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

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

**Number** | **Description**                                                                                |
| 10\.50                        | [Supplemental Agreement No\. 1, dated as of April 15, 2013, to Purchase Agreement No\. 03735 between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.1 to AMR’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620113000067/d567093dex101.htm) \*                                                                                |
| 10\.51                        | [Supplemental Agreement No\. 2, dated as of March 6, 2015, to Purchase Agreement No\. 03735 between American Airlines, Inc\. and The Boeing Company, dated as of February 1, 2013\. Relating to Boeing Model 737 MAX Aircraft, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.1 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/d900175dex101.htm) \* |
| 10\.52                        | [Supplemental Agreement No\. 3, dated as of May 22, 2015, to Purchase Agreement No\. 03735 between American Airlines, Inc\. and The Boeing Company, dated as of February 1, 2013\. Relating to Boeing Model 737 MAX Aircraft, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.3 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/d945812dex103.htm) \*   |
| 10\.53                        | [Letter Agreement, dated as of January 14, 2016, to Purchase Agreement No\. 03735 between American Airlines, Inc\. and The Boeing Company, dated as of February 1, 2013\. Relating to Boeing Model 737 MAX 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, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516551225/d164093dex102.htm) \*           |
| 10\.54                        | [Supplemental Agreement No\. 4, dated as of June 6, 2016, to Purchase Agreement No\. 03735 dated as of February 1, 2016, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516654354/d204187dex103.htm) \*                                                                                |
| 10\.55                        | [Supplemental Agreement No\. 5, dated as of August 8, 2016, to Purchase Agreement No\. 03735 dated as of February 1, 2013, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516742263/d247546dex102.htm) \*                                                                                |
| 10\.56                        | [Supplemental Agreement No\. 6, dated as of November 15, 2016, to Purchase Agreement No\. 03735 dated as of February 1, 2013, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.33 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/d286458dex1033.htm) \*                                                                                |
| 10\.57                        | [Supplemental Agreement No\. 7, dated as of March 2, 2017, to Purchase Agreement No\. 03735 dated as of February 1, 2013, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.1 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/d358913dex101.htm) \*                                                                                |
| 10\.58                        | [Supplemental Agreement No\. 8, dated as of December 7, 2017, to Purchase Agreement No\. 03735 dated as of February 1, 2013, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.45 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000009/ex104510k2017.htm) \*                                                                                |
| 10\.59                        | [Supplemental Agreement No\. 9, dated as of April 6, 2018, to Purchase Agreement No\. 03735 dated as of February 1, 2013, by and between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2018 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000027/ex10210qq218.htm) \*                                                                                |
| 10\.60                        | [Supplemental Agreement No\. 10, dated as of March 26, 2019, to Purchase Agreement No\. 03735 dated as of February 1, 2013, by and between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2019 (Commission File No\. 1\-8400))\.\*\*](http://www.sec.gov/Archives/edgar/data/4515/000000620119000023/ex10110q2019.htm)                                                                                |
| 10\.61                        | [Consent Agreement, dated as of October 5, 2015, between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), American Airlines, Inc\. and Airbus S\.A\.S\. (incorporated by reference to Exhibit 10\.98 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/d78287dex1098.htm) \*                                                                                |
| 10\.62                        | [Supplemental Executive Retirement Program for Officers of American Airlines, Inc\., as amended and restated as of January 1, 2005 (incorporated by reference to Exhibit 10\.127 to AMR’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/6201/000000620109000009/ex10127.htm) †                                                                                |
| 10\.63                        | [Trust Agreement Under Supplemental Retirement Program for Officers of American Airlines, Inc\., as amended and restated as of June 1, 2007 (incorporated by reference to Exhibit 10\.128 to AMR’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/6201/000000620109000009/ex10128.htm) †                                                                                |
| 10\.64                        | [Trust Agreement Under Supplemental Executive Retirement Program for Officers of American Airlines, Inc\. Participating in the Super Saver Plus Plan, as amended and restated as of June 1, 2007 (incorporated by reference to Exhibit 10\.129 to AMR’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/6201/000000620109000009/ex10129.htm) †                                                                                |
| 10\.65                        | [American Airlines Group Inc\. 2013 Incentive Award Plan (incorporated by reference to Exhibit 4\.1 of AAG’s Form S\-8 Registration Statement, filed on December 4, 2013 (Registration No\. 333\-192660))\.](http://www.sec.gov/Archives/edgar/data/6201/000119312513462268/d639480dex41.htm) †                                                                                |

181


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

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

ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is set forth under the heading "Proposal 3 \- Ratification of the Appointment of Independent Auditors" in our Proxy Statement and is incorporated by reference\.

PART IV

ITEM 15\. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1)\. The following is an index of the financial statements required by this item that are included in this Form 10\-K:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets— December 31, 2017  and  2016

Consolidated Statements of Operations for the years ended  December 31, 2017 ,  2016  and  2015

Consolidated Statements of Comprehensive Income for the years ended  December 31, 2017 ,  2016  and  2015

Consolidated Statements of Cash Flows for the years ended  December 31, 2017 ,  2016  and  2015

Consolidated Statements of Stockholders' Equity for the years ended  December 31, 2017 ,  2016  and  2015

Notes to the Consolidated Financial Statements

(2)\. The schedule required by this item is included in Notes  11  and  15  to the Consolidated Financial Statements\. All other financial statement schedules are not required or are inapplicable and therefore have been omitted\.

(3)\. Exhibit List\.

The exhibits required by this item are listed below\. The management contracts and compensatory plans or arrangements required to be filed as an exhibit to this Form 10\-K are listed as Exhibits 10\.11 through 10\.23\.

Note to Exhibits : Any representations and warranties of a party set forth in any agreement (including all exhibits and schedules thereto) filed with this Annual Report on Form 10\-K have been made solely for the benefit of the other party to the agreement\. Some of those representations and warranties were made only as of the date of the agreement or such other date as specified in the agreement, may be subject to a contractual standard of materiality different from what may be viewed as material to stockholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters as facts\. Such agreements are included with this filing only to provide investors with information regarding the terms of the agreements, and not to provide investors with any other factual or disclosure information regarding the registrant or its business\.

|         |                                                                                |
| ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 3\.1(a) | [Delta's Amended and Restated Certificate of Incorporation (Filed as Exhibit 3\.1 to Delta's Current Report on Form 8\-K as filed on April 30, 2007)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000118811207001266/ex3-1.htm)  |

|          |                                                                                |
| -------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 3\.1 (b) | [Amendment to Amended and Restated Certificate of Incorporation (Filed as Exhibit 3\.1 to Delta's Current Report on Form 8\-K as filed on June 27, 2014)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000101968714002579/delta_8k-ex0301.htm) |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| 3\.2 | [Delta's Bylaws (Filed as Exhibit 3\.1 to Delta's Current Report on Form 8\-K as filed on October 31, 2016)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000168316816000419/delta_8k-ex0301.htm)  |

