the new revenue recognition standard in 2018\.

Ancillary businesses and refinery\.  Ancillary businesses and refinery includes aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery sales to third parties\. Ancillary businesses and refinery revenues are not related to the generation of a seat mile\. Ancillary businesses and refinery sales primarily increased due to sales of non\-jet fuel products to third parties by our oil refinery, consistent with stronger pricing of refined products throughout the oil industry\.

Baggage fees\.  The revenue amount shown above represents baggage fees that were sold as a separate component of the passenger’s ticket\. Similar to administrative fees described above, baggage services are performed and earned in conjunction with the passenger’s flight, and these fees will be reclassified to passenger revenue with our adoption of the new revenue recognition standard in 2018\.

 29


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

|   |                                        |
| - | -------------------------------------- |
| • | other changes in business conditions\. |

Due to our concentration of flights along the West Coast and Alaska, we believe a large portion of our operation is more susceptible to air traffic control delays\. Additionally, due to our concentration of flights in the Pacific Northwest and Alaska we believe a large portion of our operation is more susceptible to adverse weather conditions\. A general reduction in airline passenger traffic as a result of any of the above\-mentioned factors could harm our business, financial condition and results of operations\.

***Changes in government regulation imposing additional requirements and restrictions on our operations could increase our operating costs and result in service delays and disruptions\.***

Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve significant compliance costs\. In the last several years, Congress has passed laws, and the U\.S\. DOT, the TSA and the FAA have issued regulations that have required significant expenditures relating to maintenance of aircraft, operation of airlines and broadening of consumer protections\.

Similarly, there are a number of legislative and regulatory initiatives and reforms at the federal, state and local levels\. These initiatives include increasingly stringent laws to protect the environment, minimum wage requirements, mandatory paid sick or family leave, and health care mandates\. They could affect our relationship with our workforce and the vendors that serve our airlines and cause our expenses to increase without an ability to pass through these costs\.

Almost all commercial service airports are owned and/or operated by units of local or state governments\. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost\. Many airports have increased their rates and charges to air carriers to reflect higher costs of security, updates to infrastructure and other\. Additional laws, regulations, taxes, airport rates and airport charges may be occasionally proposed that could significantly increase the cost of airline operations or reduce the demand for air travel\. Although lawmakers may impose these additional fees and view them as “pass\-through” costs, we believe that a higher total ticket price will influence consumer purchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business\.

***The airline industry continues to face potential security concerns and related costs\.***

Terrorist attacks, the fear of such attacks or other hostilities involving the U\.S\. could have a significant negative effect on the airline industry, including us, and could:

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------- |
| • | significantly reduce passenger traffic and yields as a result of a potentially dramatic drop in demand for air travel; |

|   |                                                      |
| - | ---------------------------------------------------- |
| • | significantly increase security and insurance costs; |

|   |                                                                      |
| - | -------------------------------------------------------------------- |
| • | make war risk or other insurance unavailable or extremely expensive; |

|   |                                                        |
| - | ------------------------------------------------------ |
| • | increase fuel costs and the volatility of fuel prices; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------- |
| • | increase costs from airport shutdowns, flight cancellations and delays resulting from security breaches and perceived safety threats; and |

|   |                                                              |
| - | ------------------------------------------------------------ |
| • | result in a grounding of commercial air traffic by the FAA\. |

The occurrence of any of these events would harm our business, financial condition and results of operations\.

***We rely on third\-party vendors for certain critical activities\.***

We rely on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, regional flying, ground handling, fueling, computer reservation system hosting, telecommunication systems, information technology infrastructure and services, and deicing\.

Even though we strive to formalize agreements with these vendors that define expected service levels, our use of outside vendors increases our exposure to several risks\. In the event that one or more vendors go into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all\. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative

 21


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

***Cargo and other***

Cargo and other revenue increased$12 million, or 7%, from 2016, due to increased lounge revenues and freight services\. On a Combined Comparative basis, Cargo and other revenue decreased $138 million or 44\.1%\. This decrease is primarily due to not reflecting the impact of the new revenue accounting standard on 2016 Pre\-Acquisition Virgin America totals\. Had the standard been applied, the majority of Virgin America's other revenue would have been moved to Passenger or Mileage Plan other revenue\.

***OPERATING EXPENSES***

Total operating expenses increased$2\.1 billion, or 45%, compared to 2016\. On a Combined Comparative basis, total operating expenses increased $725 million, or 12%, primarily as a result of higher wages and benefits and higher fuel costs, among other increases\. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

|                          |                                      |                                      |                                      |                                      |              |              |
| ------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------ | ------------ |
|                          | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Change**   | **Change**   |
|                          | **Air Group**                        | **Air Group**                        | **Virgin America**                   | **Combined**                         | **Combined** | **Combined** |
| ***(in millions)***      | **2017**  **^(b)^**                  | **2016** **^(b)^**                   | **2016** **^(c)^**                   | **2016** **^(a)^**                   | **$**        | **%**        |
| Fuel expense             | **$1,447**                           | $831                                 | $293                                 | $1,124                               | $323         | 28\.7 %      |
| Non\-fuel expenses       | **5,123**                            | 3,671                                | 1,028                                | 4,699                                | 424          | 9\.0 %       |
| Special items            | **116**                              | 117                                  | 21                                   | 138                                  | (22)         | (15\.9)%     |
| Total Operating Expenses | **$6,686**                           | $4,619                               | $1,342                               | $5,961                               | $725         | 12 %         |

^(a), (b), (c)^ See footnotes on the Combined Comparative Operating Statistics table above\.

Significant operating expense variances from 2016 are more fully described below\.

***Aircraft Fuel***

Aircraft fuel expense increased$616 million, or 74%, compared to 2016\. On a Combined Comparative basis, aircraft fuel expense increased $323 million , or 29%\. The elements of the change are summarized in the following table:

|                                                    |                                      |                                      |                                      |                                      |                                      |                                      |
| -------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                    | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                    | **2017**                             | **2017**                             | **2016 as Reported**                 | **2016 as Reported**                 | **2016 Combined**                    | **2016 Combined**                    |
| ***(in millions, except for per gallon amounts)*** | **Dollars**                          | **Cost/Gal**                         | **Dollars**                          | **Cost/Gal**                         |                                      |                                      |
| Raw or "into\-plane" fuel cost                     | **$1,437**                           | **$1\.80**                           | $828                                 | $1\.49                               | $1,105                               | $1\.49                               |
| Losses on settled hedges                           | **17**                               | **0\.02**                            | 16                                   | 0\.03                                | 34                                   | 0\.05                                |
| Consolidated economic fuel expense                 | **$1,454**                           | **$1\.82**                           | $844                                 | $1\.52                               | $1,139                               | $1\.54                               |
| Mark\-to\-mark fuel hedge adjustments              | **(7)**                              | **—**                                | (13)                                 | (0\.02)                              | (15)                                 | (0\.02)                              |
| GAAP fuel expense                                  | **$1,447**                           | **$1\.82**                           | $831                                 | $1\.50                               | $1,124                               | $1\.52                               |
| Fuel gallons                                       | **797**                              |                                      | 554                                  |                                      | 739                                  |                                      |

On a Combined Comparative basis, raw fuel expense per gallon increased 21% due primarily to higher West Coast jet fuel prices\. West Coast jet fuel prices are impacted by both the price of crude oil, as well as the refining margins associated with the conversion of crude oil to jet fuel\. The increase in raw fuel price per gallon during 2017 was driven by a 38% increase in refining margins and a 17% increase in crude oil prices, compared to the prior year\. Fuel gallons consumed increased by 58 million, or 8%, consistent with the increase in capacity of 7% on a Combined Comparative basis\.

