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

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

us to pay additional amounts to the applicable lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law\.

In certain transactions, including certain aircraft financing leases and loans, the lessors, lenders and/or other parties have rights to terminate the transaction based on changes in foreign tax law, illegality or certain other events or circumstances\. In such a case, we may be required to make a lump sum payment to terminate the relevant transaction\.

We have general indemnity clauses in many of our airport and other real estate leases where we as lessee indemnify the lessor (and related parties) against liabilities related to our use of the leased property\. Generally, these indemnifications cover liabilities resulting from the negligence of the indemnified parties, but not liabilities resulting from the gross negligence or willful misconduct of the indemnified parties\. In addition, we provide environmental indemnities in many of these leases for contamination related to our use of the leased property\.

Under certain contracts with third parties, we indemnify the third\-party against legal liability arising out of an action by the third\-party, or certain other parties\. The terms of these contracts vary and the potential exposure under these indemnities cannot be determined\. We have liability insurance protecting us for some of the obligations we have undertaken under these indemnities\.

American is required to make principal and interest payments for certain special facility revenue bonds issued by municipalities primarily to build or improve airport facilities and purchase equipment, which are leased to American\. The payment of principal and interest of certain special facility revenue bonds is guaranteed by AAG\. As of December 31, 2018, the remaining lease payments through 2035 guaranteeing the principal and interest on these bonds are $588 million and the current carrying amount of the associated operating lease liability in the accompanying consolidated balance sheet is $321 million\.

As of December 31, 2018, AAG had issued guarantees covering approximately $769 million principal amount of American’s special facility revenue bonds (and interest thereon) and $8\.4 billion principal amount of American’s secured debt (and interest thereon), including the Credit Facilities and certain EETC financings\.

***(g) Credit Card Processing Agreements***

We have agreements with companies that process customer credit card transactions for the sale of air travel and other services\. Our agreements allow these credit card processing companies, under certain conditions, to hold an amount of our cash (referred to as a holdback) equal to a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation\. Additional holdback requirements in the event of material adverse changes in our financial condition will reduce our liquidity in the form of unrestricted cash by the amount of the holdbacks\. These credit card processing companies are not currently entitled to maintain any holdbacks pursuant to these requirements\.

***(h) Labor Negotiations***

As of December 31, 2018, we employed approximately 128,900 active full\-time equivalent employees, of which 26,000 were employed by our regional operations\. Approximately 84% of employees are covered by collective bargaining agreements (CBAs) with various labor unions and approximately 22% of employees are covered by CBAs that will become amendable within one year\. Negotiations are continuing for joint collective bargaining agreements (JCBAs) covering our mainline maintenance, fleet service, stock clerks, maintenance control technicians and maintenance training instructors as well as for CBAs covering certain employee groups at our wholly\-owned regional subsidiaries\. Additionally, the post\-Merger JCBAs covering our pilots and flight attendants, while not yet amendable, provide the unions with the right to elect to commence negotiations for new collective bargaining agreements in advance of each JCBA’s amendable date\. Each of the unions has exercised these rights and negotiations are underway for new agreements as described in Part I, Item 1\. Business \- “*Employees and Labor Relations*”\. There is no assurance that a successful or timely resolution of these labor negotiations will be achieved\.

124


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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1\. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Delta Air Lines, Inc\., a Delaware corporation, provides scheduled air transportation for passengers and cargo throughout the United States ("U\.S\.") and around the world\. Our Consolidated Financial Statements include the accounts of Delta Air Lines, Inc\. and our wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U\.S\. ("GAAP")\. We do not consolidate the financial statements of any company in which we have voting rights of 50% or less\. We are not the primary beneficiary of, nor do we have a controlling financial interest in, a material variable interest entity\. Accordingly, we have not consolidated a material variable interest entity\.

We have marketing alliances with other airlines to enhance our access to domestic and international markets\. These arrangements may include codesharing, reciprocal loyalty program benefits, shared or reciprocal access to passenger lounges, joint promotions, common use of airport gates and ticket counters, ticket office co\-location and other marketing agreements\. We have received antitrust immunity for certain marketing arrangements, which enables us to offer a more integrated route network and develop common sales, marketing and discount programs for customers\. Some of our marketing arrangements provide for the sharing of revenues and expenses\. Revenues and expenses associated with collaborative arrangements are presented on a gross basis in the applicable line items on our Consolidated Statements of Operations ("income statement")\.

We have reclassified certain prior period amounts to conform to the current period presentation\. Unless otherwise noted, all amounts disclosed are stated before consideration of income taxes\.

Use of Estimates

We are required to make estimates and assumptions when preparing our Consolidated Financial Statements in accordance with GAAP\. These estimates and assumptions affect the amounts reported in our Consolidated Financial Statements and the accompanying notes\. Actual results could differ materially from those estimates\.

Recent Accounting Standards

Standards Effective in Future Years

Credit Losses\.  In 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No\. 2016\-13, "Financial Instruments\-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments\." Under this ASU an entity is required to utilize an “expected credit loss model” on certain financial instruments, including trade and financing receivables\. This model requires consideration of a broader range of reasonable and supportable information and requires an entity to estimate expected credit losses over the lifetime of the asset\. This standard is effective for interim and annual reporting periods beginning after December 15, 2019\. We do not expect adoption of this standard to have a material impact on our consolidated financial statements\. We will adopt the standard effective January 1, 2020\.

Recently Adopted Standards

Comprehensive Income\.  In February 2018, the FASB issued ASU No\. 2018\-02, "Income Statement—Reporting Comprehensive Income (Topic 220)\." This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income/(loss) ("AOCI") to retained earnings due to the U\.S\. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017\. We adopted this standard effective January 1, 2019 with the election not to reclassify $1\.2 billion of stranded tax effects, primarily related to our pension plans, from AOCI to retained earnings\.

58


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

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

Profit Sharing Program

Our broad\-based employee profit sharing program provides that, for each year in which we have an annual pre\-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees\. In determining the amount of profit sharing, the program defines profit as pre\-tax profit adjusted for profit sharing and certain other items\. For the years ended  December 31, 2017 ,  2016  and  2015 , we recorded expenses of   $1\.1 billion ,   $1\.1 billion  and   $1\.5 billion  under the profit sharing program, respectively\.

Effective October 1, 2017, we aligned our profit sharing plans under a single formula\. Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2\.5 billion of annual profit and 20% of annual profit above $2\.5 billion\. Prior to that time, the profit sharing program for pilots used this formula but for 2016 and the first nine months of 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit (as defined by the terms of the program) and, if we exceeded our prior\-year results, the program paid 20% of the year\-over\-year increase in profit to eligible employees\. For years prior to 2016, the profit sharing program for merit, ground and flight attendant employees paid according to the current formula\. Going forward, all eligible employees will be paid profit sharing under the current formula\.