 92


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

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

Aircraft Fuel\.  The table below summarizes UAL's aircraft fuel consumption and expense during the last three years\.

|          |                                               |                                            |                              |                                           |
| -------- | --------------------------------------------- | ------------------------------------------ | ---------------------------- | ----------------------------------------- |
| **Year** | **Gallons Consumed**

**(in millions)** | **Fuel Expense**

**(in millions)** | **Average Price Per Gallon** | **Percentage of Total Operating Expense** |
| **2019** | 4,292                                         | $8,953                                     | $2\.09                       | 23%                                       |
| **2018** | 4,137                                         | $9,307                                     | $2\.25                       | 24%                                       |
| **2017** | 3,978                                         | $6,913                                     | $1\.74                       | 20%                                       |

Our operational and financial results can be significantly impacted by changes in the price and availability of aircraft fuel\. To provide adequate supplies of fuel, the Company routinely enters into purchase contracts that are customarily indexed to market prices for aircraft fuel, and the Company generally has some ability to cover short\-term fuel supply and infrastructure disruptions at certain major demand locations\. The price of aircraft fuel has fluctuated substantially in the past several years\. The Company's current strategy is to not enter into transactions to hedge its fuel consumption, although the Company regularly reviews its strategy based on market conditions and other factors\.

Third\-Party Business\.  United generates third\-party business revenue that includes maintenance services, catering, frequent flyer award non\-travel redemptions and ground handling\. Third\-party business revenue is recorded in Other operating revenue\. Expenses associated with third\-party business, except non\-travel redemptions, are recorded in Other operating expenses\. Non\-travel redemptions expenses are recorded to Other operating revenue\.

Distribution Channels\.  The Company's airline seat inventory and fares are distributed through the Company's direct channels, traditional travel agencies and on\-line travel agencies\. The use of the Company's direct sales website, www\.united\.com, the Company's mobile applications and alternative distribution systems provides the Company with an opportunity to de\-commoditize its services, better present its content, make more targeted offerings, better retain its customers, enhance its brand and lower its ticket distribution costs\. Agency sales are primarily sold using global distribution systems ("GDS")\. United has developed and expects to continue to develop capabilities to sell certain ancillary products through the GDS channel to provide an enhanced buying experience for customers who purchase in that channel\.

Industry Conditions

Domestic Competition\.  The domestic airline industry is highly competitive and dynamic\. The Company's competitors consist primarily of other airlines and, to a certain extent, other forms of transportation\. Currently, any U\.S\. carrier deemed fit by the U\.S\. Department of Transportation (the "DOT") is largely free to operate scheduled passenger service between any two points within the United States\. Competition can be direct, in the form of another carrier flying the exact non\-stop route, or indirect, where a carrier serves the same two cities non\-stop from an alternative airport in that city or via an itinerary requiring a connection at another airport\. Air carriers' cost structures are not uniform and are influenced by numerous factors\. Carriers with lower costs may offer lower fares to passengers, which could have a potential negative impact on the Company's revenues\. Domestic pricing decisions are impacted by intense competitive pressure exerted on the Company by other U\.S\. airlines\. In order to remain competitive and maintain passenger traffic levels, we often find it necessary to match competitors' discounted fares\. Since we compete in a dynamic marketplace, attempts to generate additional revenue through increased fares often fail\.

International Competition\.  Internationally, the Company competes not only with U\.S\. airlines, but also with foreign carriers\. International competition has increased and may continue to increase in the future as a result of airline mergers and acquisitions, JBAs, alliances, restructurings, liberalization of aviation bilateral agreements and new or increased service by competitors, including government subsidized competitors from certain Middle East countries\. Competition on international routes is subject to varying degrees of governmental regulation\. The Company's ability to compete successfully with non\-U\.S\. carriers on international routes depends in part on its ability to generate traffic to and from the entire United States via its integrated domestic route network and its ability to overcome business and operational challenges across its network worldwide\. Foreign carriers currently are prohibited by U\.S\. law from carrying local passengers between two points in the United States and the Company generally experiences comparable restrictions in foreign countries\. Separately, "fifth freedom rights" allow the Company to operate between points in two different foreign countries and foreign carriers may also have fifth freedom rights between the U\.S\. and another foreign country\. In the absence of fifth freedom rights, or some other extra\-bilateral right to conduct operations between two foreign countries, U\.S\. carriers are constrained from carrying passengers to points beyond designated international gateway cities\. To compensate partially for these structural limitations, U\.S\. and foreign carriers have entered into alliances, immunized JBAs and marketing arrangements that enable these carriers to exchange traffic between each other's flights and route networks\. See  Alliances,  above, for additional information\.

5


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

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

The fair value of our retiree medical and other postretirement benefits plans assets at December 31, 2017 by asset category, were as follows (in millions):

|                          |                                                                                |                                                                              |                                                                                |                                                     |
| ------------------------ | -------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- |
|                          | **Fair Value Measurements as of December 31, 2017**                                                            | **Fair Value Measurements as of December 31, 2017**                          | **Fair Value Measurements as of December 31, 2017**                            | **Fair Value Measurements as of December 31, 2017** |
| **Asset Category**       | **Quoted Prices in**

**Active Markets**

**for Identical**

**Assets**

**(Level 1)** | **Significant**

**Observable**

**Inputs**

**(Level 2)** | **Significant**

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Money market fund        | $5                                                                                | $—                                                                           | $—                                                                             | $5                                                  |
| Mutual funds – AAL Class | —                                                                                | 290                                                                          | —                                                                              | 290                                                 |
| Total                    | $5                                                                                | $290                                                                         | $—                                                                             | $295                                                |

The fair value of our retiree medical and other postretirement benefits plans assets at December 31, 2016 by asset category, were as follows (in millions):

|                                    |                                                                                |                                                                              |                                                                                |                                                     |
| ---------------------------------- | -------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- |
|                                    | **Fair Value Measurements as of December 31, 2016**                                                            | **Fair Value Measurements as of December 31, 2016**                          | **Fair Value Measurements as of December 31, 2016**                            | **Fair Value Measurements as of December 31, 2016** |
| **Asset Category**                 | **Quoted Prices in**

**Active Markets**

**for Identical**

**Assets**

**(Level 1)** | **Significant**

**Observable**

**Inputs**

**(Level 2)** | **Significant**

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Money market fund                  | $5                                                                                | $—                                                                           | $—                                                                             | $5                                                  |
| Mutual funds – Institutional Class | 261                                                                                | —                                                                            | —                                                                              | 261                                                 |
| Total                              | $266                                                                                | $—                                                                           | $—                                                                             | $266                                                |

Investments in the retiree medical and other postretirement benefits plans’ mutual funds are valued by quoted prices on the active market, which is fair value and represents the net asset value of the shares of such funds as of the close of business at the end of the period\. At December 31, 2017, these funds were invested in an AAL Class mutual fund, in which trading is restricted only to American, resulting in a fair value classification of Level 2\. At December 31, 2016, these investments were part of an Institutional Class of mutual funds and were actively traded on the open market resulting in a fair value classification of Level 1\. Investments include approximately 30% and 27% of investments in non\-U\.S\. common stocks in 2017 and 2016, respectively\. Net asset value is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination\.