Losses recognized for hedges that settled during the year were $17 million in 2017, compared to losses of $16 million in 2016\. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement\.

 44


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

longer have regulatory responsibility for the United Kingdom when the commitments expire in July 2020, the United Kingdom CMA in October 2018 opened an investigation into the transatlantic JBA\. We are cooperating fully with the CMA\. Also, we had previously signed a JBA with Qantas Airways and in 2015, applied for antitrust immunity with the DOT for the revised relationship, but we withdrew that application in November 2016 after it was tentatively denied by the DOT\. In February 2018, we filed a new application for antitrust immunity with the DOT, which, if granted, would allow us to further expand our relationship with Qantas Airways\. This JBA has been approved by the competition law regulators in Australia and New Zealand\. In addition, we have signed JBAs with certain air carriers of the LATAM Airlines Group, which JBAs have been approved in all jurisdictions other than the United States, where approval is pending\. Most recently, in November 2018, the Court of Free Competition in Chile approved the JBA between American and LATAM Airlines Group with respect to both our passenger and cargo businesses\. That decision has been appealed to the Chilean Supreme Court\. The foregoing arrangements are important aspects of our international network and we are dependent on the performance and continued cooperation of the other airlines party to those agreements\. No assurances can be given as to any benefits that we may derive from such arrangements or any other arrangements that may ultimately be implemented, or whether or not regulators will continue to approve or impose material conditions on our business activities\.

Additional mergers and other forms of industry consolidation, including antitrust immunity grants, may take place and may not involve us as a participant\. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with any such combinations, our competitive position relative to the post\-combination carriers or other carriers that acquire such assets could be harmed\. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks will grow, and that growth will result in greater overlap with our network, which in turn could result in lower overall market share and revenues for us\. Such consolidation is not limited to the U\.S\., but could include further consolidation among international carriers in Europe and elsewhere\.

Additionally, our AAdvantage loyalty program, which is an important element of our sales and marketing programs, faces significant and increasing competition from the loyalty programs offered by other travel companies, as well as from similar loyalty benefits offered by banks and other financial services companies\. Competition among loyalty programs is intense regarding the rewards, fees, required usage, and other terms and conditions of these programs\. These competitive factors affect our ability to attract and retain customers, increase usage of our loyalty program and maximize the revenue generated by our loyalty program\.

***Evolving data security and privacy requirements could increase our costs, and any significant data security incident could disrupt our operations, harm our reputation, expose us to legal risks and otherwise materially adversely affect our business, results of operations and financial condition\.***

Our business requires the secure processing and storage of sensitive information relating to our customers, employees, business partners and others\. However, like any global enterprise operating in today’s digital business environment, we are subject to threats to the security of our networks and data, including threats potentially involving criminal hackers, hacktivists, state\-sponsored actors, corporate espionage, employee malfeasance, and human or technological error\. These threats continue to increase as the frequency, intensity and sophistication of attempted attacks and intrusions increase around the world\. We have been the target of cybersecurity attacks in the past and expect that we will continue to be in the future\.

Furthermore, in response to these threats there has been heightened legislative and regulatory focus on data privacy and cybersecurity in the U\.S\., the EU and elsewhere, particularly with respect to critical infrastructure providers, including those in the transportation sector\. As a result, we must comply with a growing and fast\-evolving set of legal requirements in this area, including substantive cybersecurity standards as well as requirements for notifying regulators and affected individuals in the event of a data security incident\. This regulatory environment is increasingly challenging and may present material obligations and risks to our business, including significantly expanded compliance burdens, costs and enforcement risks\. For example, in May 2018, the EU’s new General Data Protection Regulation, commonly referred to as GDPR, came into effect, which imposes a host of new data privacy and security requirements, imposing significant costs on us and carrying substantial penalties for non\-compliance\.

In addition, many of our commercial partners, including credit card companies, have imposed data security standards that we must meet\. In particular, we are required by the Payment Card Industry Security Standards Council, founded by the credit card companies, to comply with their highest level of data security standards\. While we continue our efforts to meet these standards, new and revised standards may be imposed that may be difficult for us to meet and could increase our costs\.

A significant cybersecurity incident could result in a range of potentially material negative consequences for us, including unauthorized access to, disclosure, modification, misuse, loss or destruction of company systems or data; theft of sensitive, regulated or confidential data, such as personal identifying information or our intellectual property; the loss of functionality

18


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

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

NOTE 6 \. LONG\-TERM DEBT

The following table summarizes our long\-term debt:

|                                               |              |              |              |                                   |                                   |                                   |                  |                  |
| --------------------------------------------- | ------------ | ------------ | ------------ | --------------------------------- | --------------------------------- | --------------------------------- | ---------------- | ---------------- |
|                                               | **Maturity** | **Maturity** | **Maturity** | **Interest Rate(s) Per Annum at** | **Interest Rate(s) Per Annum at** | **Interest Rate(s) Per Annum at** | **December 31,** | **December 31,** |
| **(in millions)**                             | **Dates**    | **Dates**    | **Dates**    | **December 31, 2017**             | **December 31, 2017**             | **December 31, 2017**             | **2017**         | **2016**         |
| Pacific Facilities ^(1)^ :                    |              |              |              |                                   |                                   |                                   |                  |                  |
| Pacific Term Loan B\-1 ^(2)^                  | October 2018 | October 2018 | October 2018 | 3\.99%                            | variable ^(4)^                    | variable ^(4)^                    | $1,048           | $1,059           |
| Pacific Revolving Credit Facility             | October 2018 | October 2018 | October 2018 | undrawn                           | variable ^(4)^                    | variable ^(4)^                    | —                | —                |
| 2015 Credit Facilities ^(1)^ :                |              |              |              |                                   |                                   |                                   |                  |                  |
| Term Loan Facility ^(2)^                      | August 2022  | August 2022  | August 2022  | 4\.07%                            | variable ^(4)^                    | variable ^(4)^                    | 490              | 495              |
| Revolving Credit Facility                     | August 2020  | August 2020  | August 2020  | undrawn                           | variable ^(4)^                    | variable ^(4)^                    | —                | —                |
| Financing arrangements secured by aircraft:   |              |              |
       |                                   |                                   |                                   |                  |                  |
| Certificates ^(3)^                            | 2018         | to           | 2027         | 3\.63%                            | to                                | 8\.02%                            | 2,380            | 2,777            |
| Notes ^(3)^                                   | 2018         | to           | 2027         | 1\.81%                            | to                                | 6\.76%                            | 1,961            | 2,488            |
| Unsecured notes ^(5)^                         | 2020         | to           | 2022         | 2\.60%                            | to                                | 3\.63%                            | 2,450            | —                |
| Other financings ^(3)(6)^                     | 2019         | to           | 2030         | 0\.00%                            | to                                | 8\.75%                            | 210              | 293              |
| Other revolving credit facilities ^(1)^       | 2018         | to           | 2019         | undrawn                           | variable ^(4)^                    | variable ^(4)^                    | —                | —                |
| Total secured and unsecured debt              |              |              |              |                                   |                                   |                                   | 8,539            | 7,112            |
| Unamortized discount and debt issue cost, net |              |              |              |                                   |                                   |                                   | (99