NOTE 10 \. COMMITMENTS AND CONTINGENCIES

Aircraft Purchase and Lease Commitments

Our future aircraft purchase commitments totaled approximately   $18\.3 billion  at  December 31, 2017 :

|                   |           |
| ----------------- | --------- |
| **(in millions)** | **Total** |
| 2018              | $3,570    |
| 2019              | 3,370     |
| 2020              | 3,270     |
| 2021              | 3,880     |
| 2022              | 2,450     |
| Thereafter        | 1,740     |
| Total             | $18,280   |

Our future aircraft purchase commitments included the following aircraft at  December 31, 2017 :

|                   |                          |
| ----------------- | ------------------------ |
| **Aircraft Type** | **Purchase Commitments** |
| A321\-200         | 93                       |
| A321\-200neo      | 100                      |
| A330\-900neo      | 25                       |
| A350\-900         | 19                       |
| B\-737\-900ER     | 41                       |
| CS100             | 75                       |
| Total             | 353                      |

During 2017, we entered into agreements with Airbus to place an expanded A321\-200 order for   45  firm additional aircraft and to defer   10  of our A350\-900 aircraft deliveries set for 2019\-2020 by  two  to  three  years\. We also entered into an agreement with Airbus to order   100  A321\-200neo aircraft to start delivery in 2020 with the option to purchase an additional   100  A321\-200neo aircraft\.

 79


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

Fair Values of Derivative Instruments

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

|                                                       |                                                       |                                                       |      |  |  |  |      |
|:----------------------------------------------------- |:----------------------------------------------------- |:----------------------------------------------------- | ----:|:- |:- |:- | ----:|
|                                                       |                                                       |                                                       | 2019 |  |  |  | 2018 |
| Fuel hedge contracts (not designated as hedges)       | Fuel hedge contracts (not designated as hedges)       | Fuel hedge contracts (not designated as hedges)       |      |  |  |  |      |
| Prepaid expenses and other current assets             | Prepaid expenses and other current assets             | Prepaid expenses and other current assets             |  $ 8 |  |  |  |  $ 2 |
| Other assets                                          | Other assets                                          | Other assets                                          |    3 |  |  |  |    2 |
| Interest rate swaps (designated as hedges)            | Interest rate swaps (designated as hedges)            | Interest rate swaps (designated as hedges)            |      |  |  |  |      |
| Prepaid expenses and other current assets             | Prepaid expenses and other current assets             | Prepaid expenses and other current assets             |    1 |  |  |  |    3 |
| Other noncurrent assets                               | Other noncurrent assets                               | Other noncurrent assets                               |    2 |  |  |  |    7 |
| Other accrued liabilities                             | Other accrued liabilities                             | Other accrued liabilities                             |  (5) |  |  |  |  (3) |
| Other liabilities                                     | Other liabilities                                     | Other liabilities                                     |  (5) |  |  |  |  (4) |
| Losses in accumulated other comprehensive loss (AOCL) | Losses in accumulated other comprehensive loss (AOCL) | Losses in accumulated other comprehensive loss (AOCL) | (13) |  |  |  |  (1) |

The net cash paid for new fuel hedge positions and received from settlements was $19 million, $21 million and $12 million during 2019, 2018, and 2017\.

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

|                                                               |                                                               |                                                               |        |  |  |  |      |  |  |  |       |
|:------------------------------------------------------------- |:------------------------------------------------------------- |:------------------------------------------------------------- | ------:|:- |:- |:- | ----:|:- |:- |:- | -----:|
|                                                               |                                                               |                                                               |   2019 |  |  |  | 2018 |  |  |  |  2017 |
| Fuel hedge contracts (not designated as hedges)               | Fuel hedge contracts (not designated as hedges)               | Fuel hedge contracts (not designated as hedges)               |        |  |  |  |      |  |  |  |       |
| Gains (losses) recognized in Aircraft fuel                    | Gains (losses) recognized in Aircraft fuel                    | Gains (losses) recognized in Aircraft fuel                    | $ (10) |  |  |  |  $ 1 |  |  |  | $ (6) |
| Interest rate swaps (designated as hedges)                    | Interest rate swaps (designated as hedges)                    | Interest rate swaps (designated as hedges)                    |        |  |  |  |      |  |  |  |       |
| Losses recognized in Aircraft rent                            | Losses recognized in Aircraft rent                            | Losses recognized in Aircraft rent                            |    (3) |  |  |  |  (3) |  |  |  |   (5) |
| Gains (losses) recognized in other comprehensive income (OCI) | Gains (losses) recognized in other comprehensive income (OCI) | Gains (losses) recognized in other comprehensive income (OCI) |   (13) |  |  |  |    — |  |  |  |     1 |

The amounts shown as recognized in aircraft rent for cash flow hedges (interest rate swaps) represent the realized losses transferred out of AOCL to aircraft rent\. No gains or losses related to interest rate swaps on variable rate debt have been recognized in interest expense during 2019\. The amounts shown as recognized in OCI are prior to the losses recognized in aircraft rent during the period\. The Company expects $3 million to be reclassified from OCI to aircraft rent and $4 million to interest income within the next twelve months\.

64


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

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

general, each consortium lease agreement requires the consortium to make lease payments in amounts sufficient to pay the maturing principal and interest payments on the bonds\. As of December 31, 2017, approximately $1\.5 billion principal amount of such bonds were secured by significant fuel facility leases in which United participates, as to which United and each of the signatory airlines has provided indirect guarantees of the debt\. As of December 31, 2017, the Company’s contingent exposure was approximately $244 million principal amount of such bonds based on its recent consortia participation\. The Company’s contingent exposure could increase if the participation of other air carriers decreases\. The guarantees will expire when the tax\-exempt bonds are paid in full, which ranges from 2022 to 2049\. The Company did not record a liability at the time these indirect guarantees were made\.

***Regional Capacity Purchase\.*** As of December 31, 2017, United had 257 call options to purchase regional jet aircraft being operated by certain of its regional carriers with contract dates extending until 2029\. These call options are exercisable upon wrongful termination or breach of contract, among other conditions\. None of the call options were exercisable at December 31, 2017\.

***Credit Card Processing Agreements\.*** The Company has agreements with financial institutions that process customer credit card transactions for the sale of air travel and other services\. Under certain of the Company’s credit card processing agreements, the financial institutions in certain circumstances have the right to require that the Company maintain a reserve equal to a portion of advance ticket sales that has been processed by that financial institution, but for which the Company has not yet provided the air transportation\. Such financial institutions may require additional cash or other collateral reserves to be established or additional withholding of payments related to receivables collected if the Company does not maintain certain minimum levels of unrestricted cash, cash equivalents and short\-term investments (collectively, “Unrestricted Liquidity”)\. The Company’s current level of Unrestricted Liquidity is substantially in excess of these minimum levels\.

***Labor Negotiations\.*** As of December 31, 2017, United, including its subsidiaries, had approximately 89,800 employees\. Approximately 80% of United’s employees were represented by various U\.S\. labor organizations as of December 31, 2017\. The agreement with the International Brotherhood of Teamsters (the “IBT”) contains provisions that require the Company to align contract terms with other airlines’ workgroups under certain conditions\.

UNITE HERE is attempting to organize United’s Catering Operations employees, who are currently unrepresented, and filed an application to do so with the National Mediation Board on January 24, 2018\.