***Profit Sharing Program***

We accrue 5% of our pre\-tax income excluding special items for our profit sharing program\. For the year ended December 31, 2017, we accrued $241 million for this program, which will be distributed to employees in the first quarter of 2018\.

114


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

***Deferred Revenue***

Deferred revenue results primarily from the sale of Mileage Plan™ miles to third\-parties\. It also includes Virgin America's Elevate® flown points outstanding at the acquisition date that were recorded at their estimated fair value as part of purchase price accounting\. Recognition of this deferred revenue occurs when award transportation is provided or over the term of the applicable agreement\.

***Operating Leases***

The Company leases aircraft, airport and terminal facilities, office space and other equipment under operating leases\. Airport and terminal facility leases are variable based on volumes and expensed as incurred\. Some of these lease agreements contain rent escalation clauses or rent holidays\. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight\-line basis over the terms of the leases in the consolidated statements of operations\.

***Leased Aircraft Return Costs***

Cash payments associated with returning leased aircraft are accrued when it is probable that a cash payment will be made and that amount is reasonably estimable, usually no sooner than after the last scheduled maintenance event prior to lease return\. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination\.

As leased aircraft are returned, any payments are charged against the established accrual\. The accrual is part of other current and long\-term liabilities and was not material as of December 31, 2017 and December 31, 2016\. The expense is included in Aircraft maintenance in the consolidated statements of operations\.

***Revenue Recognition***

Passenger revenue is recognized when the passenger travels\. Tickets sold but not yet used are reported as air traffic liability until travel or date of expiration\. Air traffic liability includes approximately $106 million and $62 million related to credits for future travel, as of December 31, 2017 and December 31, 2016, respectively\. These credits are recognized into revenue either when the passenger travels or at the date of expiration, which is twelve months from issuance\. Commissions to travel agents and related fees are expensed when the related revenue is recognized\. Passenger traffic commissions and related fees not yet recognized are recorded as a prepaid expense\. Taxes collected from passengers, including transportation excise taxes, airport and security fees and other fees, are recorded on a net basis within passenger revenue in the consolidated statements of operations\. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized as revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized\. These estimates are based on the Company’s historical data\.

Freight and mail revenues are recognized when the related services are provided\.

Other—net revenues are primarily related to the Mileage Plan™ program\. They are recognized as described in the “Mileage Plan” paragraph below\. Other—net also includes certain ancillary or non\-ticket revenues, such as checked\-bag fees, reservations fees, ticket change fees, on\-board food and beverage sales, and, to a much lesser extent, commissions from car and hotel vendors and sales of travel insurance\. These items are recognized as revenue when the related services are provided\. Airport lounge memberships are recognized as revenue over the membership period\.

***Frequent Flyer Programs***

Alaska operates the Mileage Plan™ frequent flyer program, and Virgin America operated the Elevate frequent flyer program for the duration of 2017\. Both programs provide travel awards to members based on accumulated mileage or points\. For miles earned by flying on the Company's airlines, and through airline partners, the estimated cost of providing award travel is recognized as a selling expense and accrued as a liability, as miles are earned and accumulated\.

Alaska and Virgin America also sell services, including miles or points for transportation, to non\-airline partners, such as hotels, car rental agencies and major banks that offer Alaska's affinity credit card\. The Company defers revenue related to air transportation and certificates for discounted companion travel until the transportation is delivered\. The deferred proceeds are recognized as passenger revenue for awards redeemed and flown on the Company's airlines and as Other—net revenue for

 70


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

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

Schedule II

Valuation and Qualifying Accounts

For the Years Ended  December 31, 2019 ,  2018  and  2017

|                                                  |                                                          |                                                                              |                |           |                                                    |
| ------------------------------------------------ | -------------------------------------------------------- | ---------------------------------------------------------------------------- | -------------- | --------- | -------------------------------------------------- |
| **(In millions)**

**Description**     | **Balance at**

**Beginning of**

**Period** | **Additions**

**Charged to**

**Costs and**

**Expenses** | **Deductions** | **Other** | **Balance at**

**End of**

**Period** |
| **Allowance for doubtful accounts:**             |                                                          |                                                                              |                |           |                                                    |
| 2019                                             | $8                                                       | $17                                                                          | $16            | $—        | $9                                                 |
| 2018                                             | 7                                                        | 17                                                                           | 16             | —         | 8                                                  |
| 2017                                             | 10                                                       | 20                                                                           | 23             | —         | 7                                                  |
| **Obsolescence allowance—spare parts:**          |                                                          |                                                                              |                |           |                                                    |
| 2019                                             | $412                                                     | $76                                                                          | $63            | $—        | $425                                               |
| 2018                                             | 354                                                      | 73                                                                           | 15             | —         | 412                                                |
| 2017                                             | 295                                                      | 75                                                                           | 17             | 1         | 354                                                |
| **Valuation allowance for deferred tax assets:** |                                                          |                                                                              |                |           |                                                    |
| 2019                                             | $59                                                      | $—                                                                           | $1             | $—        | $58                                                |
| 2018                                             | 63                                                       | 2                                                                            | 6              | —         | 59                                                 |
| 2017                                             | 68                                                       | 11                                                                           | 27             | 11        | 63                                                 |

106


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

***ASU 2016\-02: Leases (Topic 842) (the New Lease Standard)***

The New Lease Standard requires lessees to recognize a lease liability and a right\-of\-use (ROU) asset on the balance sheet for operating leases\. Accounting for finance leases is substantially unchanged\. The New Lease Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years\. Early adoption is permitted\.

In the fourth quarter of 2018, we elected to early adopt the New Lease Standard as of January 1, 2018 using a modified retrospective transition, with the cumulative\-effect adjustment to the opening balance of retained earnings as of the effective date (the effective date method)\. Under the effective date method, financial results reported in periods prior to 2018 are unchanged\. We also elected the package of practical expedients, which among other things, does not require reassessment of lease classification\.

The adoption of the New Lease Standard had a significant impact on our consolidated balance sheet due to the recognition of approximately$10 billion of lease liabilities with corresponding right\-of\-use assets for operating leases\.

Additionally, we recognized a $197 million cumulative effect adjustment credit, net of tax, to retained earnings\. The adjustment to retained earnings was driven principally by sale\-leaseback transactions including the recognition of unamortized deferred aircraft sale\-leaseback gains\. Prior to the adoption of the New Lease Standard, gains on sale\-leaseback transactions were generally deferred and recognized in the income statement over the lease term\. Under the New Lease Standard, gains on sale\-leaseback transactions (subject to adjustment for off\-market terms) are recognized immediately\.