)     | (104

)    |
| Total debt                                    |              |              |              |                                   |                                   |                                   | 8,440            | 7,008            |
| Less: current maturities                      |              |              |              |                                   |                                   |                                   | (2,145

)  | (1,009

)  |
| Total long\-term debt                         |              |              |              |                                   |                                   |                                   | $6,295           | $5,999           |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------- |
| ^(1)^ | Guaranteed by substantially all of our domestic subsidiaries (the "Guarantors")\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Borrowings must be repaid annually in an amount equal to   1%  per year of the original principal amount (paid in equal quarterly installments), with the balance due on the final maturity date\. |

|       |                       |
| ----- | --------------------- |
| ^(3)^ | Due in installments\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(4)^ | Interest rate equal to LIBOR (generally subject to a floor) or another index rate, in each case plus a specified margin\. Additionally, certain aircraft and other financings are comprised of variable rate debt\. |

|       |                                                    |
| ----- | -------------------------------------------------- |
| ^(5)^ | Includes notes issued in March and December 2017\. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------- |
| ^(6)^ | Primarily includes unsecured bonds and debt secured by certain accounts receivable and real estate\. |

Unsecured Debt Offerings

During the March 2017 quarter, we issued   $2\.0 billion  in aggregate principal amount of unsecured notes, consisting of   $1\.0 billion  of   2\.875%  Notes due 2020 and   $1\.0 billion  of   3\.625%  Notes due 2022\. During the December 2017 quarter, we issued   $450 million  in aggregate principal amount of   2\.600%  Notes due 2020 (collectively, the "Notes")\. The Notes are equal in priority with all of our other unsubordinated indebtedness and senior in priority to all of our future subordinated debt\.

The Notes are subject to covenants that, among other things, limit our ability to incur liens securing indebtedness for borrowed money or capital leases and engage in mergers and consolidations or transfer all or substantially all of our assets, in each case subject to certain exceptions\. The Notes are also subject to customary event of default provisions, including cross\-defaults to other material indebtedness\.

If we experience certain changes of control and a ratings decline on any series of Notes by two of the ratings agencies to a rating below investment grade within a certain period of time following a change of control or public notice of the occurrence of a change of control, we must offer to repurchase such series\.

Key Financial Covenants

We were in compliance with the covenants in our financing agreements at  December 31, 2017 \.

 69


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

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

ITEM 8\. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                |                                                                    |
| --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ |
|                                                                                | Page                                                               |
| [Report of Independent Registered Public Accounting Firm](http://ir.delta.com/.#s37C86D7B414257A2B6A8399A99E9FC8F)                                              |
[ 49](http://ir.delta.com/.#s37C86D7B414257A2B6A8399A99E9FC8F) |
| [Consolidated Balance Sheets \- December 31, 2017 and 2016](http://ir.delta.com/.#sF4827B882CC258A7BC0F5EF816EE93BD)                                            |
[ 50](http://ir.delta.com/.#sF4827B882CC258A7BC0F5EF816EE93BD) |
| [Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015](http://ir.delta.com/.#sEFD1156E791E5A2FBC88EF5BAA7C95CF)           |
[ 51](http://ir.delta.com/.#sEFD1156E791E5A2FBC88EF5BAA7C95CF) |
| [Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015](http://ir.delta.com/.#sEC59C522640E589EBED10AD09190C8F5) |
[ 52](http://ir.delta.com/.#sEC59C522640E589EBED10AD09190C8F5) |
| [Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015](http://ir.delta.com/.#sC6540297AF2E58A6B40F41C01FFC469D)           |
[ 53](http://ir.delta.com/.#sC6540297AF2E58A6B40F41C01FFC469D) |
| [Consolidated Statements of Stockholders' Equity for the years ended December 31, 2017, 2016 and 2015](http://ir.delta.com/.#sA628F4E022D5525896416DD2E09BA54D) |
[ 54](http://ir.delta.com/.#sA628F4E022D5525896416DD2E09BA54D) |
| [Notes to the Consolidated Financial Statements](http://ir.delta.com/.#s18DD4BB7DFAA5A3FA1120C43548195C2)                                                       |
[ 55](http://ir.delta.com/.#s18DD4BB7DFAA5A3FA1120C43548195C2) |
| [Note 1 \- Summary of Significant Accounting Policies](http://ir.delta.com/.#s6272D997B0305A34B27B86D5F0DE0885)                                                 |
[ 55](http://ir.delta.com/.#s6272D997B0305A34B27B86D5F0DE0885) |
| [Note 2 \- Fair Value Measurements](http://ir.delta.com/.#s8B1B08A8004C57329F08B5647338C739)                                                                    |
[ 63](http://ir.delta.com/.#s8B1B08A8004C57329F08B5647338C739) |
| [Note 3 \- Investments](http://ir.delta.com/.#s06E97823F8395E3EAA62B2462B5D7FEE)                                                                                |
[ 64](http://ir.delta.com/.#s06E97823F8395E3EAA62B2462B5D7FEE) |
| [Note 4 \- Derivatives and Risk Management](http://ir.delta.com/.#sF9E80B4682165B2BAAC3FDAD77FFFB8F)                                                            |
[ 66](http://ir.delta.com/.#sF9E80B4682165B2BAAC3FDAD77FFFB8F) |
| [Note 5 \- Intangible Assets](http://ir.delta.com/.#s861386D8F5EB58DD8F5C7A11CF580C41)                                                                          |
[ 68](http://ir.delta.com/.#s861386D8F5EB58DD8F5C7A11CF580C41) |
| [Note 6 \- Long\-Term Debt](http://ir.delta.com/.#s2D186BF002795EFB9351D0E0B3BCAC51)                                                                            |
[ 69](http://ir.delta.com/.#s2D186BF002795EFB9351D0E0B3BCAC51) |
| [Note 7 \- Lease Obligations](http://ir.delta.com/.#sD8CA88A405A251D4AEEF60437D8457E4)                                                                          |
[ 71](http://ir.delta.com/.#sD8CA88A405A251D4AEEF60437D8457E4) |
| [Note 8 \- Airport Redevelopment](http://ir.delta.com/.#s4dbc162a035540ea92e3ac147926c6f7)                                                                      |
[ 72](http://ir.delta.com/.#s4dbc162a035540ea92e3ac147926c6f7) |
| [Note 9 \- Employee Benefit Plans](http://ir.delta.com/.#s7AE1F0C14CF0539EB6FB6DC999F24AA9)                                                                     |
[ 73](http://ir.delta.com/.#s7AE1F0C14CF0539EB6FB6DC999F24AA9) |
| [Note 10 \- Commitments and Contingencies](http://ir.delta.com/.#s4254C98A1B135498AF75CCBE0F888E86)                                                             |
[ 79](http://ir.delta.com/.#s4254C98A1B135498AF75CCBE0F888E86) |
| [Note 11 \- Income Taxes](http://ir.delta.com/.#sFB23BCDBBE9E5580ABC6242401199726)                                                                              |
[ 82](http://ir.delta.com/.#sFB23BCDBBE9E5580ABC6242401199726) |
| [Note 12 \- Equity and Equity Compensation](http://ir.delta.com/.#s57886DCDF75B565BB9AA107B01E386D8)                                                            |
[ 84](http://ir.delta.com/.#s57886DCDF75B565BB9AA107B01E386D8) |
| [Note 13 \- Accumulated Other Comprehensive Loss](http://ir.delta.com/.#s18AB3DEBCEDC5EC8A8223EBD70301FEA)                                                      |
[ 85](http://ir.delta.com/.#s18AB3DEBCEDC5EC8A8223EBD70301FEA) |
| [Note 14 \- Segments and Geographic Information](http://ir.delta.com/.#s6CE4C35F7359550D8A8C14BD580D8C4E)                                                       |
[ 85](http://ir.delta.com/.#s6CE4C35F7359550D8A8C14BD580D8C4E) |
| [Note 15 \- Restructuring and Other](http://ir.delta.com/.#s3DEECA44F47759A1B656EF202423A7E9)                                                                   |
[ 87](http://ir.delta.com/.#s3DEECA44F47759A1B656EF202423A7E9) |
| [Note 16 \- Earnings Per Share](http://ir.delta.com/.#sA681D467706152B6BCE8089F8E867F21)                                                                        |
[ 88](http://ir.delta.com/.#sA681D467706152B6BCE8089F8E867F21) |
| [Note 17 \- Quarterly Financial Data (Unaudited)](http://ir.delta.com/.#s2F4EFA89AFBC52CFBAD06F1AC3BB974D)                                                      |
[ 88](http://ir.delta.com/.#s2F4EFA89AFBC52CFBAD06F1AC3BB974D) |