96


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

Other\.  Primarily includes globally\-diversified, risk\-managed commingled funds consisting mainly of equity, fixed income and commodity exposures\. Investments in these strategies are typically valued monthly by third\-party administrators or valuation agents with an annual audit performed by an independent third party\.

On an annual basis we assess the potential for adjustments to the fair value of all investments\. Certain of our investments valued using NAV as a practical expedient have a lag in the availability of data\. This primarily applies to private equity, private equity\-related strategies and real assets\. We solicit valuation updates from the investment fund managers and use their information and corroborating data from public markets to determine any needed fair value adjustments\.

Other

We also sponsor defined benefit pension plans for eligible employees in certain foreign countries\. These plans did not have a material impact on our Consolidated Financial Statements in any period presented\.

Profit Sharing Program

Our broad\-based employee profit sharing program provides that, for each year in which we have an annual pre\-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees\. In determining the amount of profit sharing, the program defines profit as pre\-tax profit adjusted for profit sharing and certain other items\. For the years ended December 31, 2019, 2018 and 2017, we recorded expenses of $1\.6 billion, $1\.3 billion and $1\.1 billion under the profit sharing program, respectively\.

Effective October 1, 2017, we aligned our profit sharing plans under a single formula\. Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2\.5 billion of annual profit and 20% of annual profit above $2\.5 billion\. Prior to that time, the profit sharing program for pilots used this formula but in the first nine months of 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit and, if we exceeded our prior\-year results, the program paid 20% of the year\-over\-year increase in profit to eligible employees\.

NOTE 11\. COMMITMENTS AND CONTINGENCIES

Aircraft Purchase Commitments

Our future aircraft purchase commitments totaled approximately $13\.7 billion at December 31, 2019:

|               |               |               |          |
|:------------- |:------------- |:------------- | --------:|
| (in millions) | (in millions) | (in millions) |    Total |
| 2020          | 2020          | 2020          |  $ 2,980 |
| 2021          | 2021          | 2021          |    3,740 |
| 2022          | 2022          | 2022          |    3,390 |
| 2023          | 2023          | 2023          |    1,640 |
| 2024          | 2024          | 2024          |      500 |
| Thereafter    | Thereafter    | Thereafter    |    1,440 |
| Total         | Total         | Total         | $ 13,690 |

Our future aircraft purchase commitments included the following aircraft at December 31, 2019:

|                    |                    |                    |                      |                      |
|:------------------ |:------------------ |:------------------ | --------------------:| --------------------:|
| Aircraft Type      | Aircraft Type      | Aircraft Type      | Purchase Commitments | Purchase Commitments |
| A220\-100          | A220\-100          | A220\-100          |                   17 |                   17 |
| A220\-300          | A220\-300          | A220\-300          |                   50 |                   50 |
| A321\-200          | A321\-200          | A321\-200          |                   31 |                   31 |
| A321\-200neo       | A321\-200neo       | A321\-200neo       |                  100 |                  100 |
| A330\-900neo ^(1)^ | A330\-900neo ^(1)^ | A330\-900neo ^(1)^ |                   33 |                   33 |
| A350\-900          | A350\-900          | A350\-900          |                   16 |                   16 |
| CRJ\-900           | CRJ\-900           | CRJ\-900           |                    6 |                    6 |
| Total              | Total              | Total              |                  253 |                  253 |

^(1)^ Includes  two A330\-900neo lease commitments with one in each of 2020 and 2021\.

86


Annual Report of Southwest Airlines Co\. for year 2019

operating or cash flow losses associated with the use of the long\-lived asset\. If an asset is deemed to be impaired, an impairment loss is recorded for the excess of the asset book value in relation to its estimated fair value\.

Leases

The Company determines if an arrangement is a lease at inception\. Operating leases are included in Operating lease right\-of\-use assets, Current operating lease liabilities, and Noncurrent operating lease liabilities in the Consolidated Balance Sheet\. Finance leases are included in Property and equipment, Current maturities of long\-term debt, and Long\-term debt less current maturities in the Consolidated Balance Sheet\.

Right\-of\-use assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease\. The lease liability is measured as the present value of the unpaid lease payments, and the right\-of\-use asset value is derived from the calculation of the lease liability\. Lease payments include fixed and in\-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, fees paid by the lessee to the owners of a special\-purpose entity for restructuring the transaction, and probable amounts the lessee will owe under a residual value guarantee\. Lease payments do not include (i) variable lease payments other than those that depend on an index or rate, (ii) any guarantee by the lessee of the lessor’s debt, or (iii) any amount allocated to non\-lease components, if such election is made upon adoption, per the provisions of the New Lease Standard\. The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments, since the Company does not know the actual implicit rates in its leases\. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate\. Lease expense for operating lease payments is recognized on a straight\-line basis over the lease term\. The Company combines lease and nonlease components for all asset groups\. The Company's lease term includes any option to extend the lease when it is reasonably certain to be exercised based on considering all relevant economic factors\.

Aircraft and Engine Maintenance

The cost of scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are charged to Maintenance materials and repairs expense within the accompanying Consolidated Statement of Income as incurred\.

The Company has maintenance agreements related to certain of its aircraft engines with external service providers, including agreements that effectively transfer the risk of performance of such work to the service provider\. Under the agreements where the risk of performance is deemed transferred to the counterparty, the appropriate expense is recorded commensurate with the period in which the corresponding level of service is provided\. Generally, expense is recorded on a straight\-line basis over the term of the agreement based on the Company's best estimate of expected future aircraft utilization\. For its engine maintenance contracts that do not transfer risk to the service provider, the Company records expense on a time and materials basis when an engine repair event takes place\.

Modifications that significantly enhance the operating performance or extend the useful lives of aircraft or engines are capitalized and amortized over the remaining life of the asset\.

Goodwill and Intangible Assets

The Company applies a fair value based impairment test to the carrying value of goodwill and indefinite\-lived intangible assets annually on October 1st, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred\. The Company assesses the value of goodwill and indefinite\-lived assets under either a qualitative or quantitative approach\. Under a qualitative approach, the Company considers various market factors, including applicable key assumptions listed below\. These factors are analyzed to determine if events and circumstances could reasonably have affected the fair value of goodwill and indefinite\-lived intangible assets\. If the Company determines that it is more likely than not that an indefinite\-lived intangible asset is impaired, the quantitative approach

71


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

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

1\. Basis of Presentation and Summary of Significant Accounting Policies

(a) Basis of Presentation

American Airlines, Inc\. (American) is a Delaware corporation whose primary business activity is the operation of a major network air carrier\. American is the principal wholly\-owned subsidiary of American Airlines Group Inc\. (AAG), which owns all of American’s outstanding common stock, par value   $1\.00  per share\. On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc\. (US Airways Group), a Delaware corporation, which survived as a wholly\-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger)\. Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc\. All significant intercompany transactions have been eliminated\.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements\. Actual results could differ from those estimates\. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long\-lived and intangible assets, the loyalty program, as well as pension and retiree medical and other postretirement benefits\.