Finally, our 2018 pre\-tax income decreased by $16 million as a result of adoption of the New Lease Standard\.

***ASU 2016\-01: Financial Instruments \- Overall (Subtopic 825\-10)***

This ASU made several modifications to Subtopic 825\-10, including the elimination of the available\-for\-sale classification of equity investments, and it required equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income\. This standard was adopted prospectively as of January 1, 2018 and resulted in a$60 million cumulative effect adjustment credit to retained earnings, net of tax, related to our investment in China Southern Airlines, which was previously accounted for under the cost method\.

***ASU 2016\-18: Statement of Cash Flows (Topic 230): Restricted Cash***

This ASU required that the change in the total cash balance, cash at the beginning of the period and cash at the end of the period on the statement of cash flows include restricted cash, and also required companies that report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows\. This standard was applied retrospectively, which resulted in the recast of prior reporting periods in the statement of cash flows\. For the years endedDecember 31, 2018, 2017 and 2016, $11 million, $103 million and $113 million, respectively, of restricted cash is included in the total cash and restricted cash balance at the end of the period\. A reconciliation of cash and restricted cash reported on our consolidated statements of cash flows to the amounts reported on our consolidated balance sheets is provided in a table below the Consolidated Statements of Cash Flows in Part II, Item 8A \- AAG’s Consolidated Financial Statements\.

76


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

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

The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above\. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided\.

For the portion of American’s outstanding mileage credits that it estimates will not be redeemed, American recognizes the associated value proportionally as the remaining mileage credits are redeemed\. American’s estimates are based on analysis of historical redemptions\.

**Cargo Revenue**

Cargo revenue is recognized when American provides the transportation\.

**Other Revenue**

Other revenue includes revenue associated with American’s loyalty program, which is comprised principally of the marketing component of mileage sales to co\-branded credit card and other partners and other marketing related payments\. For the years ended December 31, 2018, 2017 and 2016, loyalty revenue included in other revenue was $2\.4 billion, $2\.1 billion and $1\.9 billion, respectively\. The accounting and recognition for the loyalty program marketing services are discussed above in “*Loyalty Revenue*\.” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation\-related services\.

*Contract Balances*

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

|                           |                       |                       |
| ------------------------- | --------------------- | --------------------- |
|                           | **December 31, 2018** | **December 31, 2017** |
|                           | **(in millions)**     | **(in millions)**     |
| Loyalty program liability | $8,539                | $8,822                |
| Air traffic liability     | 4,339                 | 4,042                 |
| Total                     | $12,878               | $12,864               |

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

|                                     |         |
| ----------------------------------- | ------- |
| Balance at December 31, 2017        | $8,822  |
| Deferral of revenue                 | 3,083   |
| Recognition of revenue  ^(1)^       | (3,366) |
| Balance at December 31, 2018  ^(2)^ | $8,539  |

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

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every  18 months \. As of  December 31, 2018 , American’s current loyalty program liability was  $3\.3 billion  and represents American’s current estimate of revenue expected to be recognized in the next twelve months based on historical trends, with the balance reflected in long\-term loyalty program liability expected to be recognized as revenue in periods thereafter\. |

The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel\. The balance in American’s air traffic liability also

143


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

Non\-fuel operating expense increased due to higher wages related to new contract wage rates for pilots and flight attendants, and higher other operating expense categories as described above\. Higher raw fuel prices and an increase in gallons consumed drove the increase in Mainline fuel expense\. Mainline revenue increased primarily due to increased revenue passengers on lower average fares\.

***Regional***

Our Regional operations incurred a pretax loss of $100 million in 2018 compared to a pretax profit of $34 million in 2017\. The pretax loss was primarily attributable to $172 million higher non\-fuel operating expense and $90 million increase in fuel costs, partially offset by a $139 million increase in operating revenues\. The increase in non\-fuel operating expenses is primarily due to higher ownership costs associated with nine E175 aircraft operated by SkyWest that were added to the regional fleet over the past year, as well as higher CPA rates on a 20% increase in capacity\.

***Horizon***

Horizon achieved a pretax profit of $27 million in 2018 compared to pretax loss of $8 million in 2017\. The change was primarily driven by a significantly improved operation in 2018 as compared to 2017, a $17 million decrease in aircraft maintenance expense due to a lower volume of scheduled maintenance events as compared to the prior period, and a 11% increase growth in capacity attributable to 16 E175 aircraft added to Horizon's fleet over the past year\.

 41


Annual Report of Southwest Airlines Co\. for year 2018

(b) Includes $14 million reclassified from Salaries, wages, and benefits to Other (gains) losses, net, as a result of the New Retirement Standard\. See Note 2 to the Consolidated Financial Statements for further information\.

**Income Taxes**

The Company's effective tax rate was 22\.1 percent for 2018, compared with a 2\.8 percent benefit for 2017\. The increase in rate was driven by a prior year $1\.3 billion reduction in Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re\-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21 percent\. The Company's 2018 effective tax rate of 22\.1 percent was lower than its previously forecasted rate of approximately 23 percent, primarily due to additional tax credits realized during fourth quarter 2018\. The Company currently projects a full year 2019 effective tax rate to be approximately 23\.5 percent based on currently forecasted financial results\.

***2017 Compared with 2016***

**Operating Revenues**

Passenger revenues for 2017 increased by $695 million, or 3\.6 percent, compared with 2016\. The increase was primarily attributable to a 3\.6 percent increase in capacity, as strong demand enabled the Company to fill the majority of the additional seats offered\. This increase was partially offset by approximately $100 million in reduced revenues as a result of the hurricanes and earthquakes during third quarter 2017\. On a unit basis, Passenger revenues was relatively flat\. Load factor remained solid at 83\.9 percent\.

Freight revenues for 2017 increased by $2 million, or 1\.2 percent, compared with 2016, primarily due to increased demand\.

Other revenues for 2017 increased by $160 million, or 15\.2 percent, compared with 2016, primarily due to an increase in revenues associated with cardholder spend on the Company's co\-branded Chase® Visa credit card\.

