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

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

**Number** | **Description**                                                                                |
| 10\.87                        | [Letter Agreement, dated as of April 28, 2016, between American Airlines Group Inc\. and W\. Douglas Parker (incorporated by reference to Exhibit 10\.1 to AAG’s Current Report on Form 8\-K filed on April 29, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516566426/d189148dex101.htm) †                                           |
| 10\.88                        | [Transition and Separation Agreement, dated as of August 29, 2016, among J\. Scott Kirby, American Airlines Group Inc\. and American Airlines, Inc\. (incorporated by reference to Exhibit 99\.1 to AAG’s Current Report on Form 8\-K filed on August 29, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516695562/d249575dex991.htm) † |
| 12\.1                         | [Computation of ratio of earnings to combined fixed charges and preferred dividends of American Airlines Group Inc\. for 2017, 2016, 2015, 2014 and 2013\.](https://americanairlines.gcs-web.com/email-alerts/ex12110k2017.htm)                                                                                |
| 12\.2                         | [Computation of ratio of earnings to fixed charges of American Airlines, Inc\. for 2017, 2016, 2015, 2014 and 2013\.](https://americanairlines.gcs-web.com/email-alerts/ex12210k2017.htm)                                                                                |
| 14\.1                         | [Code of Ethics (incorporated by reference to Exhibit 14\.1 to AAG’s Current Report on Form 8\-K filed on December 9, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513466973/d640718dex141.htm)                                                                                |
| 21\.1                         | [Significant subsidiaries of AAG and American as of December 31, 2017\.](https://americanairlines.gcs-web.com/email-alerts/ex2110k2017.htm)                                                                                |
| 23\.1                         | [Consent of Independent Registered Public Accounting Firm – KPMG LLP\.](https://americanairlines.gcs-web.com/email-alerts/ex23110k2017.htm)                                                                                |
| 24\.1                         | [Powers of Attorney (included in signature page of this Annual Report on Form 10\-K)\.](https://americanairlines.gcs-web.com/email-alerts#sCD1AEDE6BFAB5FB2A064734989CCB92B)                                                                                |
| 31\.1                         | [Certification of AAG Chief Executive Officer pursuant to Rule 13a\-14(a)\.](https://americanairlines.gcs-web.com/email-alerts/ex31110k2017.htm)                                                                                |
| 31\.2                         | [Certification of AAG Chief Financial Officer pursuant to Rule 13a\-14(a)\.](https://americanairlines.gcs-web.com/email-alerts/ex31210k2017.htm)                                                                                |
| 31\.3                         | [Certification of American Chief Executive Officer pursuant to Rule 13a\-14(a)\.](https://americanairlines.gcs-web.com/email-alerts/ex31310k2017.htm)                                                                                |
| 31\.4                         | [Certification of American Chief Financial Officer pursuant to Rule 13a\-14(a)\.](https://americanairlines.gcs-web.com/email-alerts/ex31410k2017.htm)                                                                                |
| 32\.1                         | [Certification pursuant to Rule 13a\-14(b) and section 906 of the Sarbanes\-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code)\.](https://americanairlines.gcs-web.com/email-alerts/ex32110k2017.htm)                                                                                |
| 32\.2                         | [Certification pursuant to Rule 13a\-14(b) and section 906 of the Sarbanes\-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code)\.](https://americanairlines.gcs-web.com/email-alerts/ex32210k2017.htm)                                                                                |
| 101\.1                        | Interactive data files pursuant to Rule 405 of Regulation S\-T\.                                                                                |

|      |                                                                                |                                                                                |                                                                                |                                                                                |
| ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| \#   | Pursuant to Item 601(b)(2) of Regulation S\-K promulgated by the Securities and Exchange Commission, certain exhibits and schedules to this agreement have been omitted\. Such exhibits and schedules are described in the referenced agreement\. AAG and American hereby agree to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules\. | Pursuant to Item 601(b)(2) of Regulation S\-K promulgated by the Securities and Exchange Commission, certain exhibits and schedules to this agreement have been omitted\. Such exhibits and schedules are described in the referenced agreement\. AAG and American hereby agree to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules\. | Pursuant to Item 601(b)(2) of Regulation S\-K promulgated by the Securities and Exchange Commission, certain exhibits and schedules to this agreement have been omitted\. Such exhibits and schedules are described in the referenced agreement\. AAG and American hereby agree to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules\. | Pursuant to Item 601(b)(2) of Regulation S\-K promulgated by the Securities and Exchange Commission, certain exhibits and schedules to this agreement have been omitted\. Such exhibits and schedules are described in the referenced agreement\. AAG and American hereby agree to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules\. |
| \*   | Confidential treatment has been granted with respect to certain portions of this agreement\.