 48


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

**AMERICAN AIRLINES, INC\.**

**CONSOLIDATED BALANCE SHEETS**

**(In millions, except shares and par value)**

|                                                                                |                  |                  |
| ------------------------------------------------------------------------------- | ---------------- | ---------------- |
|                                                                                | **December 31,** | **December 31,** |
|                                                                                | **2018**         | **2017**         |
| **ASSETS**                                                                      |                  |                  |
| **Current assets**                                                              |                  |                  |
| Cash                                                                            | $265             | $287             |
| Short\-term investments                                                         | 4,482            | 4,768            |
| Restricted cash and short\-term investments                                     | 154              | 318              |
| Accounts receivable, net                                                        | 1,755            | 1,755            |
| Receivables from related parties, net                                           | 10,666           | 8,822            |
| Aircraft fuel, spare parts and supplies, net                                    | 1,442            | 1,294            |
| Prepaid expenses and other                                                      | 493              | 647              |
| Total current assets                                                            | 19,257           | 17,891           |
| **Operating property and equipment**                                            |                  |                  |
| Flight equipment                                                                | 41,180           | 39,993           |
| Ground property and equipment                                                   | 8,466            | 8,006            |
| Equipment purchase deposits                                                     | 1,277            | 1,217            |
| Total property and equipment, at cost                                           | 50,923           | 49,216           |
| Less accumulated depreciation and amortization                                  | (17,123)         | (15,354)         |
| Total property and equipment, net                                               | 33,800           | 33,862           |
| **Operating lease right\-of\-use assets**                                       | 9,094            | —                |
| **Other assets**                                                                |                  |                  |
| Goodwill                                                                        | 4,091            | 4,091            |
| Intangibles, net of accumulated amortization of $663 and $622, respectively     | 2,137            | 2,203            |
| Deferred tax asset                                                              | 1,280            | 2,071            |
| Other assets                                                                    | 1,219            | 1,283            |
| Total other assets                                                              | 8,727            | 9,648            |
| **Total assets**                                                                | $70,878          | $61,401          |
| **LIABILITIES AND STOCKHOLDER’S EQUITY**                                        |                  |                  |
| **Current liabilities**                                                         |                  |                  |
| Current maturities of long\-term debt and finance leases                        | $2,547           | $2,058           |
| Accounts payable                                                                | 1,707            | 1,625            |
| Accrued salaries and wages                                                      | 1,363            | 1,613            |
| Air traffic liability                                                           | 4,339            | 4,042            |
| Loyalty program liability                                                       | 3,267            | 3,121            |
| Operating lease liabilities                                                     | 1,639            | —                |
| Other accrued liabilities                                                       | 2,259            | 2,209            |
| Total current liabilities                                                       | 17,121           | 14,668           |
| **Noncurrent liabilities**                                                      |                  |                  |
| Long\-term debt and finance leases, net of current maturities                   | 20,650           | 21,236           |
| Pension and postretirement benefits                                             | 6,863            | 7,452            |
| Loyalty program liability                                                       | 5,272            | 5,701            |
| Operating lease liabilities                                                     | 7,857            | —                |
| Other liabilities                                                               | 1,345            | 2,456            |
| Total noncurrent liabilities                                                    | 41,987           | 36,845           |
| **Commitments and contingencies (Note 10)**                                     |
           |
           |
| **Stockholder’s equity**                                                        |                  |                  |
| Common stock, $1\.00 par value; 1,000 shares authorized, issued and outstanding | —                | —                |
| Additional paid\-in capital                                                     | 16,802           | 16,716           |
| Accumulated other comprehensive loss                                            | (5,370)          | (5,251)          |
| Retained earnings  (deficit)                                                    | 338              | (1,577)          |
| Total stockholder’s equity                                                      | 11,770           | 9,888            |
| **Total liabilities and stockholder’s equity**                                  | $70,878          | $61,401          |

See accompanying notes to consolidated financial statements\.

132


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

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

|                                           |                 |                 |                                    |                                    |                 |                 |
| ----------------------------------------- | --------------- | --------------- | ---------------------------------- | ---------------------------------- | --------------- | --------------- |
|                                           | **As Reported** | **As Reported** | **New Lease Standard Adjustments** | **New Lease Standard Adjustments** | **As Adjusted** | **As Adjusted** |
|                                           | **2018**        | **2017**        | **2018**                           | **2017**                           | **2018**        | **2017**        |
| Cash Flows from Operating Activities:     |                 |                 |                                    |                                    |                 |                 |
| Net cash provided by operating activities | $6,181          | $3,413          | $

(17

)              | $61                                | $6,164          | $3,474          |
| Cash Flows from Investing Activities:     |                 |                 |                                    |                                    |                 |                 |
| Capital expenditures                      | (4,177

) | (3,998

) | 107                                | 128                                | (4,070

) | (3,870

) |
| Cash Flows from Financing Activities:     |                 |                 |                                    |                                    |                 |                 |
| Proceeds from issuance of long\-term debt | 1,740           | 2,765           | (146

)                      | (228

)                      | 1,594           | 2,537           |
| Principal payments under finance leases   | (134

)   | (124

)   | 55                                 | 40                                 | (79

)    | (84

)    |

The adoption of the New Lease Standard primarily resulted in the recording of assets and liabilities of our operating leases on our consolidated balance sheets\. Certain amounts recorded for prepaid and accrued rent associated with historical operating leases were reclassified to the newly captioned Operating lease right\-of\-use assets in the consolidated balance sheets\. Also, certain leases designated under Topic 840 as owned assets and capital leases are not considered to be assets under the New Lease Standard and have been removed from the consolidated balance sheets, along with the related capital lease liability, due to the leases having variable lease payments\.