**Operating Expenses**

Operating expenses for 2017 increased by $972 million, or 5\.8 percent, compared with 2016, while capacity increased 3\.6 percent over the same period\. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs\. The following table presents the Company's Operating expenses per ASM for 2017 and 2016, followed by explanations of these changes on a per ASM basis and dollar basis:

|                                    |                             |                             |             |             |
| ---------------------------------- | --------------------------- | --------------------------- | ----------- | ----------- |
|                                    | **Year ended December 31,** | **Year ended December 31,** |             |             |
|                                    | **2017**                    | **2016**                    | **Per ASM** | **Percent** |
| (in cents, except for percentages) | **As Recast**               | **As Recast**               | **change**  | **change**  |
| Salaries, wages, and benefits      | 4\.74¢                      | 4\.57¢                      | 0\.17¢      | 3\.7 %      |
| Fuel and oil                       | 2\.65                       | 2\.56                       | 0\.09       | 3\.5        |
| Maintenance materials and repairs  | 0\.65                       | 0\.70                       | (0\.05)     | (7\.1)      |
| Landing fees and airport rentals   | 0\.84                       | 0\.82                       | 0\.02       | 2\.4        |
| Depreciation and amortization      | 0\.79                       | 0\.82                       | (0\.03)     | (3\.7)      |
| Other operating expenses           | 1\.86                       | 1\.82                       | 0\.04       | 2\.2        |
| Total                              | 11\.53¢                     | 11\.29¢                     | 0\.24¢      | 2\.1 %      |

Operating expenses per ASM for 2017 increased 2\.1 percent, compared with 2016, primarily due to wage rate increases, increases in market jet fuel prices, and charges associated with the grounding of the Company's remaining Classic aircraft\. Operating expenses in 2016 included $356 million of accrued ratification bonuses, associated with collective\-

46


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

As part of the integration, we have been working to bring represented Alaska Airlines and Virgin America work groups under single collective bargaining agreements\. The process for combining workgroups begins with the union filing a petition with the National Mediation Board (NMB), at which point the NMB performs a review to assess a ‘single carrier determination’ for the airlines\. Following this single carrier determination, the NMB makes a representation determination depending on size of the pre\-merger bargaining units and will either extend the certification if one is significantly larger than the other or require a vote\. Once representation is determined, the NMB certifies the union as the bargaining representative for the work group\. The parties must also work together to achieve agreed upon single collective bargaining agreements\. Integration also requires the pre\-merger work groups to agree upon and finalize integrated seniority lists\. As of December 31, 2017 we have labor integration agreements with pilots and clerical, office, and passenger services employees, meaning all agreements are completed to define how and when we will combine the Alaska and Virgin America groups into one\. The remaining work groups are still in process of completing similar such agreements\. The time frame to reach single CBA and full transition to work rules for each group will vary\.

At December 31, 2017, labor unions represented 84% of Alaska’s, 84% of Virgin America's, 44% of Horizon’s, and 90% of McGee Air Services' employees\.

Our relations with U\.S\. labor organizations are governed by the Railway Labor Act (RLA)\. Under the RLA, collective bargaining agreements do not expire but instead become amendable as of a stated date\. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner prescribed by the RLA and/or described in the agreement\. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the NMB to initiate a process including mediation, arbitration, and a potential “cooling off” period that must be followed before either party may engage in self\-help\.

 14


Annual Report of Southwest Airlines Co\. for year 2017

***Postretirement Benefit Plans***

The Company provides postretirement benefits to qualified retirees in the form of medical and dental coverage\. Employees must meet minimum levels of service and age requirements as set forth by the Company, or as specified in collective\-bargaining agreements with specific workgroups\. Employees meeting these requirements, as defined, may use accrued unused sick time to pay for medical and dental premiums from the age of retirement until age 65\.

The following table shows the change in the accumulated postretirement benefit obligation (APBO) for the years ended December 31, 2017 and 2016:

|                             |          |          |
| --------------------------- | -------- | -------- |
| **(in millions)**           | **2017** | **2016** |
| APBO at beginning of period | $256     | $201     |
| Service cost                | 18       | 13       |
| Interest cost               | 11       | 9        |
| Benefits paid               | (8)      | (6)      |
| Actuarial (gain)/loss       | (2)      | 38       |
|  Plan amendments            | —        | 1        |
| APBO at end of period       | $275     | $256     |

All plans are unfunded, and benefits are paid as they become due\. Estimated future benefit payments expected to be paid are $8 million in 2018, $10 million in 2019, $11 million in 2020, $12 million in 2021, $14 million in 2022, and $101 million for the next five years thereafter\.

The funded status (the difference between the fair value of plan assets and the projected benefit obligations) of the Company’s consolidated benefit plans are recognized in the Consolidated Balance Sheet, with a corresponding adjustment to AOCI\. The following table reconciles the funded status of the plans to the accrued postretirement benefit cost recognized in Other non\-current liabilities on the Company’s Consolidated Balance Sheet at December 31, 2017 and 2016\.

|                                               |          |          |
| --------------------------------------------- | -------- | -------- |
| **(in millions)**                             | **2017** | **2016** |
| Funded status                                 | $(275)   | $(256)   |
| Unrecognized net actuarial loss               | 5        | 7        |
| Unrecognized prior service cost               | 4        | 7        |
| Accumulated other comprehensive loss          | (9)      | (14)     |
| Cost recognized on Consolidated Balance Sheet | $(275)   | $(256)   |

The consolidated periodic postretirement benefit cost for the years ended December 31, 2017, 2016, and 2015, included the following:

|                                          |          |          |          |
| ---------------------------------------- | -------- | -------- | -------- |
| **(in millions)**                        | **2017** | **2016** | **2015** |
| Service cost                             | $18      | $13      | $11      |
| Interest cost                            | 11       | 9        | 7        |
| Amortization of prior service cost       | 3        | 3        | 3        |
| Recognized actuarial gain                | —        | —        | (3)      |
| Net periodic postretirement benefit cost | $32      | $25      | $18      |

Unrecognized prior service cost is expensed using a straight\-line amortization of the cost over the average future service of Employees expected to receive benefits under the plans\. Actuarial gains are amortized utilizing the minimum amortization method\. The following actuarial assumptions were used to account for the Company’s postretirement benefit plans at December 31,2017, 2016, and 2015:

106


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

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

August 2015 to August 2016 and from May 2018 to August 2018\. Mr\. Laderman served as Senior Vice President Finance and Treasurer for the Company from 2010 to 2013\. From 2001 to 2010, Mr\. Laderman served as Senior Vice President of Finance and Treasurer for Continental\. Mr\. Laderman joined Continental in 1988 as senior director legal affairs, finance and aircraft programs\.

**Oscar Munoz\.** Age 60\. Mr\. Munoz has served as Chief Executive Officer of UAL and United since September 2015, and also as President of UAL and United from September 2015 until August 2016\. From February 2015 to September 2015, Mr\. Munoz served as President and Chief Operating Officer of CSX Corporation ("CSX"), a railroad and intermodal transportation services company, overseeing operations, sales and marketing, human resources, service design and information technology\. Prior to his appointment as President and Chief Operating Officer of CSX, Mr\. Munoz served as Executive Vice President and Chief Operating Officer of CSX from January 2012 to February 2015 and as Executive Vice President and Chief Financial Officer of CSX from 2003 to 2012\. Mr\. Munoz has been a member of the UAL Board of Directors since 2010\.

**Andrew Nocella\.** Age 49\. Mr\. Nocella has served as Executive Vice President and Chief Commercial Officer of UAL and United since September 2017\. From February 2017 to September 2017, he served as Executive Vice President and Chief Revenue Officer of UAL and United\. Prior to joining the Company, from August 2016 to February 2017, Mr\. Nocella served as Senior Vice President, Alliances and Sales of American Airlines, Inc\. From December 2013 to August 2016, he served as Senior Vice President and Chief Marketing Officer of American Airlines, Inc\. From August 2007 to December 2013, he served as Senior Vice President, Marketing and Planning of US Airways\.