                                                                                | Confidential treatment has been granted with respect to certain portions of this agreement\.

                                                                                | Confidential treatment has been granted with respect to certain portions of this agreement\.

                                                                                | Confidential treatment has been granted with respect to certain portions of this agreement\.

                                                                                |
| \*\* | Confidential treatment has been requested with respect to certain portions of this agreement\.

                                                                                | Confidential treatment has been requested with respect to certain portions of this agreement\.

                                                                                | Confidential treatment has been requested with respect to certain portions of this agreement\.

                                                                                | Confidential treatment has been requested with respect to certain portions of this agreement\.

                                                                                |
| †    | Management contract or compensatory plan or arrangement\.                                                                                | Management contract or compensatory plan or arrangement\.                                                                                | Management contract or compensatory plan or arrangement\.                                                                                | Management contract or compensatory plan or arrangement\.                                                                                |

196


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

Fuel Hedging Program

Our derivative contracts to hedge the financial risk from changing fuel prices are primarily related to Monroe’s inventory\. We may utilize different contract and commodity types in this program and frequently test their economic effectiveness against our financial targets\. We closely monitor the hedge portfolio and rebalance the portfolio based on market conditions, which may result in locking in gains or losses on hedge contracts prior to their settlement dates\.

Fuel Supply Availability

We are currently able to obtain adequate supplies of aircraft fuel, including fuel produced by Monroe or procured through the exchange of non\-jet fuel products the refinery produces, and crude oil for Monroe's operations\. However, it is impossible to predict the future availability or price of aircraft fuel and crude oil\. Weather\-related events, natural disasters, political disruptions or wars involving oil\-producing countries, changes in governmental policy concerning aircraft fuel production, transportation, taxes or marketing, changes in refining capacity, environmental concerns and other unpredictable events may result in future fuel supply shortages and fuel price increases\.

Competition

The airline industry is highly competitive, marked by significant competition with respect to routes, fares, schedules (both timing and frequency), services, products, customer service and loyalty programs\. The industry has evolved through mergers and new entry, both domestically and internationally, and evolution in international alliances\. Consolidation in the airline industry, the presence of subsidized government sponsored international carriers, changes in international alliances and the creation of immunized joint ventures have altered, and will continue to alter, the competitive landscape in the industry, resulting in the formation of airlines and alliances with significant financial resources, extensive global networks and competitive cost structures\.

Domestic

Our domestic operations are subject to competition from traditional network carriers, including American Airlines and United Airlines, national point\-to\-point carriers, including Alaska Airlines, JetBlue Airways and Southwest Airlines, and other discount or ultra low\-cost carriers, including Spirit Airlines, Frontier Airlines and Allegiant Air, some of which may have lower costs than we do and provide service at low fares to destinations served by us\. Point\-to\-point, discount and ultra low\-cost carriers place significant competitive pressure on network carriers in the domestic market\. In particular, we face significant competition at our domestic hubs and key airports either directly at those airports or at the hubs of other airlines that are located in close proximity to our hubs and key airports\. We also face competition in smaller to medium\-sized markets from regional jet operations of other carriers\.

International

Our international operations are subject to competition from both foreign and domestic carriers\. Competition from government\-owned and subsidized carriers in the Gulf region, including Emirates, Etihad Airways and Qatar Airways, is significant\. These carriers have large numbers of international widebody aircraft on order and have increased service to the U\.S\. These carriers' government subsidies have allowed them to grow quickly, reinvest in their product and expand their global presence at the expense of U\.S\. airlines\.

Through alliance and other marketing and codesharing agreements with foreign carriers, U\.S\. carriers have increased their ability to sell international transportation, such as services to and beyond traditional European and Asian gateway cities\. Similarly, foreign carriers have obtained increased access to interior U\.S\. passenger traffic beyond traditional U\.S\. gateway cities through these relationships\. In particular, alliances formed by domestic and foreign carriers, including SkyTeam, the Star Alliance (among United Airlines, Lufthansa German Airlines, Air Canada and others) and the oneworld alliance (among American Airlines, British Airways, Qantas and others) have enhanced competition in international markets\.