In June 2016, the FASB issued Accounting Standards Update No\. 2016\-13, Financial Instruments\-Credit Losses ("ASU 2016\-13")\. The amendments in this update replace the incurred loss methodology with a methodology that reflects expected credit losses\. This update requires financial assets measured at amortized cost basis, such as trade receivables, loans and held\-to\-maturity debt securities, to be presented at the net amount expected to be collected, and requires entities to record expected losses for certain guarantees and off\-balance sheet exposures\. The update also eliminates the concept of other\-than\-temporary impairment for available\-for\-sale securities\. Impairments on available\-for\-sale securities will be required to be recognized in earnings through an allowance when the fair value is less than amortized cost and a credit loss exists, or the securities are expected to be sold before recovery of amortized cost\. The Company adopted ASU 2016\-13 on January 1, 2020\. The standard update is not expected to have a material impact on the Company's consolidated financial statements\.

62


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

Medical and other benefits expense increased $66 million, or 27%, primarily due to FTE growth, rising medical costs, a greater occurrence of high\-dollar value claims in 2019 as compared to the prior year, and increases in the obligation for our pilots long\-term disability plan\.

We expect wages and benefits expense to be higher in 2020 compared to 2019 on an approximate 3% increase in FTEs\. Our guidance does not include the impact of any future agreements we may reach with represented work groups in 2020, most notably our mainline pilots whose contract becomes amendable in April 2020\.

Variable Incentive Pay

Variable incentive pay expense increased to $163 million in 2019 from $147 million in 2018 due to a higher wage base upon which the achievement percentage is applied, as well as a greater achievement of our stated goals, as compared to the prior year\.

Aircraft Maintenance

Aircraft maintenance costs increased by $2 million compared to 2018\. Although not a significant increase overall, core maintenance costs were higher resulting from a larger volume of airframe and engine maintenance checks as compared to the prior year, particularly on our Airbus fleet\. This was partially offset by lower costs associated with our leased Airbus aircraft\.

We expect aircraft maintenance expense to increase 17% to 19% in 2020 due to increased volume of engine maintenance checks on our Airbus and B737\-800 fleets, as well as increased costs associated with the return of certain leased Airbus aircraft\.

Aircraft Rent

Aircraft rent expense increased $16 million, or 5%, compared to 2018, primarily due to the the addition of two A321neos to our Mainline fleet and the annualization of rent on our leased E175s under the CPA agreement with SkyWest\.

We expect aircraft rent to be flat in 2020\.

Landing Fees and Other Rentals

Landing fees and other rental expenses increased $32 million, or 6%, compared to 2018, primarily driven by a 2% increase in capacity and rate increases at many of our hub airports\.

We expect landing fees and other rental expense to grow 9% to 12% in 2020 as we continue to add capacity to our network\. We also expect rate increases at many airports we serve, specifically our hubs, as significant capital programs are underway and will be included in our lease rates\.

Selling Expenses

Selling expenses decreased by $13 million, or 4%, compared to 2018 due to improvements in our credit card rates, as well as decreased spending on advertising as compared to the prior year\.

We expect selling expense to decrease slightly in 2020, due primarily to ongoing reductions in overall advertising and sponsorship spend, and an expected shift in distribution to lower\-cost channels\.

Depreciation and Amortization

Depreciation and amortization expenses increased by $25 million, or 6%, compared to 2018, primarily due to the addition of four owned B737\-900ERs and four owned E175s to our fleet since December 31, 2018\.

We expect depreciation and amortization expense to increase 4% to 6% in 2020, primarily due to the full year impact of depreciation on aircraft delivered in 2019 and the impact of 737 MAX aircraft scheduled for delivery in 2020\.

39


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

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

|          |                 |                                                                                |
| -------- | --------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|  ^10\.67 | UAL
United | [Supplemental Agreement No\. 22, including side letters, to Purchase Agreement No\. 1951, dated May 23, 2001 (filed as Exhibit 10\.3 to Continental's Form 10\-Q for the quarter ended June 30, 2001, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968701500015/exhibit103.htm)               |
|  ^10\.68 | UAL
United | [Supplemental Agreement No\. 23, including side letters, to Purchase Agreement No\. 1951, dated June 29, 2001 (filed as Exhibit 10\.4 to Continental's Form 10\-Q for the quarter ended June 30, 2001, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968701500015/exhibit104.htm)              |
|  ^10\.69 | UAL
United | [Supplemental Agreement No\. 24, including side letters, to Purchase Agreement No\. 1951, dated August 31, 2001 (filed as Exhibit 10\.11 to Continental's Form 10\-Q for the quarter ended September 30, 2001, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968701500040/exhibit1011.htm)     |
|  ^10\.70 | UAL
United | [Supplemental Agreement No\. 25, including side letters, to Purchase Agreement No\. 1951, dated December 31, 2001 (filed as Exhibit 10\.22(z) to Continental's Form 10\-K for the year ended December 31, 2001, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968702000006/exhibit1022z.htm)   |
|  ^10\.71 | UAL
United | [Supplemental Agreement No\. 26, including side letters, to Purchase Agreement No\. 1951, dated March 29, 2002 (filed as Exhibit 10\.4 to Continental's Form 10\-Q for the quarter ended March 31, 2002, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968702000012/exhibit104.htm)            |
|  ^10\.72 | UAL
United | [Supplemental Agreement No\. 27, including side letters, to Purchase Agreement No\. 1951, dated November 6, 2002 (filed as Exhibit 10\.22(ab) to Continental's Form 10\-K for the year ended December 31, 2002, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968703000006/exhibit1022ab.htm)  |
|  ^10\.73 | UAL
United | [Supplemental Agreement No\. 28, including side letters, to Purchase Agreement No\. 1951, dated April 1, 2003 (filed as Exhibit 10\.6 to Continental's Form 10\-Q for the quarter ended March 31, 2003, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968703000014/exhibit106.htm)             |
|  ^10\.74 | UAL
United | [Supplemental Agreement No\. 29, including side letters, to Purchase Agreement No\. 1951, dated August 19, 2003 (filed as Exhibit 10\.2 to Continental's Form 10\-Q for the quarter ended September 30, 2003, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968703000071/exhibit102.htm)       |
|  ^10\.75 | UAL
United | [Supplemental Agreement No\. 30 to Purchase Agreement No\. 1951, dated November 4, 2003 (filed as Exhibit 10\.23(ae) to Continental's Form 10\-K for the year ended December 31, 2003, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968704000008/exhibit1023ae.htm)                           |
|  ^10\.76 | UAL
United | [Supplemental Agreement No\. 31 to Purchase Agreement No\. 1951, dated August 20, 2004 (filed as Exhibit 10\.4 to Continental's Form 10\-Q for the quarter ended September 30, 2004, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968704000085/fexhibit104.htm)                               |
|  ^10\.77 | UAL
United | [Supplemental Agreement No\. 32, including side letters, to Purchase Agreement No\. 1951, dated December 29, 2004 (filed as Exhibit 10\.21(ag) to Continental's Form 10\-K for the year ended December 31, 2004, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968705000036/exhibit1021ag.htm) |
|  ^10\.78 | UAL
United | [Supplemental Agreement No\. 33, including side letters, to Purchase Agreement No\. 1951, dated December 29, 2004 (filed as Exhibit 10\.21(ah) to Continental's Form 10\-K for the year ended December 31, 2004, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968705000036/exhibit1021ah.htm) |
|  ^10\.79 | UAL
United | [Supplemental Agreement No\. 34 to Purchase Agreement No\. 1951, dated June 22, 2005 (filed as Exhibit 10\.3 to Continental's Form 10\-Q for the quarter ended June 30, 2005, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968705000095/fexhibit103.htm)                                      |
|  ^10\.80 | UAL
United | [Supplemental Agreement No\. 35 to Purchase Agreement No\. 1951, dated June 30, 2005 (filed as Exhibit 10\.4 to Continental's Form 10\-Q for the quarter ended June 30, 2005, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968705000095/fexhibit104.htm)                                      |
|  ^10\.81 | UAL
United | [Supplemental Agreement No\. 36 to Purchase Agreement No\. 1951, dated July 28, 2005 (filed as Exhibit 10\.1 to Continental's Form 10\-Q for the quarter ended September 30, 2005, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968705000138/f3rd10qexhibit101.htm)                           |
|  ^10\.82 | UAL
United | [Supplemental Agreement No\. 37 to Purchase Agreement No\. 1951, dated March 30, 2006 (filed as Exhibit 10\.2 to Continental's Form 10\-Q for the quarter ended March 31, 2006, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968706000025/fexhibit102.htm)                                    |
|  ^10\.83 | UAL
United | [Supplemental Agreement No\. 38 to Purchase Agreement No\. 1951, dated June 6, 2006 (filed as Exhibit 10\.3 to Continental's Form 10\-Q for the quarter ended June 30, 2006, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968706000062/fexhibit103.htm)                                       |
|  ^10\.84 | UAL
United | [Supplemental Agreement No\. 39 to Purchase Agreement No\. 1951, dated August 3, 2006 (filed as Exhibit 10\.4 to Continental's Form 10\-Q for the quarter ended September 30, 2006, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968706000073/fexhibit104.htm)                                |