There are no family relationships among the executive officers or the directors of UAL\. The executive officers are elected by UAL's Board of Directors each year and hold office until the next annual meeting of stockholders, until their successors are elected and qualified, or until their earlier death, resignation or removal\.

The Company has a code of ethics, the "Code of Ethics and Business Conduct," for its directors, officers and employees\. The code serves as a "Code of Ethics" as defined by SEC regulations, and as a "Code of Conduct" under Nasdaq Listing Rule 5610\. The code is available on the Company's investor relations website at ir\.united\.com\. Waivers granted to certain officers from compliance with or future amendments to the code will be disclosed on the Company's investor relations website in accordance with Item 5\.05 of Form 8\-K\.

|               |                              |
| ------------- | ---------------------------- |
| **ITEM 11\.** | **EXECUTIVE COMPENSATION\.** |

Information required by this item with respect to UAL is incorporated by reference from UAL's definitive proxy statement for its 2019 Annual Meeting of Stockholders under the captions "Executive Compensation," "2018 Director Compensation" and "Corporate Governance—Compensation Committee Interlocks and Insider Participation\."

Information required by this item with respect to United is omitted pursuant to General Instruction I(2)(c) of Form 10\-K\.

|               |                                                                                |
| ------------- | ---------------------------------------------------------------------------------------------------- |
| **ITEM 12\.** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS\.** |

Information required by this item with respect to UAL is incorporated by reference from UAL's definitive proxy statement for its 2019 Annual Meeting of Stockholders under the caption "Beneficial Ownership of Securities\."

Information required by this item with respect to United is omitted pursuant to General Instruction I(2)(c) of Form 10\-K\.

|                |                                                                                |
| -------------- | ------------------------------------------------------------------------------- |
| **ITEM 13\.**  | **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE\.** |

Information required by this item with respect to UAL is incorporated by reference from UAL's definitive proxy statement for its 2019 Annual Meeting of Stockholders under the captions "Corporate Governance—Certain Relationships and Related Transactions," "Corporate Governance—Committees of the Board" and "Corporate Governance—Director Independence\."

Information required by this item with respect to United is omitted pursuant to General Instruction I(2)(c) of Form 10\-K\.

|               |                                               |
| ------------- | --------------------------------------------- |
| **ITEM 14\.** | **PRINCIPAL ACCOUNTANT FEES AND SERVICES\.**  |

The Audit Committee of the UAL Board of Directors has adopted a policy on pre\-approval of services of the Company's independent registered public accounting firm\. As a wholly\-owned subsidiary of UAL, United's audit services are determined by UAL\. The policy provides that the Audit Committee shall pre\-approve all audit and non\-audit services to be provided to UAL and its subsidiaries and affiliates by its independent auditors\. The process by which this is carried out is as follows:

94


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

In an effort to manage our exposure to the risk associated with our variable rate debt, we periodically enter into interest rate swaps\. We designate interest rate contracts used to convert the interest rate exposure on a portion of our debt portfolio from a floating rate to a fixed rate as cash flow hedges, while those contracts converting our interest rate exposure from a fixed rate to a floating rate are designated as fair value hedges\.

We also have exposure to market risk from adverse changes in interest rates associated with our cash and cash equivalents and benefit plan obligations\. Market risk associated with our cash and cash equivalents relates to the potential decline in interest income from a decrease in interest rates\. Pension, postretirement, postemployment and worker's compensation obligation risk relates to the potential increase in our future obligations and expenses from a decrease in interest rates used to discount these obligations\.

Foreign Currency Exchange Rate Risk

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

In November 2019, we entered into a three and a half\-year U\.S\. dollar\-South Korean won ("KRW") cross currency swap with a notional value of 177 billion KRW\. This swap is intended to mitigate foreign currency volatility resulting from our KRW\-denominated investment in Hanjin\-KAL\. During the year ended December 31, 2019, we recorded an unrealized loss on this swap of $3 million, which is reflected in gain/(loss) on investments, net within non\-operating expense\.

In January 2018, we entered into a  three\-year U\.S\. dollar\-Euro cross currency swap with a notional value of €375 million\. This swap was intended to mitigate foreign currency volatility resulting from our Euro\-denominated investment in Air France\-KLM\. In response to favorable changes in interest rates and the U\.S\. dollar\-Euro exchange rate, we settled the cross currency swap in August 2018\. Upon settlement, we recognized gains of $18 million in miscellaneous in our income statement within non\-operating expense\. Subsequently, we entered into a new U\.S\. dollar\-Euro cross currency swap with a notional value of €397 million and a maturity date in December 2020\. During the years ended December 31, 2019 and 2018, we recorded an unrealized gain of $13 million and an unrealized loss of $4 million, respectively, on this swap which is reflected in gain/(loss) on investments, net within non\-operating expense\.

Hedge Position as of December 31, 2019

|                                             |                                             |                                             |                             |                             |                                            |                                            |                     |                     |                     |                            |                         |                           |                              |                        |      |
|:------------------------------------------- |:------------------------------------------- |:------------------------------------------- | ---------------------------:| ---------------------------:|:------------------------------------------ |:------------------------------------------ |:-------------------:|:-------------------:|:-------------------:| --------------------------:| -----------------------:| -------------------------:| ----------------------------:| ----------------------:| ----:|
| (in millions)                               | (in millions)                               | (in millions)                               |                      Volume |                      Volume |                                            |                                            | Final Maturity Date | Final Maturity Date | Final Maturity Date | Prepaid Expenses and Other | Other Noncurrent Assets | Other Accrued Liabilities | Other Noncurrent Liabilities | Hedge Derivatives, net |
| *Designated as hedges*                      | *Designated as hedges*                      | *Designated as hedges*                      |                             |                             |                                            |                                            |                     |                     |                     |                            |                         |                           |                              |                        |
| Interest rate contracts (fair value hedges) | Interest rate contracts (fair value hedges) | Interest rate contracts (fair value hedges) |                       1,872 |                       1,872 | U\.S\. dollars                             | U\.S\. dollars                             |     April 2028      |     April 2028      |     April 2028      |                       $ 12 |                    $ 53 |                     $ (4) |                          $ — |                   $ 61 |
| *Not designated as hedges*                  | *Not designated as hedges*                  | *Not designated as hedges*                  |                             |                             |                                            |                                            |                     |                     |                     |                            |                         |                           |                              |                        |
| Foreign currency exchange contract          | Foreign currency exchange contract          | Foreign currency exchange contract          |                         397 |                         397 | Euros                                      | Euros                                      |    December 2020    |    December 2020    |    December 2020    |                          9 |                       — |                         — |                            — |                      9 |
| Foreign currency exchange contract          | Foreign currency exchange contract          | Foreign currency exchange contract          |                     177,045 |                     177,045 | South Korean won                           | South Korean won                           |     April 2023      |     April 2023      |     April 2023      |                          1 |                       — |                         — |                          (4) |                    (3) |
| Fuel hedge contracts                        | Fuel hedge contracts                        | Fuel hedge contracts                        |                         243 |                         243 | gallons \- crude oil and refined products  | gallons \- crude oil and refined products  |      July 2020      |      July 2020      |      July 2020      |                         16 |                       — |                      (15) |                            — |                      1 |
| Total derivative contracts                  | Total derivative contracts                  | Total derivative contracts                  | Total derivative contracts  | Total derivative contracts  |                                            |                                            |                     |                     |                     |                            |                    $ 38 |                      $ 53 |                       $ (19) |                  $ (4) | $ 68 |