In addition, several joint ventures among U\.S\. and foreign carriers, including our joint ventures, have received grants of antitrust immunity allowing the participating carriers to coordinate schedules, pricing, sales and inventory\. Other joint ventures that have received antitrust immunity include a transatlantic alliance among United Airlines, Air Canada and Lufthansa German Airlines, a transpacific joint venture between United Airlines and All Nippon Airways, a transatlantic joint venture among American Airlines, British Airways and Iberia, a transpacific joint venture between American Airlines and Japan Air Lines and a transpacific joint venture between American Airlines and Qantas\.

7


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

*Operating Special Items, Net*

|                                                                    |                              |                              |
| ------------------------------------------------------------------ | ---------------------------- | ---------------------------- |
|                                                                    | **Year Ended December 31,**  | **Year Ended December 31,**  |
|                                                                    | **2018**                     | **2017**                     |
|                                                                    | **(In millions)**            | **(In millions)**            |
| Fleet restructuring expenses  ^(1)^                                | $422                         | $232                         |
| Merger integration expenses  ^(2)^                                 | 268                          | 273                          |
| Severance expenses  ^(3)^                                          | 58                           | —                            |
| Litigation settlement  ^(4)^                                       | 45                           | —                            |
| Intangible asset impairment  ^(5)^                                 | 26                           | —                            |
| Labor contract expenses                                            | 13                           | 46                           |
| Mark\-to\-market adjustments on bankruptcy obligations, net  ^(6)^ | (76)                         | 27                           |
| Employee 2017 Tax Act bonus expense  ^(7)^                         | —                            | 123                          |
| Other operating charges, net                                       | 31                           | 11                           |
| Total mainline operating special items, net                        | 787                          | 712                          |
| Regional operating special items, net                              | 6                            | 22                           |
| Total operating special items, net                                 | $793                         | $734                         |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment grounded or expected to be grounded earlier than planned\. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Merger integration expenses included costs associated with integration projects, principally our flight attendant, human resources and payroll, and technical operations systems\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | Severance expenses primarily included costs associated with reductions of management and support staff team members\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(4)^ | Settlement of a private party antitrust lawsuit\. See Note 12(e) \- “ *Private Party Antitrust Action Related to Passenger Capacity* ” to AAG’s Consolidated Financial Statements in Part II, Item 8A for further discussion\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(5)^ | Intangible asset impairment includes a non\-cash charge to write\-off our Brazil route authority as a result of the U\.S\.\-Brazil open skies agreement\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------- |
| ^(6)^ | Bankruptcy obligations that will be settled in shares of our common stock are marked\-to\-market based on our stock price\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(7)^ | Employee bonus expense included costs related to the  $1,000  cash bonus and associated payroll taxes granted to mainline employees as of December 31, 2017 in recognition of H\.R\. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act)\. |

*Nonoperating Results*

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

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

**Increase**

**(Decrease)** |
|                                 | **2018**                                     | **2017**                                     | **Increase**

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

**Increase**

**(Decrease)** |
|                                 | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Interest income                 | $118                                         | $94                                          | $24                                          | 25\.8                                                 |
| Interest expense, net           | (1,056)                                      | (1,053)                                      | (3)                                          | 0\.3                                                  |
| Other income, net               | 166                                          | 123                                          | 43                                           | 35\.0                                                 |
| Total nonoperating expense, net | $(772)                                       | $(836)                                       | $64                                          | (7\.7)                                                |

Our short\-term investments in each period consisted of highly liquid investments that provided nominal returns\. Interest income increased $24 million, or 25\.8%, in 2018 principally due to a 103 basis point increase in average yields in 2018 as compared to 2017\.

54


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

DELTA AIR LINES, INC\.