102


Annual Report of Southwest Airlines Co\. for year 2019

Taxes

Grants of RSUs result in the creation of a deferred tax asset, which is a temporary difference, until the time the RSU vests\. All excess tax benefits and tax deficiencies are recorded through the income statement\. Due to the treatment of RSUs for tax purposes, the Company’s effective tax rate from year to year is subject to variability\.

10 \. FINANCIAL DERIVATIVE INSTRUMENTS

Fuel Contracts

Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices\. Furthermore, jet fuel and oil typically represents one of the largest operating expenses for airlines\. The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program\. Although the Company may periodically enter into jet fuel derivatives for short\-term timeframes, because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately  24  months into the future\. However, the Company has found that financial derivative instruments in other commodities, such as West Texas Intermediate ("WTI") crude oil, Brent crude oil, and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility\. The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes\.

The Company has used financial derivative instruments for both short\-term and long\-term timeframes, and primarily uses a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio\. Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than purchased call options in that the Company could end up in a liability position when the collar structure or swap agreement settles\. With the use of purchased call options and call spreads, the Company cannot be in a liability position at settlement, but does not have coverage once market prices fall below the strike price of the purchased call option\.

For the purpose of evaluating its net cash spend for jet fuel and for forecasting its future estimated jet fuel expense, the Company evaluates its hedge volumes strictly from an "economic" standpoint and thus does not consider whether the hedges have qualified or will qualify for hedge accounting\. The Company defines its "economic" hedge as the net volume of fuel derivative contracts held, including the impact of positions that have been offset through sold positions, regardless of whether those contracts qualify for hedge accounting\. The level at which the Company is economically hedged for a particular period is also dependent on current market prices for that period, as well as the types of derivative instruments held and the strike prices of those instruments\. For example, the Company may enter into "out\-of\-the\-money" option contracts (including catastrophic protection), which may not generate intrinsic gains at settlement if market prices do not rise above the option strike price\. Therefore, even though the Company may have an economic hedge in place for a particular period, that hedge may not produce any hedging gains at settlement and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments\.

For  2019 , the Company had fuel derivative instruments in place for up to   73 percent  of its fuel consumption\. As of  December 31, 2019 , the Company also had fuel derivative instruments in place to provide coverage at varying price levels, but up to a maximum of approximately   59 percent  of its  2020  estimated fuel consumption, depending on where market prices settle\. The following table provides information about the Company’s volume of fuel hedging on an economic basis:

92


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

***We rely on third\-party distribution channels and must manage effectively the costs, rights and functionality of these channels\.***

We rely on third\-party distribution channels, including those provided by or through global distribution systems (GDSs) (e\.g\., Amadeus, Sabre and Travelport), conventional travel agents and online travel agents (OTAs) (e\.g\., Expedia, including its booking sites Orbitz and Travelocity, and The Priceline Group), to distribute a significant portion of our airline tickets, and we expect in the future to continue to rely on these channels and hope to expand their ability to distribute and collect revenues for ancillary products (e\.g\., fees for selective seating)\. These distribution channels are more expensive and at present have less functionality in respect of ancillary product offerings than those we operate ourselves, such as our website at *www\.aa\.com*\. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally\. To remain competitive, we will need to manage successfully our distribution costs and rights, increase our distribution flexibility and improve the functionality of our distribution channels, while maintaining an industry\-competitive cost structure\. These imperatives may affect our relationships with GDSs and OTAs, including as consolidation of OTAs continues or is proposed to continue\. Further, as distribution technology changes we will need to continue to update our technology either by acquiring new technology from third parties, building the functionality ourselves, or a combination, which in any event will likely entail significant technological and commercial risk and involve potentially material investments\. Any inability to manage our third\-party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material adverse effect on our business, results of operations and financial condition\.

***Our business is subject to extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages\.***

Airlines are subject to extensive domestic and international regulatory requirements\. In the last several years, Congress has passed laws, and the DOT, the FAA, the TSA and the Department of Homeland Security have issued a number of directives and other regulations, that affect the airline industry\. These requirements impose substantial costs on us and restrict the ways we may conduct our business\.

For example, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions\. These requirements can be issued with little or no notice, or can otherwise impact our ability to efficiently or fully utilize our aircraft\. The FAA also exercises comprehensive regulatory authority over nearly all technical aspects of our operations\. Our failure to comply with such requirements has in the past and may in the future result in fines and other enforcement actions by the FAA or other regulators\. In the future, any new regulatory requirements, particularly requirements that limit our ability to operate or price our products, could have a material adverse effect on us and the industry\.

The DOT consumer rules that took effect in 2010 require procedures for customer handling during long onboard delays, further regulate airline interactions with passengers through the ticketing process, at the airport, and onboard the aircraft, and require disclosures concerning airline fares and ancillary fees such as baggage fees\. Other DOT rules apply to post\-ticket purchase price increases and an expansion of tarmac delay regulations to international airlines\. Further, Congress has proposed the FAIR Fees Act, which would direct the DOT to prescribe regulations prohibiting an air carrier from imposing change or cancellation fees that are unreasonable or disproportional to the costs incurred by the carrier, as well as establish standards for assessing whether all other fees are reasonable and proportional to the costs incurred by the air carrier\.

The Aviation and Transportation Security Act mandates the federalization of certain airport security procedures and imposes additional security requirements on airports and airlines, most of which are funded by a per\-ticket tax on passengers and a tax on airlines\. Present and potential future security requirements can have the effect of imposing costs and inconvenience on travelers, potentially reducing the demand for air travel\.