70


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

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

|                |                     |
| -------------- | ------------------- |
|  **ITEM 1A\.** | **RISK FACTORS\.**  |

*The following risk factors should be read carefully when evaluating the Company’s business and the forward\-looking statements contained in this report and other statements the Company or its representatives make from time to time\. Any of the following risks could materially and adversely affect the Company’s business, operating results, financial condition and the actual outcome of matters as to which forward\-looking statements are made in this report\.*

***Global economic, political and industry conditions constantly change and unfavorable conditions may have a material adverse effect on the Company’s business and results of operations\.***

The Company’s business and results of operations are significantly impacted by global economic and industry conditions\. The airline industry is highly cyclical, and the level of demand for air travel is correlated to the strength of the U\.S\. and global economies\. The Company is a global business with operations outside of the United States from which it derives significant operating revenues\. The Company’s international operations are a vital part of its worldwide airline network\. Volatile economic, political and market conditions in these international regions may have a negative impact on the Company’s operating results and its ability to achieve its business objectives\.

Robust demand for the Company’s air transportation services depends largely on favorable economic conditions, including the strength of the domestic and foreign economies, low unemployment levels, strong consumer confidence levels and the availability of consumer and business credit\. Air transportation is often a discretionary purchase that leisure travelers may limit or eliminate during difficult economic times\. In addition, during periods of unfavorable economic conditions, business travelers usually reduce the volume of their travel, either due to cost\-saving initiatives or as a result of decreased business activity requiring travel\. During such periods, the Company’s business and results of operations may be adversely affected due to significant declines in industry passenger demand, particularly with respect to the Company’s business and premium cabin travelers, and a reduction in fare levels\.

Stagnant or weakening global economic conditions either in the United States or in other geographic regions, and any future volatility in U\.S\. and global financial and credit markets may have a material adverse effect on the Company’s revenues, results of operations and liquidity\. If such economic conditions were to disrupt capital markets in the future, the Company may be unable to obtain financing on acceptable terms (or at all) to refinance certain maturing debt and to satisfy future capital commitments\.

In June 2016, United Kingdom (“UK”) voters voted for the UK to exit the EU\. The UK parliament voted in favor of allowing the government to commence negotiations to determine the future terms of the UK’s relationship with the EU, including the terms of trade between the UK and the EU and other nations\. A process of negotiation is now taking place to determine the future terms of the UK’s relationship with the EU\. Depending on the outcome of these negotiations, we could face new challenges in our operations, such as instability in global financial and foreign exchange markets, including volatility in the value of the British pound and European euro, additional travel restrictions on passengers traveling between the UK and other EU countries and legal uncertainty and potentially divergent national laws and regulations\. These adverse effects in European market conditions could negatively impact the Company’s business, results of operations and financial condition\.

In addition, significant or volatile changes in exchange rates between the U\.S\. dollar and other currencies may have a material adverse impact upon the Company’s liquidity, revenues, costs and operating results\.

***The airline industry is highly competitive and susceptible to price discounting and changes in capacity, which could have a material adverse effect on the Company\.***

The U\.S\. airline industry is characterized by substantial price competition including from low\-cost carriers\. The significant market presence of low\-cost carriers, which engage in substantial price discounting, may diminish our ability to achieve sustained profitability on domestic and international routes\.

10


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

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

Results of Operations \-  2017  Compared to  2016

Operating Revenue

|                   |                             |                             |              |                |
| ----------------- | --------------------------- | --------------------------- | ------------ | -------------- |
|                   | **Year Ended December 31,** | **Year Ended December 31,** | **Increase** | **% Increase** |
| **(in millions)** | **2017**                    | **2016**                    | **Increase** | **% Increase** |
| Passenger         | $34,819                     | $33,777                     | 1,042        | 3\.1%          |
| Cargo             | 729                         | 668                         | 61           | 9\.1%          |
| Other             | 5,696                       | 5,194                       | 502          | 9\.7%          |
| Total             | $41,244                     | $39,639                     | $1,605       | 4\.0%          |

Passenger Revenue

|                   |                                  |                                                                      |                                                                      |                                                                      |                                                                      |                                                                      |                                                                      |                                                                      |
| ----------------- | -------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- |
|                   |                                  | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** |
| **(in millions)** | **Year Ended December 31, 2017** | **Passenger Revenue**                                                | **RPMs**  **(Traffic)**                                              | **ASMs (Capacity)**                                                  | **Passenger Mile Yield**                                             | **PRASM**                                                            | **Load Factor**                                                      | **Load Factor**                                                      |
| Mainline          | $18,878                          | 5\.3 %                                                               | 4\.1 %                                                               | 3\.6 %                                                               | 1\.1 %                                                               | 1\.7 %                                                               | 0\.4                                                                 | pts                                                                  |
| Regional carriers | 5,714                            | 0\.8 %                                                               | (2\.5)%                                                              | (2\.6)%                                                              | 3\.4 %                                                               | 3\.4 %                                                               | —                                                                    | pts                                                                  |
| Domestic          | 24,592                           | 4\.2 %                                                               | 3\.0 %                                                               | 2\.5 %                                                               | 1\.1 %                                                               | 1\.7 %                                                               | 0\.4                                                                 | pts                                                                  |
| Atlantic          | 5,292                            | 2\.1 %                                                               | 4\.8 %                                                               | 0\.3 %                                                               | (2\.6)%                                                              | 1\.7 %                                                               | 3\.6                                                                 | pts                                                                  |
| Pacific           | 2,366                            | (9\.6)%                                                              | (9\.0)%                                                              | (7\.7)%                                                              | (0\.7)%                                                              | (2\.0)%                                                              | (1\.2)                                                               | pts                                                                  |
| Latin America     | 2,569                            | 8\.3 %                                                               | 4\.2 %                                                               | 2\.0 %                                                               | 4\.0 %                                                               | 6\.2 %                                                               | 1\.8                                                                 | pts                                                                  |
| Total             | $34,819                          | 3\.1 %                                                               | 2\.2 %                                                               | 1\.0 %                                                               | 0\.9 %                                                               | 2\.1 %                                                               | 1\.0                                                                 | pt                                                                   |

Passenger revenue  increased  $1\.0 billion  over the prior year\. PRASM  increased  2\.1%  and passenger mile yield  increased  0\.9%  on  1\.0%  higher  capacity\. Load factor was  1\.0 point  higher  than the prior year at  85\.6% \.