Consolidated Balance Sheets

|                                                                                |                                                                                |                                                                                |
| ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- |
|                                                                                | **December 31,**                                                                         | **December 31,**                                                                         |
| **(in millions, except share data)**                                                                                | **2018**                                                                                | **2017**                                                                                |
| **ASSETS**                                                                                | **ASSETS**                                                                               | **ASSETS**                                                                               |
| **Current Assets:**                                                                                |                                                                                |                                                                                |
| Cash and cash equivalents                                                                                | $1,565                                                                                | $1,814                                                                                |
| Short\-term investments                                                                                | 203                                                                                | 825                                                                                |
| Accounts receivable, net of an allowance for uncollectible accounts of $12 at December 31, 2018 and 2017                                                   | 2,314                                                                                | 2,377                                                                                |
| Fuel inventory                                                                                | 592                                                                                | 916                                                                                |
| Expendable parts and supplies inventories, net of an allowance for obsolescence of $102 and $113 at December 31, 2018 and 2017, respectively               | 463                                                                                | 413                                                                                |
| Prepaid expenses and other                                                                                | 1,203                                                                                | 1,459                                                                                |
| Total current assets                                                                                | 6,340                                                                                | 7,804                                                                                |
| **Noncurrent Assets:**                                                                                |                                                                                |                                                                                |
| Property and equipment, net of accumulated depreciation and amortization of $15,823 and $14,097 at December 31, 2018 and 2017, respectively                | 28,335                                                                                | 26,563                                                                                |
| Operating lease right\-of\-use assets                                                                                | 5,994                                                                                | —                                                                                |
| Goodwill                                                                                | 9,781                                                                                | 9,794                                                                                |
| Identifiable intangibles, net of accumulated amortization of $862 and $845 at December 31, 2018 and 2017, respectively                                     | 4,830                                                                                | 4,847                                                                                |
| Cash restricted for airport construction                                                                                | 1,136                                                                                | —                                                                                |
| Deferred income taxes, net                                                                                | 242                                                                                | 1,354                                                                                |
| Other noncurrent assets                                                                                | 3,608                                                                                | 3,309                                                                                |
| Total noncurrent assets                                                                                | 53,926                                                                                | 45,867                                                                                |
| Total assets                                                                                | $60,266                                                                                | $53,671                                                                                |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                | **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                 | **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                 |
| **Current Liabilities:**                                                                                |                                                                                |                                                                                |
| Current maturities of long\-term debt and finance leases                                                                                | $1,518                                                                                | $2,242                                                                                |
| Current maturities of operating leases                                                                                | 955                                                                                | —                                                                                |
| Air traffic liability                                                                                | 4,661                                                                                | 4,364                                                                                |
| Accounts payable                                                                                | 2,976                                                                                | 3,634                                                                                |
| Accrued salaries and related benefits                                                                                | 3,287                                                                                | 3,022                                                                                |
| Loyalty program deferred revenue                                                                                | 2,989                                                                                | 2,762                                                                                |
| Fuel card obligation                                                                                | 1,075                                                                                | 1,067                                                                                |
| Other accrued liabilities                                                                                | 1,117                                                                                | 1,868                                                                                |
| Total current liabilities                                                                                | 18,578                                                                                | 18,959                                                                                |
| **Noncurrent Liabilities:**                                                                                |                                                                                |                                                                                |
| Long\-term debt and finance leases                                                                                | 8,253                                                                                | 6,592                                                                                |
| Pension, postretirement and related benefits                                                                                | 9,163                                                                                | 9,810                                                                                |
| Loyalty program deferred revenue                                                                                | 3,652                                                                                | 3,559                                                                                |
| Noncurrent operating leases                                                                                | 5,801                                                                                | —                                                                                |
| Other noncurrent liabilities                                                                                | 1,132                                                                                | 2,221                                                                                |
| Total noncurrent liabilities                                                                                | 28,001                                                                                | 22,182                                                                                |
| **Commitments and Contingencies**                                                                                |
                                                                                |
                                                                                |
| **Stockholders' Equity:**                                                                                |                                                                                |                                                                                |
| Common stock at $0\.0001 par value; 1,500,000,000 shares authorized, 688,136,306 and 714,674,160 shares issued at December 31, 2018 and 2017, respectively | —                                                                                | —                                                                                |
| Additional paid\-in capital                                                                                | 11,671                                                                                | 12,053                                                                                |
| Retained earnings                                                                                | 10,039                                                                                | 8,256                                                                                |
| Accumulated other comprehensive loss                                                                                | (7,825

)                                                                          | (7,621

)                                                                          |
| Treasury stock, at cost, 8,191,831 and 7,476,181 shares at December 31, 2018 and 2017, respectively                                                        | (198

)                                                                            | (158

)                                                                            |
| Total stockholders' equity                                                                                | 13,687                                                                                | 12,530                                                                                |
| Total liabilities and stockholders' equity                                                                                | $60,266                                                                                | $53,671                                                                                |
| The accompanying notes are an integral part of these Consolidated Financial Statements\.                                                                   | The accompanying notes are an integral part of these Consolidated Financial Statements\. | The accompanying notes are an integral part of these Consolidated Financial Statements\. |

 53


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

Disruptions of our information technology infrastructure could interfere with our operations, possibly having a material adverse effect on our business\.