The results of our operations, demand for air travel, and the manner in which we conduct business each may be affected by changes in law and future actions taken by governmental agencies, including:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | changes in law that affect the services that can be offered by airlines in particular markets and at particular airports, or the types of fees that can be charged to passengers; |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | the granting and timing of certain governmental approvals (including antitrust or foreign government approvals) needed for codesharing alliances, joint businesses and other arrangements with other airlines; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | restrictions on competitive practices (for example, court orders, or agency regulations or orders, that would curtail an airline’s ability to respond to a competitor); |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------- |
| • | the adoption of new passenger security standards or regulations that impact customer service standards; |

22


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

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

**Number** | **Description**                                                                                |
| 10\.8                         | [First Amendment and Restatement Agreement, dated as of May 21, 2015, in relation to the Credit and Guaranty Agreement, dated as of June 27, 2013 (as amended), among American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.), American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), the Revolving Lenders (as defined therein) party thereto, the 2015 Term Loan Lenders (as defined therein) party thereto and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10\.5 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515261937/d945812dex105.htm) |
| 10\.9                         | [First Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of October 26, 2015, amending the Amended and Restated Credit and Guaranty Agreement, dated as of May 21, 2015, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), American Airlines Group Inc\., (as successor in interest to US Airways Group, Inc \.), the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.8 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516474605/d78287dex108.htm)                                  |
| 10\.10                        | [Second Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of March 14, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of May 21, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex102.htm)                                                                                |
| 10\.11                        | [Third Amendment to the Amended and Restated Credit And Guaranty Agreement, dated as of August 21, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of May 21, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and certain other parties thereto\.](https://americanairlines.gcs-web.com/email-alerts/ex101110k2017.htm) \*\*                                                                                |
| 10\.12                        | [Purchase Agreement No\. 3219, dated as of October 15, 2008, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.29 to American’s Annual Report on Form 10\-K for the year ended December 31, 2008 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000451509000008/ex1029.htm) \*                                                                                |
| 10\.13                        | [Credit and Guaranty Agreement, dated as of April 29, 2016, among American Airlines, Inc\. as borrower, American Airlines Group Inc\., as parent and guarantor, certain other subsidiaries of American Airlines Group Inc\., as guarantors, the lenders party thereto, Barclays Bank PLC, as administrative agent and collateral agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q filed on July 22, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516654354/d204187dex102.htm)                                                                                |
| 10\.14                        | [First Amendment to Credit and Guaranty Agreement, dated as of October 31, 2016, amending the Credit and Guaranty Agreement, dated as of April 29, 2016, among American Airlines, Inc\. as borrower, American Airlines Group Inc\., as parent and guarantor, the lenders party thereto, Barclays Bank PLC, as administrative agent (incorporated by reference to Exhibit 10\.81 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2016 (Commission File No\. 1\-8400))\. ](http://www.sec.gov/Archives/edgar/data/4515/000119312517051216/d286458dex1081.htm)                                                                                |
| 10\.15                        | [Second Amendment to the Credit and Guaranty Agreement, dated as of August 21, 2017, amending the Credit and Guaranty Agreement, dated as of April 29, 2016, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Barclays Bank PLC, as administrative agent, and certain other parties thereto\.](https://americanairlines.gcs-web.com/email-alerts/ex101510k2017.htm) \*\*                                                                                |
| 10\.16                        | [Third Amendment to Credit and Guaranty Agreement, dated as of November 1, 2017, amending the Credit and Guaranty Agreement, dated as of April 29, 2016, among American Airlines, Inc\. as borrower, American Airlines Group Inc\., as parent and guarantor, the lenders party thereto, Barclays Bank PLC, as administrative agent\.](https://americanairlines.gcs-web.com/email-alerts/ex101610k2017.htm)                                                                                |
| 10\.17                        | [Supplemental Agreement No\. 2, dated as of July 21, 2010, to Purchase Agreement No\. 3219 between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.2 to AMR’s report on Form 10\-Q for the quarter ended June 30, 2010 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000095012310066894/d73384exv10w2.htm) \*                                                                                |
| 10\.18                        | [Supplemental Agreement No\. 3, dated as of February 1, 2013, to Purchase Agreement No\. 3219 between American Airlines, Inc\., and The Boeing Company (incorporated by reference to Exhibit 10\.2 to AMR’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620113000040/d516424dex102.htm) \*                                                                                |
| 10\.19                        | [Supplemental Agreement No\. 4, dated as of June 9, 2014, to Purchase Agreement No\. 3219 between The Boeing Company and American Airlines, Inc\. dated as of October 15, 2008, Relating to Boeing Model 787 Aircraft, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.6 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000014/d759439dex106.htm) \*                                                                                |
| 10\.20                        | [Supplemental Agreement No\. 5, dated as of January 20, 2015, to Purchase Agreement No\. 3219 between The Boeing Company and American Airlines, Inc\., dated as of October 15, 2008, Relating to Boeing Model 787 Aircraft, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515145178/d900175dex102.htm) \*                                                                                |

191


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

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

Maturities of lease liabilities were as follows (in millions):

|                              |                       |                       |
| ---------------------------- | --------------------- | --------------------- |
|                              | **December 31, 2018** | **December 31, 2018** |
|                              | **Operating Leases**  | **Finance Leases**    |
| 2019                         | $1,912                | $124                  |
| 2020                         | 1,838                 | 120                   |
| 2021                         | 1,636                 | 118                   |
| 2022                         | 1,438                 | 122                   |
| 2023                         | 1,255                 | 105                   |
| 2024 and thereafter          | 3,620                 | 282                   |
| Total lease payments         | 11,699                | 871                   |
| Less: Imputed interest       | (2,143)               | (177)                 |
| Total lease obligations      | 9,556                 | 694                   |
| Less: Current obligations    | (1,654)               | (81)                  |
| Long\-term lease obligations | $7,902                | $613                  |

As of December 31, 2018, we have additional operating lease commitments that have not yet commenced of approximately $1\.9 billion for 22 787\-8 aircraft to be delivered in 2020 and 2021 with lease terms of 10 years\.

*Disclosures related to periods prior to adoption of the New Lease Standard*

Operating lease rent expense, excluding landing fees, was approximately $3\.2 billion in each of 2017 and 2016, which includes the lease of certain aircraft under capacity purchase agreements\. As of December 31, 2017, future minimum lease payment obligations under noncancellable operating leases, including payments for the lease of certain aircraft under capacity purchase agreements, as well as payments under capital lease obligations were as follows (in millions):

|                              |                       |                       |
| ---------------------------- | --------------------- | --------------------- |
|                              | **December 31, 2017** | **December 31, 2017** |
|                              | **Operating Leases**  | **Capital Leases**    |
| 2018                         | $2,572                | $126                  |
| 2019                         | 2,329                 | 123                   |
| 2020                         | 2,104                 | 120                   |
| 2021                         | 1,621                 | 118                   |
| 2022                         | 1,398                 | 122                   |
| 2023 and thereafter          | 3,965                 | 387                   |
| Total lease payments         | $13,989               | 996                   |
| Less: Imputed interest       |                       | (225)                 |
| Total lease obligations      |                       | 771                   |
| Less: Current obligations    |                       | (78)                  |
| Long\-term lease obligations |                       | $693                  |

106


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

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------- |
| *1\.* | *The rate at which we defer sales proceeds related to services sold through non\-airline partners:* |