(b) Recent Accounting Pronouncements

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, American 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\. American 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 American’s consolidated balance sheet due to the recognition of approximately   $10 billion  of lease liabilities with corresponding right\-of\-use assets for operating leases\.

Additionally, American 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\.

ASU 2018\-02: Income Statement  –  Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This ASU provides the option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings due to the U\.S\. federal corporate income tax rate change as a result of H\.R\. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act)\. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previous U\.S\. federal corporate income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U\.S\. federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations\. This standard is effective for interim and annual reporting periods beginning after December 15, 2018\. In the first quarter of 2019, American adopted this standard retrospectively as of December 22, 2017, the date the 2017 Tax Act was enacted, which resulted in the recast of prior reporting periods\. As a result of the adoption, American reclassified   $622 million  of stranded tax effects principally related to its pension plans from accumulated other comprehensive loss to retained earnings\.

122


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

**AMERICAN AIRLINES, INC\.**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**(In millions)**

|                                                            |                             |                             |                             |
| ---------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                            | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                            | **2018**                    | **2017**                    | **2016**                    |
| **Net income**                                             | $1,658                      | $1,285                      | $2,689                      |
| **Other comprehensive income (loss), net of tax:**         |                             |                             |                             |
| Pension, retiree medical and other postretirement benefits | (116)                       | (68)                        | (357)                       |
| Investments                                                | (3)                         | (1)                         | 6                           |
| **Total other comprehensive loss, net of tax**             | (119)                       | (69)                        | (351)                       |
| **Total comprehensive income**                             | $1,539                      | $1,216                      | $2,338                      |

See accompanying notes to consolidated financial statements\.

131


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

The major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the years ended December 31, 2016 and 2015 are as follows (amounts may not recalculate due to rounding):

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

**Increase**

**(Decrease)** |
|                                                 | **2016**                                  | **2015**                                  | **Percent**

**Increase**

**(Decrease)** |
|                                                 | **(In cents, except percentage changes)** | **(In cents, except percentage changes)** | **(In cents, except percentage changes)**             |
| Mainline CASM:                                  |                                           |                                           |                                                       |
| Aircraft fuel and related taxes                 | 2\.10                                     | 2\.60                                     | (19\.3)                                               |
| Salaries, wages and benefits                    | 4\.51                                     | 3\.98                                     | 13\.2                                                 |
| Maintenance, materials and repairs              | 0\.76                                     | 0\.79                                     | (3\.9)                                                |
| Other rent and landing fees                     | 0\.73                                     | 0\.72                                     | 1\.4                                                  |
| Aircraft rent                                   | 0\.50                                     | 0\.52                                     | (4\.7)                                                |
| Selling expenses                                | 0\.55                                     | 0\.58                                     | (6\.0)                                                |
| Depreciation and amortization                   | 0\.63                                     | 0\.57                                     | 10\.7                                                 |
| Special items, net                              | 0\.29                                     | 0\.44                                     | (33\.2)                                               |
| Other                                           | 1\.87                                     | 1\.83                                     | 2\.4                                                  |
| Total mainline CASM                             | 11\.94                                    | 12\.03                                    | (0\.8)                                                |
| Special items, net                              | (0\.29)                                   | (0\.44)                                   | (33\.2)                                               |
| Aircraft fuel and related taxes                 | (2\.10)                                   | (2\.60)                                   | (19\.3)                                               |
| Mainline CASM, excluding special items and fuel | 9\.54                                     | 8\.99                                     | 6\.1                                                  |

Significant changes in the components of mainline CASM are as follows:

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Aircraft fuel and related taxes per ASM decreased 19\.3% primarily due to an 18\.2% decrease in the average price per gallon of fuel to $1\.41 in 2016 from $1\.72 in 2015\. |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Salaries, wages and benefits per ASM increased 13\.2% primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program\. |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------- |
| • | Selling expenses per ASM decreased 6\.0% primarily due to lower credit card and booking fees\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Depreciation and amortization per ASM increased 10\.7% primarily due to depreciation related to aircraft purchased in connection with our fleet renewal program\. In 2016, we took delivery of 55 new mainline aircraft\. |

57


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

Lease Position

The table below presents the lease\-related assets and liabilities recorded on the balance sheet\.

|                                        |                                        |                                        |                                               |                                               |                                               |              |              |  |  |  |
|:-------------------------------------- |:-------------------------------------- |:-------------------------------------- |:---------------------------------------------:|:---------------------------------------------:|:---------------------------------------------:| ------------:| ------------:|:- |:- |:- |
|                                        |                                        |                                        |                                               |                                               |                                               | December 31, | December 31, |  |  |  |
| (in millions)                          | (in millions)                          | (in millions)                          |      Classification on the Balance Sheet      |      Classification on the Balance Sheet      |      Classification on the Balance Sheet      |         2019 |         2018 |
| Assets                                 | Assets                                 | Assets                                 |                                               |                                               |                                               |              |              |
| Operating lease assets                 | Operating lease assets                 | Operating lease assets                 |     Operating lease right\-of\-use assets     |     Operating lease right\-of\-use assets     |     Operating lease right\-of\-use assets     |      $ 5,627 |      $ 5,994 |
| Finance lease assets                   | Finance lease assets                   | Finance lease assets                   |          Property and equipment, net          |          Property and equipment, net          |          Property and equipment, net          |        1,062 |          490 |
| Total lease assets                     | Total lease assets                     | Total lease assets                     |                                               |                                               |                                               |      $ 6,689 |      $ 6,484 |
| Liabilities                            | Liabilities                            | Liabilities                            |                                               |                                               |                                               |              |              |
| Current                                | Current                                | Current                                |                                               |                                               |                                               |              |              |
| Operating                              | Operating                              | Operating                              |    Current maturities of operating leases     |    Current maturities of operating leases     |    Current maturities of operating leases     |        $ 801 |        $ 955 |
| Finance                                | Finance                                | Finance                                | Current maturities of debt and finance leases | Current maturities of debt and finance leases | Current maturities of debt and finance leases |          233 |          109 |
| Noncurrent                             | Noncurrent                             | Noncurrent                             |                                               |                                               |                                               |              |              |
| Operating                              | Operating                              | Operating                              |          Noncurrent operating leases          |          Noncurrent operating leases          |          Noncurrent operating leases          |        5,294 |        5,801 |
| Finance                                | Finance                                | Finance                                |            Debt and finance leases            |            Debt and finance leases            |            Debt and finance leases            |          821 |          294 |
| Total lease liabilities                | Total lease liabilities                | Total lease liabilities                |                                               |                                               |                                               |      $ 7,149 |      $ 7,159 |
| Weighted\-average remaining lease term | Weighted\-average remaining lease term | Weighted\-average remaining lease term |                                               |                                               |                                               |              |              |
| Operating leases                       | Operating leases                       | Operating leases                       |                                               |                                               |                                               |     12 years |     12 years |
| Finance leases                         | Finance leases                         | Finance leases                         |                                               |                                               |                                               |      5 years |      7 years |
| Weighted\-average discount rate        | Weighted\-average discount rate        | Weighted\-average discount rate        |                                               |                                               |                                               |              |              |
| Operating leases^(1)^                  | Operating leases^(1)^                  | Operating leases^(1)^                  |                                               |                                               |                                               |      3\.73 % |      3\.69 % |
| Finance leases                         | Finance leases                         | Finance leases                         |                                               |                                               |                                               |      3\.46 % |      5\.23 % |

^(1)^ Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2018\.