Disruptions in our information technology network could result from a technology error or failure impacting our internal systems, whether hosted internally at our data centers or externally at third\-party locations, or large scale external interruption in technology infrastructure support on which we depend, such as power, telecommunications or the internet\. The operation of our technology systems and the use of related data may also be vulnerable to a variety of other sources of interruption, including natural disasters, terrorist attacks, computer viruses, hackers and other security issues\. A significant individual, sustained or repeated failure of our network, including third\-party networks we utilize and on which we depend, could impact our customer service and result in increased costs\. While we have in place initiatives to prevent disruptions and disaster recovery plans (including the creation of a back\-up data center) and continue to invest in improvements to these initiatives and plans, these measures may not be adequate to prevent a business disruption and any material adverse financial and reputational consequences to our business\.

Failure of our technology to perform effectively could have a material adverse effect on our business\.

We are dependent on technology initiatives to provide customer service and operational effectiveness in order to compete in the current business environment\. For example, we have made and continue to make significant investments in customer facing technology such as delta\.com, mobile device applications, check\-in kiosks, customer service applications, application of biometric technology, airport information displays and related initiatives, including security for these initiatives\. We are also investing in significant upgrades to technology infrastructure and other supporting systems\. The performance, reliability and security of the technology are critical to our ability to serve customers\. If our technology does not perform effectively, our business and operations would be negatively affected, which could be material\.

Our significant investments in airlines in other parts of the world and the commercial relationships that we have with those carriers may not produce the returns or results we expect\.

An important part of our strategy to expand our global network has been to make significant investments in airlines in other parts of the world and expand our commercial relationships with these carriers, including through joint ventures\. We expect to continue exploring ways to expand our relationships with other carriers as part of our global business strategy\. These investments and relationships involve significant challenges and risks, including that we may not realize a satisfactory return on our investment or that they may not generate the expected financial results\. These events could have a material adverse effect on our operating results\.

In addition, we are dependent on these other carriers for significant aspects of our network in the regions in which they operate\. While we work closely with these carriers, we do not have control over their operations or business methods\. To the extent that the operations of any of these carriers are disrupted over an extended period or their actions have a significant adverse effect on our operations, our results of operations could be materially adversely affected\.

In certain circumstances, we also may be subject to consequences of the failure of these carriers to comply with laws and regulations, including U\.S\. laws to which they may be subject\. For example, we may be subject to consequences from improper behavior of our joint venture partners, including for failure to comply with anti\-corruption laws such as the U\.S\. Foreign Corrupt Practices Act\. Such a result could have a material adverse effect on our operating results\.

Agreements governing our debt, including credit agreements, include financial and other covenants\. Failure to comply with these covenants could result in events of default\.

Our primary credit facility has various financial and other covenants that require us to maintain a minimum fixed charge coverage ratio and a minimum asset coverage ratio\. We have other smaller facilities, some of which are secured and also contain collateral coverage ratios\. A decline in the value of our assets supporting these facilities from factors that are not under our control could affect one or more of the ratios\. In addition, the credit facilities contain other negative covenants customary for such financings\. These covenants are subject to important exceptions and qualifications\. If we fail to comply with these covenants and are unable to remedy or obtain a waiver or amendment, an event of default would result\.

14


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

**ITEM 8A\. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES GROUP INC\.**

**Report of Independent Registered Public Accounting Firm**

To the Stockholders and Board of Directors

American Airlines Group Inc\.:

*Opinion on the Consolidated Financial Statements*

We have audited the accompanying consolidated balance sheets of American Airlines Group Inc\. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements)\. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U\.S\. generally accepted accounting principles\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in *Internal Control \- Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting\.

*Change in Accounting Principle*

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with customers and leases in 2018 due to the full retrospective adoption of Accounting Standards Update (ASU) 2014\-09, *Revenue from Contracts with Customers (Topic 606)*,as amended, and the modified retrospective adoption of ASU 2016\-02, *Leases (Topic 842)*, as amended\.