We use the relative selling price method for the deferral of sales proceeds\. For contracts that were modified after the effective date of Accounting Standards Update 2009\-13, "Multiple\-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force" (ASU 2009\-13), we determined our best estimate of selling price by considering multiple inputs and methods including, but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded and the number of miles redeemed\. We estimated the selling prices and volumes over the terms of the agreements in order to determine the allocation of proceeds to each of the multiple deliverables\. This relative allocation is evaluated annually and updated according to changes in the assumptions of the volume of related deliverables\. A 1% shift between the allocation of cash proceeds to travel deliverables from marketing deliverables would defer the timing of revenue recognition by approximately $9 million\.

|       |                                                                        |
| ----- | ---------------------------------------------------------------------- |
| *2\.* | *The number of miles that will not be redeemed for travel (breakage):* |

The liability for outstanding Mileage Plan™ mileage credits includes all mileage credits that are expected to be redeemed, including mileage credits earned by members whose mileage account balances have not yet reached the minimum mileage credit level to redeem an award\. Our estimate of the number of miles that will not be redeemed (breakage) considers historical activity in our members’ accounts and other factors\. Based on statistical analysis of historical data, our current breakage rate is 17\.4%\. A hypothetical 1% change in our estimate of breakage has approximately a $10 million effect on the liability\.

|       |                                       |
| ----- | ------------------------------------- |
| *3\.* | *The number of miles used per award:* |

We estimate how many miles will be used per award\. For example, our members may redeem credit for award travel to various locations or choose between a highly restricted award and an unrestricted award\. Our estimates are based on the current requirements in our Mileage Plan™ program and historical award redemption patterns\.

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------- |
| *4\.* | *The number of awards redeemed for travel on our airlines versus other airlines:* |

The cost for us to carry an award passenger is typically lower than the cost we will pay to our travel partners\. We estimate the number of awards that will be redeemed on our airlines versus on our travel partners and accrue the estimated costs based on historical redemption patterns\. If the number of awards redeemed on our travel partner is higher or lower than estimated, we may need to adjust our liability and corresponding expense\.

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------- |
| 5\. | *The costs that will be incurred to provide award travel for miles earned by guests who fly on us or our airline partners:* |

When a frequent flyer travels on his or her award ticket on one of our airlines, incremental costs such as food, fuel and insurance are incurred to carry that passenger\. We estimate what these costs will be (excluding any contribution to overhead and profit) and accrue a liability\. If the guest travels on another airline on an award ticket, we often must pay the other airline for carrying the guest\. The other airline costs are based on negotiated agreements and are often substantially higher than the costs we would incur to carry that guest\. We estimate how much we will pay to other airlines for future travel awards based on historical redemptions and settlements with other carriers and accrue a liability accordingly\. The costs actually incurred by us or paid to other airlines may be higher or lower than the costs that were estimated and accrued, and therefore we may need to adjust our liability and recognize a corresponding expense\.

We regularly review significant Mileage Plan™ assumptions and change our assumptions if facts and circumstances indicate that a change is necessary\. Any such change in assumptions could have a significant effect on our financial position and results of operations\.

See further discussion below for the impact to the accounting of frequent flyer programs due to the new revenue recognition accounting standard\.

**PENSION PLANS**

Our actuarial estimates of pension liability, the related expense and the associated significant assumptions are discussed in Note 7 to the consolidated financial statements\.

The calculation of pension expense and the corresponding liability requires the use of a number of key assumptions, including the expected long\-term rate of return on plan assets and the assumed discount rates to be used in the calculation of the projected

 56


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

Unless otherwise indicated, the terms "Delta," "we," "us," and "our" refer to Delta Air Lines, Inc\. and its subsidiaries\.

FORWARD\-LOOKING STATEMENTS

Statements in this Form 10\-K (or otherwise made by us or on our behalf) that are not historical facts, including statements about our estimates, expectations, beliefs, intentions, projections or strategies for the future, may be "forward\-looking statements" as defined in the Private Securities Litigation Reform Act of 1995\. Forward\-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations\. Known material risk factors applicable to Delta are described in "Risk Factors Relating to Delta" and "Risk Factors Relating to the Airline Industry" in "Item 1A\. Risk Factors" of this Form 10\-K, other than risks that could apply to any issuer or offering\. All forward\-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward\-looking statements to reflect events or circumstances that may arise after the date of this report\.

 1


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

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(3)^ | The assumed health care cost trend rate is based upon an evaluation of our historical trends and experience, taking into account current and expected market conditions\. Increasing the assumed health care cost trend rate by 100 basis points would increase estimated  2019  retiree medical and other postretirement benefits expense by  $6 million \. |

During 2018, we reviewed and revised certain economic and demographic assumptions including the pension and retiree medical and other postretirement benefits discount rates, retirement rates and health care cost and trend rates\. The net effect of changing these assumptions for the pension plans resulted in a decrease of $1\.8 billion in the projected benefit obligation at December 31, 2018\. The net effect of changing these assumptions for retiree medical and other postretirement benefits plans resulted in a decrease of $126 million in the projected benefit obligation at December 31, 2018\. We also revised our mortality assumptions to incorporate the new mortality improvement scale issued by the Society of Actuaries\. This resulted in a decrease in the projected benefit obligations of our pension and retiree medical and other postretirement benefits plans of $58 million and $1 million, respectively\.

See Note 10 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 8 to American’s Consolidated Financial Statements in Part II, Item 8B for additional information regarding our employee benefit plans\.

***Recent Accounting Pronouncements***

*Standards Adopted in 2018*

Effective January 1, 2018, we adopted the accounting pronouncements described below\.

***ASU 2014\-09: Revenue from Contracts with Customers (Topic 606) (the New Revenue Standard)***

The New Revenue Standard applies to all companies that enter into contracts with customers to transfer goods or services\. We adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods\.

The adoption of the New Revenue Standard impacted our accounting for outstanding mileage credits earned through travel by AAdvantage loyalty program members\. There was no change in accounting for sales of mileage credits to co\-branded credit card or other partners\. Prior to the adoption of the New Revenue Standard, we used the incremental cost method to account for the portion of our loyalty program liability related to mileage credits earned through travel, which were valued based on the estimated incremental cost of carrying one additional passenger\. The New Revenue Standard required us to change our policy to the deferred revenue method and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned is deferred and recognized in passenger revenue upon future mileage redemption\. The value of the earned mileage credits is materially greater under the deferred revenue method than the value attributed to these mileage credits under the incremental cost method\.

The New Revenue Standard also required certain reclassifications, principally the reclassification of certain ancillary revenues previously classified and reported as other revenue to passenger revenue and as applicable to cargo revenue\. Additionally, the New Revenue Standard required a gross presentation on the face of our consolidated statements of operations for certain revenues and expenses that had previously been presented on a net basis\.

See *“Impacts to 2017 Results”* and *“Impacts to 2016 Results”* below for the impact to our consolidated statements of operations data for 2017 and 2016, respectively, and our consolidated balance sheet as of December 31, 2017 related to the adoption of the New Revenue Standard\.

***ASU 2017\-07: Compensation \- Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the New Retirement Standard)***

The New Retirement Standard required all components of our net periodic benefit cost (income), with the exception of service cost, previously reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense)\. The New Retirement Standard was applied retrospectively, which resulted in the recast of each prior reporting period presented\. The adoption of the New Retirement Standard had no impact on pre\-tax income or net income reported\.

See *“Impacts to 2017 Results”* and *“Impacts to 2016 Results”* below for the impact to our consolidated statements of operations data for 2017 and 2016, respectively, related to the adoption of the New Retirement Standard\.

75