Lease Costs

The table below presents certain information related to the lease costs for finance and operating leases\.

|                               |                               |                               |                         |                         |  |  |  |
|:----------------------------- |:----------------------------- |:----------------------------- | -----------------------:| -----------------------:|:- |:- |:- |
|                               |                               |                               | Year Ended December 31, | Year Ended December 31, |  |  |  |
| (in millions)                 | (in millions)                 | (in millions)                 |                    2019 |                    2018 |
| Finance lease cost            | Finance lease cost            | Finance lease cost            |                         |                         |
| Amortization of leased assets | Amortization of leased assets | Amortization of leased assets |                   $ 110 |                   $ 100 |
| Interest of lease liabilities | Interest of lease liabilities | Interest of lease liabilities |                      29 |                      22 |
| Operating lease cost^(1)^     | Operating lease cost^(1)^     | Operating lease cost^(1)^     |                   1,013 |                     994 |
| Short\-term lease cost^(1)^   | Short\-term lease cost^(1)^   | Short\-term lease cost^(1)^   |                     500 |                     458 |
| Variable lease cost^(1)^      | Variable lease cost^(1)^      | Variable lease cost^(1)^      |                   1,456 |                   1,427 |
| Total lease cost              | Total lease cost              | Total lease cost              |                 $ 3,108 |                 $ 3,001 |

^(1)^ Expenses are classified within aircraft rent, landing fees and other rents and regional carriers expense, excluding fuel on the income statement\. For the year ended December 31, 2019, $174 million and $64 million of the operating and variable lease costs, respectively, and for the year ended December 31, 2018, $150 million, $18 million and $48 million of the operating, short\-term and variable lease costs, respectively, are attributable to our regional carriers\.

In 2017, operating lease expense, excluding landing fees, was approximately $1\.6 billion, which includes leases of certain aircraft under capacity purchase agreements\. Expenses were primarily classified within aircraft rent, landing fees and other rents and regional carriers expense\.

77


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

***Aircraft Maintenance and Parts Management***

Through its acquisition of Virgin America, the Company has a separate maintenance\-cost\-per\-hour contract for management and repair of certain rotable parts to support Airbus airframe and engine maintenance and repair\. In 2017, Alaska entered into a similar contract for maintenance on its B737\-800 aircraft engines\. These agreements require monthly payments based upon utilization, such as flight hours, cycles and age of the aircraft, and, in turn, the agreement transfers certain risks to the third\-party service provider\. There are minimum payments under both agreements, which are reflected in the table above\. Accordingly, payments could differ materially based on actual aircraft utilization\.

***Capacity Purchase Agreements (CPAs)***

At December 31, 2018, Alaska had CPAs with three carriers, including the Company's wholly\-owned subsidiary, Horizon\. Horizon sells 100% of its capacity under a CPA with Alaska\. In addition, Alaska has CPAs with SkyWest to fly certain routes in the Lower 48 and Canada and with PenAir to fly certain routes in the state of Alaska\. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services\. Future payments (excluding Horizon) are based on minimum levels of flying by the third\-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights such as fuel\.

***Aircraft Maintenance Deposits***

Certain Airbus leases include contractually required maintenance deposit payments to the lessor, which collateralize the lessor for future maintenance events should the Company not perform required maintenance\. Most of the lease agreements provide that maintenance deposits are reimbursable upon completion of the major maintenance event in an amount equal to the lesser of (i) the amount qualified for reimbursement from maintenance deposits held by the lessor associated with the specific major maintenance event or (ii) the qualifying costs related to the specific major maintenance event\.

***Contingencies***

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected\. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable\.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all California\-based Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws\. The court certified a class of approximately 1,800 flight attendants in November 2016\. The Company believes the claims in this case are without factual and legal merit\.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor\-in\-interest to Virgin America, responsible for various damages and penalties sought by the class members\. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million\. It did not award behavioral relief from Alaska Airlines\.

The Company will then seek an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U\.S\. Constitution and federal law and for other employment law and improper class certification reasons\. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter\-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal\. For these reasons, no loss has been accrued\.

**NOTE 10\. SHAREHOLDERS' EQUITY**

***Dividends***

During 2018, the Board of Directors declared dividends of $1\.28 per share\. The Company paid dividends of $158 million, $148 million and $136 million to shareholders of record during 2018, 2017 and 2016\.

Subsequent to year\-end, the Board of Directors declared a quarterly cash dividend of $0\.35 per share to be paid in March 2019 to shareholders of record as of February 19, 2019\. This is a 9% increase from the most recent quarterly dividend of $0\.32 per share\.

 85


Annual Report of Southwest Airlines Co\. for year 2018

produce safer and more efficient flight patterns; and (iii) conserve fuel and reduce carbon emissions\. Since its first use of RNP in 2011, Southwest has conducted approximately 143,000 RNP approaches, including over 85,000 in 2018\. Southwest must rely on RNP approaches published by the FAA, and the rate of introduction and utilization of RNP approaches continues to be slower than expected, with fuel efficient RNP approaches currently available at only 50 of Southwest's airports\. In addition, even at airports with approved RNP approaches, the clearance required from air traffic controllers to perform RNP approaches is often not granted\. Southwest continues to work with the FAA to develop and seek more use of RNP approaches and to evolve air traffic control rules to support greater utilization of RNP\.

As part of its commitment to corporate sustainability, the Company has published the Southwest One Report^TM^ describing the Company's sustainability strategies, which include the foregoing and other efforts to reduce greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling\. Information contained in the Southwest One Report is not incorporated by reference into, and does not constitute a part of, this Form 10\-K\.

**Data Privacy and Security Regulation**

The airline industry has experienced heightened legislative and regulatory focus on data privacy and security in the United States and elsewhere\. As a result, the Company must comply with a growing and fast\-evolving set of legal requirements in this area\. For example, the California Consumer Privacy Act of 2018 requires significant compliance efforts from businesses across the United States to the extent they do business in California and collect personal information from California residents\. The new law gives consumers much broader access and control over their personal information\. This regulatory environment is increasingly challenging and may present material obligations and risks to the Company's business, including significantly expanded compliance burdens, costs, and enforcement risks\.

The Company expects the federal government to closely examine cyber\-security and data privacy in 2019\. This could include the DOT looking at new requirements, guidance, or best practices for the industry, as well as the introduction of new legislation in Congress\.