*Basis for Opinion*

These consolidated financial statements are the responsibility of the Company’s management\. Our responsibility is to express an opinion on these consolidated financial statements based on our audits\. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U\.S\. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB\.

We conducted our audits in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud\. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks\. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements\. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements\. We believe that our audits provide a reasonable basis for our opinion\.

/s/ KPMG LLP

We have served as the Company’s auditor since 2014\.

Dallas, Texas

February 25, 2019

80


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

This report is filed by American Airlines Group Inc\. (formerly named AMR Corporation) (AAG) and its wholly\-owned subsidiary American Airlines, Inc\. (American)\. References in this Annual Report on Form 10\-K to “we,” “us,” “our,” the “Company” and similar terms refer to AAG and its consolidated subsidiaries\. “AMR” or “AMR Corporation” refers to the Company during the period of time prior to its emergence from Chapter 11 and its acquisition of US Airways Group, Inc\. (US Airways Group) on December 9, 2013\. References to “US Airways Group” and “US Airways,” a subsidiary of US Airways Group, represent the entities during the period of time prior to the dissolution of those entities in connection with AAG’s internal corporate restructuring on December 30, 2015\. References in this report to “mainline” refer to the operations of American only and exclude regional operations\.

**Note Concerning Forward\-Looking Statements**

Certain of the statements contained in this report should be considered forward\-looking statements within the meaning of the Securities Act of 1933, as amended (the Securities Act), the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private Securities Litigation Reform Act of 1995\. These forward\-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “would,” “continue,” “seek,” “target,” “guidance,” “outlook,” “if current trends continue,” “optimistic,” “forecast” and other similar words\. Such statements include, but are not limited to, statements about our plans, objectives, expectations, intentions, estimates and strategies for the future, and other statements that are not historical facts\. These forward\-looking statements are based on our current objectives, beliefs and expectations, and they are subject to significant risks and uncertainties that may cause actual results and financial position and timing of certain events to differ materially from the information in the forward\-looking statements\. These risks and uncertainties include, but are not limited to, those described below under Part I, Item 1A\. Risk Factors, Part II, Item 7\. Management’s Discussion and Analysis of Financial Condition and Results of Operations and other risks and uncertainties listed from time to time in our filings with the Securities and Exchange Commission (the SEC)\.

All of the forward\-looking statements are qualified in their entirety by reference to the factors discussed in Part I, Item 1A\. Risk Factors and elsewhere in this report\. There may be other factors of which we are not currently aware that may affect matters discussed in the forward\-looking statements and may also cause actual results to differ materially from those discussed\. We do not assume any obligation to publicly update or supplement any forward\-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting such statements other than as required by law\. Forward\-looking statements speak only as of the date of this report or as of the dates indicated in the statements\.

4


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

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

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

***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\.

***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 millioncumulative effect adjustment credit to retained earnings, net of tax, related to our investment in China Southern Airlines Company Limited (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\.

87


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

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

UNITED AIRLINES, INC\.

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

|                                                                                |                             |                             |                             |
| ----------------------------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                                | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                                | **2019**                    | **2018 (a)**                | **2017 (a)**                |
| Operating Activities:                                                               |                             |                             |                             |
| Net income                                                                          | $3,011                      | $2,123                      | $2,161                      |
| Adjustments to reconcile net income to net cash provided by operating activities \- |                             |                             |                             |
| Deferred income taxes                                                               | 882                         | 513                         | 941                         |
| Depreciation and amortization                                                       | 2,288                       | 2,165                       | 2,096                       |
| Special charges, non\-cash portion                                                  | 175                         | 416                         | 35                          |
| Unrealized (gains) losses on investments                                            | (153

)               | 5                           | —                           |
| Other operating activities                                                          | 186                         | 162                         | 141                         |
| Changes in operating assets and liabilities \-                                      |                             |                             |                             |
| (Increase) decrease in receivables                                                  | 44                          | 17                          | (73

)                |
| Increase in intercompany receivables                                                | (33

)                | (20

)                | (15

)                |
| (Increase) decrease in other assets                                                 | (252

)               | 265                         | (432

)               |
| Increase in advance ticket sales                                                    | 438                         | 441                         | 145                         |
| Increase (decrease) in frequent flyer deferred revenue                              | 271                         | 222                         | (107