Unit revenues of the domestic region  increased  1\.7% , resulting from our commercial initiatives, including differentiated products for our customers, known as Branded Fares, and an improving revenue environment\. We continue to differentiate our product offerings and enable customer choice through segmentation, including offering Basic Economy throughout our domestic network\. Our domestic operations closed 2017 with three consecutive quarters of year\-over\-year unit revenue growth, with robust demand for both business and leisure\. We continue to see improvements in business markets with 81 of the top 100 business markets producing positive yields during the December 2017 quarter, up from 50% from earlier in the year\.

Passenger revenues related to our international regions  increased  0\.5%  year\-over\-year primarily due to strength in the Atlantic and Latin America regions, partially offset by revenue declines in the Pacific\. During 2017, we continued to roll out the expansion of our Branded Fares product throughout the international regions\.

The Atlantic region closed 2017 with three consecutive quarters of year\-over\-year unit revenue growth on strong business class bookings\. We continue to leverage our alliance partners' hub positions in Europe's leading business markets of London, Amsterdam and Paris to increase the volume of U\.S\. point\-of\-sale traffic\. The U\.K\. was particularly robust, with unit revenue growth throughout 2017, including double\-digit growth in the second half of 2017\. During the year, we expanded our Basic Economy product to mitigate the impact of ultra\-low cost carrier capacity increases\.

Unit revenue declines in the Pacific primarily resulted from industry capacity growth in the region\. We continued to optimize the Pacific region with a  7\.7%  reduction in capacity during 2017, focused on refining the network to generate incremental value from our Chinese and Korean alliances and differentiating our product offerings, including expanding Basic Economy and selling Comfort\+ as a separate fare product\. During 2017, we reached an agreement to create a trans\-Pacific joint venture with Korean Air, offering an enhanced and expanded network, industry\-leading products and service, and a seamless customer experience between the U\.S\. and Asia\. We also retired our last B\-747\-400 and introduced our new A350\-900 with Delta One suites and the Delta Premium Select cabin on routes from Detroit to Tokyo\-Narita and Seoul\-Incheon, which are driving improvements in both profitability and customer feedback\. These efforts are beginning to show results as the Pacific returned to positive PRASM growth during the December 2017 quarter for the first time in more than four years\.

 28


Annual Report of Southwest Airlines Co\. for year 2018

is delivered, at which time deposits previously made are deducted from the final purchase price of the aircraft and are reclassified as Flight equipment\. See Part I, Item 2 for a complete table of the Company’s firm deliveries and options for Boeing 737 MAX 7 and 737 MAX 8 aircraft, and Note 4 to the Consolidated Financial Statements for the financial commitments related to these firm deliveries\.

The leasing of aircraft (including the sale and leaseback of aircraft) provides flexibility to the Company as a source of financing\. Although the Company is responsible for all maintenance, insurance, and expense associated with operating leased aircraft, and retains the risk of loss for these aircraft, it has generally not made guarantees to the lessors regarding the residual value (or market value) of the aircraft at the end of the lease terms\. As of December 31, 2018, the Company had 198 leased aircraft, including 75 B717s subleased to Delta\. Of these leased aircraft, 124 are under operating leases, including 73 B717s subleased to Delta\. See Note 7 to the Consolidated Financial Statements for further information on this transaction\. Assets and obligations under operating leases are not included in the Company’s Consolidated Balance Sheet\. Disclosure of the contractual obligations associated with the Company’s leased aircraft is included below\.

The Company is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business and may choose to provide letters of credit in place of posting cash collateral related to its fuel hedging positions\. Although the letters of credit are off\-balance sheet, the majority of the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet\. Outstanding letters of credit totaled $170 million at December 31, 2018\.

The following table aggregates the Company’s material expected contractual obligations and commitments as of December 31, 2018:

|                                          |                                         |                                         |                                         |                                         |                                         |
| ---------------------------------------- | --------------------------------------- | --------------------------------------- | --------------------------------------- | --------------------------------------- | --------------------------------------- |
|                                          | **Obligations by period (in millions)** | **Obligations by period (in millions)** | **Obligations by period (in millions)** | **Obligations by period (in millions)** | **Obligations by period (in millions)** |
| **Contractual obligations**              | **2019**                                | **2020 \- 2021**                        | **2022 \- 2023**                        | **Thereafter**                          | **Total**                               |
| Long\-term debt (a)                      | $506                                    | $821                                    | $414                                    | $797                                    | $2,538                                  |
| Interest commitments \- fixed (b)        | 64                                      | 95                                      | 66                                      | 94                                      | 319                                     |
| Interest commitments \- floating (c)     | 37                                      | 30                                      | 9                                       | 8                                       | 84                                      |
| Facility construction commitments (d)    | 70                                      | 141                                     | 135                                     | 168                                     | 514                                     |
| Facility operating lease commitments     | 36                                      | 65                                      | 31                                      | 42                                      | 174                                     |
| Aircraft operating lease commitments (e) | 220                                     | 417                                     | 263                                     | 431                                     | 1,331                                   |
| Aircraft capital lease commitments (f)   | 111                                     | 214                                     | 197                                     | 335                                     | 857                                     |
| Aircraft purchase commitments (g)        | 924                                     | 3,042                                   | 2,798                                   | 3,444                                   | 10,208                                  |
| Other commitments                        | 144                                     | 188                                     | 115                                     | 325                                     | 772                                     |
| Total contractual obligations            | $2,112                                  | $5,013                                  | $4,028                                  | $5,644                                  | $16,797                                 |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------- |
| (a) | Includes principal only\. See Note  6  to the Consolidated Financial Statements\. |

|     |                                                                          |
| --- | ------------------------------------------------------------------------ |
| (b) | Related to fixed\-rate debt (either at issuance or through swaps) only\. |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (c) | Interest obligations associated with floating\-rate debt (either at issuance or through swaps) is estimated utilizing forward interest rate curves as of  December 31, 2018 , and can be subject to significant fluctuation\. |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (d) | Includes some lease payments that are considered variable which have a related construction obligation\. See Note  4  to the Consolidated Financial Statements\.  |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------- |
| (e) | Includes the impact of the B717 lease/sublease transaction entered into in  2012 \. See Note  7  to the Consolidated Financial Statements\. |

|     |                                                     |
| --- | --------------------------------------------------- |
| (f) | Includes principal and interest on capital leases\. |

|     |                           |
| --- | ------------------------- |
| (g) | Firm orders from Boeing\. |

**Airport Projects**

The Company has commitments associated with various airport improvement projects that will impact its future liquidity needs in differing ways\. These projects include the construction of new facilities and the rebuilding or modernization of existing facilities and are discussed in more detail in Note 4 to the Consolidated Financial Statements\.

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