**International Regulation**

All international air service is subject to certain U\.S\. federal requirements and approvals, as well as the regulatory requirements of the appropriate authorities of the foreign countries involved\. The Company has obtained the necessary economic authority from the DOT, as well as approvals required by the FAA and applicable foreign government entities, to conduct operations, under certain circumstances, to points outside of the continental United States currently served by the Company\. Certain international authorities and approvals held by the Company are subject to periodic renewal requirements\. The Company requests extensions of such authorities and approvals when and as appropriate\. To the extent the Company seeks to serve additional foreign destinations in the future, or to renew its authority to serve certain routes, it may be required to obtain necessary authority from the DOT and/or approvals from the FAA, as well as any applicable foreign government entity\.

Certain international route authorities are governed by bilateral air transportation agreements between the United States and foreign countries\. Changes in U\.S\. or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of the Company's existing international authorities, present barriers to renewing existing or securing new authorities, or otherwise affect the Company's international operations\. In particular, there is still a degree of uncertainty about the future of scheduled commercial flight operations between theUnited States and Cuba as a result of changes in diplomatic relations between the two governments, as well as travel and trade restrictions implemented by the U\.S\. government in 2017\. There are also capacity limitations at certain airports in Mexico and the Caribbean, which could impact future service levels\. In general, bilateral agreements between the United States and foreign countries the Company currently serves, or may serve in the future, may be subject to renegotiation or reinterpretation from time to time\. While the U\.S\. government has negotiated "open skies" agreements with many countries, which allow for unrestricted access between the United States and respective foreign destinations, agreements with other countries may restrict the Company's entry into those destinations and/or its related growth opportunities\.

The CBP is the federal agency of the U\.S\. Department of Homeland Security charged with facilitating international trade, collecting import duties, and enforcing U\.S\. regulations with respect to trade, customs, and immigration\. As the

16


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

New York\-LaGuardia Redevelopment\.  As part of the terminal redevelopment project at LaGuardia Airport, we are partnering with the Port Authority of New York and New Jersey ("Port Authority") to replace Terminals C and D with a new state\-of\-the\-art terminal facility consisting of 37 gates across 4 concourses connected to a central headhouse\. The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and 30 percent more concessions space than the existing terminals\. The facility will also offer direct access between the parking garage and terminal and improved roadways and drop\-off/pick\-up areas\. The design of the new terminal will integrate sustainable technologies and improvements in energy efficiency\. Construction will be phased to limit passenger inconvenience and is expected to be completed by 2026\.

In connection with the redevelopment, during 2017, we entered into an amended and restated terminal lease with the Port Authority with a term through 2050\. Pursuant to the lease agreement we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off\-premises supporting facilities, (2) receive a Port Authority contribution of $600 million to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers\. We currently expect our net project cost to be approximately $3\.3 billion and we bear the risks of project construction, including any potential cost over\-runs\. Using funding provided by cash flows from operations and/or financing arrangements, we spent approximately $562 million on this project during 2019 and expect to spend approximately $700 million during 2020\.

In the December 2019 quarter, we opened Concourse G, the first of the four new concourses housing seven of the 37 new gates\. Not only does this deliver the first direct impact to the Delta passenger experience, it also represents the first major phasing milestone\. This new concourse will allow us to vacate portions of the existing terminals which can then be demolished and made ready for the next phase of construction\. The next major milestone will be the opening of the headhouse and Concourse E, which is scheduled for 2022\.

Financing Activities

Debt and Finance Leases\.  In February 2019, we entered into a $1 billion term loan issued by two lenders, which was subsequently repaid by the end of the June 2019 quarter\. We used the net proceeds of the term loan to accelerate planned 2019 repurchases under our share repurchase program\.

In the March 2019 quarter, we completed a $500 million offering of Pass Through Certificates, Series 2019\-1 ("2019\-1 EETC") through a pass through trust\. The net proceeds of the offering were used for general corporate purposes, including to refinance debt maturing during 2019\.

In October 2019 we issued $1\.5 billion in aggregate principal amount of unsecured notes, consisting of $900 million of 2\.9% Notes due 2024 and $600 million of 3\.75% Notes due 2029 (collectively, the "Notes")\. We used the net proceeds from the offering of these Notes to fund a portion of the tender offer to acquire common shares of LATAM in January 2020\.

During 2019, the three major credit rating agencies reaffirmed our investment\-grade ratings:

|                   |                   |                   |                |                |                |         |         |         |
|:----------------- |:----------------- |:----------------- |:--------------:|:--------------:|:--------------:|:-------:|:-------:|:-------:|
| Rating Agency     | Rating Agency     | Rating Agency     | Current Rating | Current Rating | Current Rating | Outlook | Outlook | Outlook |
| Fitch             | Fitch             | Fitch             |     BBB\-      |     BBB\-      |     BBB\-      | Stable  | Stable  | Stable  |
| Moody's           | Moody's           | Moody's           |      Baa3      |      Baa3      |      Baa3      | Stable  | Stable  | Stable  |
| Standard & Poor's | Standard & Poor's | Standard & Poor's |     BBB\-      |     BBB\-      |     BBB\-      | Stable  | Stable  | Stable  |

Capital Returns to Shareholders\.  Since first implementing our quarterly dividend in 2013, we have annually increased the dividend per share and paid $3\.8 billion in total dividends, including $980 million in 2019\. Through dividends and share repurchases, we have returned $15\.3 billion to shareholders since 2013, while reducing outstanding shares by approximately 25% compared to the beginning of 2013\. During 2019, we repurchased and retired 38 million  shares at a cost of $2\.0 billion\.

On February 6, 2020, the Board of Directors approved and we will pay a quarterly dividend of $0\.4025 per share to shareholders of record as of February 20, 2020\.

Undrawn Lines of Credit

We have $3\.1 billion available in revolving lines of credit\. These credit facilities include covenants customary for financing of this type\. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them\.

39


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

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

Group and American Airlines, Inc\. Mr\. Kirby also previously served as President of US Airways from October 2006 to December 2013\. Mr\. Kirby held significant other leadership roles at US Airways and at America West prior to the 2005 merger of those carriers, including Executive Vice President—Sales and Marketing (2001 to 2006); Senior Vice President, e\-business (2000 to 2001); Vice President, Revenue Management (1998 to 2000); Vice President, Planning (1997 to 1998); and Senior Director, Scheduling and Planning (1995 to 1998)\. Prior to joining America West, Mr\. Kirby worked for American Airlines Decision Technologies and at the Pentagon\.

**Andrew C\. Levy\.** Age 48\. Mr\. Levy has served as Executive Vice President and Chief Financial Officer of UAL and United since August 2016\. From November 2014 to August 2016, he was the Chief Executive Officer and Managing Partner of AML Ventures, LLC, an investment and advisory firm specializing in the airline industry\. Previously, Mr\. Levy held leadership roles at Allegiant Travel Company (“Allegiant”) for thirteen years, including as Chief Operating Officer and a Director from September 2013 to October 2014; President from September 2009 to October 2014; Chief Financial Officer from October 2007 to May 2010; and Managing Director, Planning & Treasurer from April 2001 to October 2010\. Prior to joining Allegiant, Mr\. Levy worked at Mpower Communications, Inc\., Savoy Capital and ValuJet Airlines, Inc\.