)               |
| Increase in accounts payable                                                        | 324                         | 130                         | 66                          |
| Decrease in advanced purchase of miles                                              | —                           | —                           | (942

)               |
| Decrease in other liabilities                                                       | (302

)               | (293

)               | (556

)               |
| Net cash provided by operating activities                                           | 6,879                       | 6,146                       | 3,460                       |
| Investing Activities:                                                               |                             |                             |                             |
| Capital expenditures                                                                | (4,528

)             | (4,070

)             | (3,870

)             |
| Purchases of short\-term and other investments                                      | (2,897

)             | (2,552

)             | (3,241

)             |
| Proceeds from sale of short\-term and other investments                             | 2,996                       | 2,616                       | 3,177                       |
| Loans made to others                                                                | (174

)               | (466

)               | (30

)                |
| Investment in affiliates                                                            | (36

)                | (139

)               | (2

)                 |
| Other, net                                                                          | 79                          | 156                         | 163                         |
| Net cash used in investing activities                                               | (4,560

)             | (4,455

)             | (3,803

)             |
| Financing Activities:                                                               |                             |                             |                             |
| Proceeds from issuance of long\-term debt                                           | 1,847                       | 1,594                       | 2,537                       |
| Payments of long\-term debt                                                         | (1,240

)             | (1,727

)             | (901

)               |
| Dividend to UAL                                                                     | (1,645

)             | (1,235

)             | (1,844

)             |
| Principal payments under finance leases                                             | (151

)               | (79

)                | (84

)                |
| Capitalized financing costs                                                         | (61

)                | (37

)                | (80

)                |
| Other, net                                                                          | —                           | 1                           | 3                           |
| Net cash used in financing activities                                               | (1,250

)             | (1,483

)             | (369

)               |
| Net increase (decrease) in cash, cash equivalents and restricted cash               | 1,069                       | 208                         | (712

)               |
| Cash, cash equivalents and restricted cash at beginning of year                     | 1,793                       | 1,585                       | 2,297                       |
| Cash, cash equivalents and restricted cash at end of year                           | $2,862                      | $1,793                      | $1,585                      |
| Investing and Financing Activities Not Affecting Cash:                              |                             |                             |                             |
| Property and equipment acquired through the issuance of debt                        | $493                        | $143                        | $897                        |
| Right\-of\-use assets acquired through operating leases                             | 498                         | 663                         | 319                         |
| Property and equipment acquired through finance lease                               | 22                          | 17                          | 16                          |
| Lease modifications and lease conversions                                           | (2

)                 | 52                          | —                           |
| Debt associated with termination of a maintenance service agreement                 | —                           | 163                         | —                           |
| Investment in Republic Airways Holdings Inc\. received from bankruptcy claims       | —                           | —                           | 92                          |
| Cash Paid During the Period for:                                                    |                             |                             |                             |
| Interest                                                                            | $648                        | $651                        | $571                        |
| Income taxes                                                                        | 29                          | 19                          | 20                          |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2016\-02,  Leases (Topic 842) \. See Note 1 to the financial statements contained in Part II, Item 8 of this report for additional information\.

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements\.

53


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

Changes to our business model that are designed to increase revenues may not be successful and may cause operational difficulties or decreased demand\.

We have recently instituted, and intend to institute in the future, changes to our business model designed to increase revenues and offset costs\. These measures include further segmentation of the classes of services we offer, such as Premium Economy service and Basic Economy service, enhancements to our AAdvantage loyalty program, charging separately for services that had previously been included within the price of a ticket, increasing other pre\-existing fees, reconfiguration of our aircraft cabins, and efforts to optimize our network including by focusing growth on a limited number of large hubs\. We may introduce additional initiatives in the future; however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives\. We cannot assure that these measures or any future initiatives will be successful in increasing our revenues\. Additionally, the implementation of these initiatives may create logistical challenges that could harm the operational performance of our airline or result in decreased demand\. Also, our implementation of any new or increased fees might reduce the demand for air travel on our airline or across the industry in general, particularly if weakened economic conditions make our customers more sensitive to increased travel costs or provide a significant competitive advantage to other carriers that determine not to institute similar charges\.

Our intellectual property rights, particularly our branding rights, are valuable, and any inability to protect them may adversely affect our business and financial results\.