**Oscar Munoz\.** Age 59\. 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 P\. Nocella\.** Age 48\. 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 Business Conduct and Ethics” under the listed Company Manual of the NYSE\. The code is available on the Company’s website at http://ir\.united\.com\. Waivers granted to certain officers from compliance with or future amendments to the code will be disclosed on the Company’s 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 2018 Annual Meeting of Stockholders\.

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 2018 Annual Meeting of Stockholders\.

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

106


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

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

***Fair Values of Derivative Instruments***

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

|                                                       |          |          |
| ----------------------------------------------------- | -------- | -------- |
|                                                       | **2017** | **2016** |
| Fuel hedge contracts (not designated as hedges)       |          |          |
| Prepaid expenses and other current assets             | **$19**  | $17      |
| Other assets                                          | **3**    | 3        |
| Interest rate swaps (designated as hedges)            |          |          |
| Prepaid expenses and other current assets             | **1**    | —        |
| Other noncurrent assets                               | **8**    | —        |
| Other accrued liabilities                             | **(3)**  | (5)      |
| Other liabilities                                     | **(5)**  | —        |
| Losses in accumulated other comprehensive loss (AOCL) | **(2)**  | (5)      |

The net cash paid for new fuel hedge positions and received from settlements was $12 million, $19 million and $17 million during 2017, 2016, and 2015, respectively\.

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

|                                                               |          |          |          |
| ------------------------------------------------------------- | -------- | -------- | -------- |
|                                                               | **2017** | **2016** | **2015** |
| Fuel hedge contracts (not designated as hedges)               |          |          |          |
| Gains (losses) recognized in Aircraft fuel                    | **$(6)** | $(3)     | $(19)    |
| Interest rate swaps (designated as hedges)                    |          |          |          |
| Gains (losses) recognized in Aircraft rent                    | **(5)**  | (6)      | (6)      |
| Gains (losses) recognized in other comprehensive income (OCI) | **1**    | 8        | (5)      |

The amounts shown as recognized in aircraft rent for cash flow hedges (interest rate swaps) represent the realized losses transferred out of AOCL to aircraft rent\. No gains or losses related to interest rate swaps on variable rate debt have been recognized in interest expense during 2017\. The amounts shown as recognized in OCI are prior to the losses recognized in aircraft rent during the period\. The Company expects $3 million to be reclassified from OCI to aircraft rent and $1 million to interest income within the next twelve months\.

 76


Annual Report of Southwest Airlines Co\. for year 2018

and Purchases of short\-investments for the security purchased, in the accompanying Consolidated Statement of Cash Flows\. Unrealized gains and losses, net of tax, if any, are recognized in Accumulated other comprehensive income (loss) ("AOCI") in the accompanying Consolidated Balance Sheet\. Realized net gains and losses on specific investments, if any, are reflected in Interest income in the accompanying Consolidated Statement of Income\. Both unrealized and realized gains and/or losses associated with investments were immaterial for all years presented\.

Noncurrent investments consist of investments with maturities of greater than twelve months\. Noncurrent investments are included as a component of Other assets in the Consolidated Balance Sheet\.

***Accounts and Other Receivables***

Accounts and other receivables are carried at cost\. They primarily consist of amounts due from credit card companies associated with sales of tickets for future travel, and amounts due from business partners in the Company’s loyalty program\. The allowance for doubtful accounts was immaterial at December 31, 2018 and 2017\. In addition, the provision for doubtful accounts and write\-offs for 2018, 2017, and 2016 were each immaterial\.

***Inventories***

Inventories primarily consist of aircraft fuel, flight equipment expendable parts, materials, and supplies\. All of these items are carried at average cost, less an allowance for obsolescence\. These items are generally charged to expense when issued for use\. The reserve for obsolescence was $2 million and $45 million at December 31, 2018, and 2017, respectively\. In addition, the Company’s provision for obsolescence and write\-offs for 2018, 2017, and 2016 were each immaterial\.

***Property and Equipment***

Property and equipment is stated at cost\. Capital expenditures include payments made for aircraft, other flight equipment, purchase deposits related to future aircraft deliveries, airport and other facility construction projects, and ground and other property and equipment\. Depreciation is provided by the straight\-line method to estimated residual values over periods of approximately 25 years for flight equipment, 5 to 30 years for ground property and equipment, and 5 to 30 years, or the expected term of the Company's lease if shorter, for Assets constructed for others, once the asset is placed in service\. Residual values estimated for aircraft are approximately 15 percent, for ground property and equipment generally range from 0 to 10 percent, and for Assets constructed for others range from 17 to 75 percent\. Property under capital leases and related obligations are initially recorded at an amount equal to the present value of future minimum lease payments computed on the basis of the Company’s incremental borrowing rate or, when known, the interest rate implicit in the lease\. Amortization of property under capital leases is on a straight\-line basis over the lease term and is included in Depreciation and amortization expense\. Leasehold improvements generally are amortized on a straight\-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease\. Assets constructed for others consists of airport improvement projects in which the Company is considered the accounting owner of the facilities\. See Note 4 for further information\.

During first quarter 2016, the Company made the decision to further simplify its operations and accelerate the retirement of its less\-efficient Boeing 737\-300 ("Classic") fleet\. In September 2017, the Company retired the remaining 61 Classic aircraft as part of this accelerated retirement schedule\. This change in retirement dates was considered a change in estimate and was accounted for on a prospective basis as of the dates the decisions were finalized\. Therefore, the Company recorded accelerated depreciation expense over the remainder of the useful lives for each Classic aircraft and related parts\. See Note 7 for further information regarding the Company's aircraft fleet\.

73


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

Pension expense increased28% compared to the same period in the prior year\. The increase is due to the change in certain assumptions used at December 31, 2016, particularly discount rates which were lowered by 60 to 72 basis points, resulting in higher expense recognition in 2017\.

Under the new retirement benefits accounting standard, 2017 recast wages and benefits will increase approximately $7 million\. On a recast basis, we expect wages and benefits to grow at a greater rate than projected capacity growth in 2018\. Alaska and Virgin America pilot wage increases are the primary drivers of this increase\. The remainder is due to the expected growth in FTEs to support our capacity growth, along with higher wage rates, medical costs and higher pension costs\. Furthermore, we may reach a new agreement with our mainline flight attendants, which would also result in higher wages\.

***Variable Incentive Pay***

Variable incentive pay expense increased to $135 million in 2017 from $127 million in 2016\. On a Combined Comparative basis, variable incentive pay decreased$24 million, or 15%, due to lower achievement against performance\-based pay metrics as compared to the prior year\.

***Aircraft Maintenance***

Aircraft maintenance costs increased by $121 million, or 45%, compared to 2016\. On a Combined Comparative basis, aircraft maintenance costs increased$41 million, or 12%\. Maintenance costs increased primarily due to timing of scheduled maintenance events in 2017, as well as a power\-by\-the\-hour maintenance agreement that began during the fourth quarter of 2017\.

We expect aircraft maintenance expense to increase, consistent with capacity growth in 2018\. We will have an increase in engine maintenance costs primarily due to the full year impact of the power\-by\-the\-hour engine maintenance arrangement on our B737\-800 aircraft as noted above, as well as general maintenance expenditures increases as we continue to add capacity to our network\.

***Aircraft Rent***

Aircraft rent expense increased$160 million, or 140%, compared to 2016\. On a Combined Comparative basis, aircraft rent expense decreased$10 million, or 4%, primarily due to the resetting of straight\-line aircraft rent resulting from purchase price accounting for leases held by Virgin America, partially offset by the addition of four A321neos added to our mainline fleet and eight E175s added to our regional fleet\.

We expect aircraft rent to increase in 2018 at a greater rate than our forecasted capacity growth due to additional leased A321neo and E175 aircraft scheduled for delivery in 2018\.

***Landing Fees and Other Rentals***

Landing fees and other rental expenses increased$140 million, or 44%, compared to 2016\. On a Combined Comparative basis, landing fees and other rental expenses increased$33 million, or 8%, primarily due to increased flying in 2017, as we increased capacity by 7% on a combined basis, and entered into 44 new markets\.

We expect landing fees and other rental expense to grow at a slightly greater rate than capacity in 2018 as we continue to add capacity in our network and enter new markets\. Additionally, we expect continued rate increases at airports across our network\.

***Contracted Services***

Contracted services increased$67 million, or 27%, when compared to 2016\. On a Combined Comparative basis, contracted services increased$7 million, or 2%, primarily due to increased flying at stations where we use vendors to assist us\. Additionally, wage rates for our vendor employees have increased due to higher minimum wage laws in many locations we serve\. These cost increases were partially offset by insourcing some of the ground services at many airports to McGee Air Services, whose costs are now included in other financial statement line items, particularly wages and benefits\.

We expect contracted services to increase in 2018, consistent with our projected capacity growth\. The increases are primarily due to higher wage rates in locations where we use vendor employees, and ongoing information technology and facilities projects that we use outside contractors to assist with\.

 44


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

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

|           |                 |                                                                                |
| --------- | --------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
|  ^10\.120 | UAL
United | [Supplemental Agreement No\. 8 to Purchase Agreement No\. 2484, dated June 17, 2013 (filed as Exhibit 10\.4 to UAL's Form 10\-Q for the quarter ended June 30, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex104.htm)                                                                  |
|  ^10\.121 | UAL
United | [Supplemental Agreement No\. 9 to Purchase Agreement No\. 2484, dated June 6, 2014 (filed as Exhibit 10\.4 to UAL's Form 10\-Q for the quarter ended June 30, 2014, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312514278970/d732259dex104.htm)                                                                   |
|  ^10\.122 | UAL
United | [Supplemental Agreement No\. 10 to Purchase Agreement No\. 2484, dated January 14, 2015 (filed as Exhibit 10\.4 to UAL's Form 10\-Q for the quarter ended March 31, 2015, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312515144255/d891332dex104.htm)                                                             |
|  ^10\.123 | UAL
United | [Supplemental Agreement No\. 11 to Purchase Agreement No\. 2484, dated April 30, 2015 (filed as Exhibit 10\.3 to UAL's Form 10\-Q for the quarter ended June 30, 2015, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312515261239/d941677dex103.htm)                                                               |
|  ^10\.124 | UAL
United | [Amended and Restated Letter Agreement No\. 11, dated August 8, 2005, by and among Continental and General Electric Company (filed as Exhibit 10\.3 to Continental's Form 10\-Q for the quarter ended September 30, 2005, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968705000138/f3rd10qexhibit103.htm)        |
|  ^10\.125 | UAL
United | [Purchase Agreement No\. PA\-03784, dated July 12, 2012, between The Boeing Company and United Air Lines, Inc\. (filed as Exhibit 10\.1 to UAL's Form 10\-Q for the quarter ended September 30, 2012, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312512435658/d408868dex101.htm)                                 |
|  ^10\.126 | UAL
United | [Supplemental Agreement No\. 01 to Purchase Agreement No\. PA\-03784, dated September 27, 2012 (filed as Exhibit 10\.2 to UAL's Form 10\-Q for the quarter ended September 30, 2012, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312512435658/d408868dex102.htm)                                                  |
|  ^10\.127 | UAL
United | [Supplemental Agreement No\. 02 to Purchase Agreement Number PA\-03784, dated March 1, 2013 (filed as Exhibit 10\.3 to UAL's Form 10\-Q for the quarter ended June 30, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex103.htm)                                                          |
|  ^10\.128 | UAL
United | [Supplemental Agreement No\. 03 to Purchase Agreement Number PA\-03784, dated June 27, 2013 (filed as Exhibit 10\.7 to UAL's Form 10\-Q for the quarter ended June 30, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex107.htm)                                                          |
|  ^10\.129 | UAL
United | [Supplemental Agreement No\. 04 to Purchase Agreement Number PA\-03784, dated September 11, 2013 (filed as Exhibit 10\.2 to UAL's Form 10\-Q for the quarter ended September 30, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513409916/d578285dex102.htm)                                                |
|  ^10\.130 | UAL
United | [Supplemental Agreement No\. 05 to Purchase Agreement Number PA\-03784, dated March 3, 2014 (filed as Exhibit 10\.2 to UAL's Form 10\-Q for the quarter ended June 30, 2014, Commission file number 1\-6033 and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312514278970/d732259dex102.htm)                                                           |
|  ^10\.131 | UAL
United | [Supplemental Agreement No\. 06 to Purchase Agreement Number PA\-03784, dated June 6, 2014 (filed as Exhibit 10\.3 to UAL's Form 10\-Q for the quarter ended June 30, 2014, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312514278970/d732259dex103.htm)                                                           |
|  ^10\.132 | UAL
United | [Supplemental Agreement No\. 07 to Purchase Agreement Number PA\-03784, dated May 26, 2015 (filed as Exhibit 10\.6 to UAL's Form 10\-Q for the quarter ended June 30, 2015, Commission file number 1\-10323 and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312515261239/d941677dex106.htm)                                                           |
|  ^10\.133 | UAL
United | [Supplemental Agreement No\. 08 to Purchase Agreement Number PA\-03784, dated June 12, 2015 (filed as Exhibit 10\.7 to UAL's Form 10\-Q for the quarter ended June 30, 2015, Commission file number 1\-10323 and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312515261239/d941677dex107.htm)                                                          |
|  ^10\.134 | UAL
United | [Supplemental Agreement No\. 9 to Purchase Agreement No\. 03784, dated January 20, 2016, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.2 to UAL's Form 10\-Q for the quarter ended March 31, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312516550432/d116267dex102.htm)      |
|  ^10\.135 | UAL
United | [Supplemental Agreement No\. 10 to Purchase Agreement No\. 03784, dated February 8, 2016, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.4 to UAL's Form 10\-Q for the quarter ended March 31, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312516550432/d116267dex104.htm)     |
|  ^10\.136 | UAL
United | [Supplemental Agreement No\. 11 to Purchase Agreement Number No\. 03784, dated March 7, 2016, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.6 to UAL's Form 10\-Q for the quarter ended March 31, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312516550432/d116267dex106.htm) |

105