We consider our intellectual property rights, particularly our branding rights such as our trademarks applicable to our airline and AAdvantage loyalty program, to be a significant and valuable aspect of our business\. We protect our intellectual property rights through a combination of trademark, copyright and other forms of legal protection, contractual agreements and policing of third\-party misuses of our intellectual property\. Our failure to obtain or adequately protect our intellectual property or any change in law that lessens or removes the current legal protections of our intellectual property may diminish our competitiveness and adversely affect our business and financial results\. Any litigation or disputes regarding intellectual property may be costly and time\-consuming and may divert the attention of our management and key personnel from our business operations, either of which may adversely affect our business and financial results\.

We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity\.

From time to time, we are a party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of our business or otherwise\. We are currently involved in various legal proceedings and claims that have not yet been fully resolved, and additional claims may arise in the future\. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our cont r ol\. Litigation is subject to significant uncertainty and may be expensive, time\-consuming, and disruptive to our operations\. Although we will vigorously defend ourselves in such legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain\. For these and other reasons, we may choose to settle legal proceedings and claims, regardless of their actual merit\. If a legal proceeding is resolved against us, it could result in significant compensatory damages, and in certain circumstances punitive or trebled damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief imposed on us\. If our existing insurance does not cover the amount or types of damages awarded, or if other resolution or actions taken as a result of the legal proceeding were to restrain our ability to operate or market our services, our consolidated financial position, results of operations or cash flows could be materially adversely affected\. In addition, legal proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to our reputation, which could adversely impact our business\. Additional information regarding certain legal matters in which we are involved can be found in Part I, Item 3\. Legal Proceedings\.

A higher than normal number of pilot retirements, more stringent duty time regulations, increased flight hour requirement for commercial airline pilots, reductions in the number of military pilots entering the commercial workforce, increased training requirements and other factors have caused a shortage of pilots that could materially adversely affect our business\.

We currently have a higher than normal number of pilots eligible for retirement\. Large numbers of pilots in the industry are approaching the FAA’s mandatory retirement age of 65\. Our pilots and other employees are subject to rigorous certification standards, and our pilots and other crew members must adhere to flight time and rest requirements\. Commencing in 2013, the minimum flight hour requirement to achieve a commercial pilot’s license in the United States (an Air Transport Pilot’s certificate) increased from 250 to 1,500 hours, thereby significantly increasing the time and cost commitment required to become licensed to fly commercial aircraft\. Additionally, the number of military pilots being trained by the U\.S\. armed forces and available as commercial pilots upon their retirement from military service has been decreasing\. These and other factors have contributed to a shortage of qualified, entry\-level pilots and increased compensation costs,

31


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

countries, which allow unrestricted route authority access between the U\.S\. and the foreign markets\. While the U\.S\. has worked to increase the number of countries with which open skies agreements are in effect, a number of markets important to us, including China, do not have open skies agreements\. For example, the open skies air services agreement between the U\.S\. and the EU, which took effect in March 2008, provides airlines from the U\.S\. and EU member states open access to each other’s markets, with freedom of pricing and unlimited rights to fly from the U\.S\. to any airport in the EU, including LHR\. As a result of the agreement and a subsequent open skies agreement involving the U\.S\. and the United Kingdom, which was agreed in anticipation of Brexit, we face increased competition in these markets, including LHR\. Bilateral and multilateral agreements among the U\.S\. and various foreign governments of countries we serve but which are not covered by an open skies treaty are subject to periodic renegotiation\. We currently operate a number of international routes under government arrangements that limit the number of airlines permitted to operate on the route, the capacity of the airlines providing services on the route, or the number of airlines allowed access to particular airports\. If an open skies policy were to be adopted for any of these markets, it could have a material adverse impact on us and could result in the impairment of material amounts of our related tangible and intangible assets\. In addition, competition from foreign airlines, revenue\-sharing joint ventures, JBAs, and other alliance arrangements by and among other airlines could impair the value of our business and assets on the open skies routes\.

The pending withdrawal of the United Kingdom from the EU, commonly referred to as Brexit, is currently scheduled to occur on March 29, 2019 and will mandate further modification in the current regulatory regime\. We face risks associated with the United Kingdom’s exit from the EU, notably given the extent of our passenger and cargo traffic and that of our joint business partners that flows through LHR in the United Kingdom\. Absent an approved withdrawal agreement between the United Kingdom and the EU (resulting in the so\-called “No Deal Brexit” scenario), our expectation is that air services (including those involving our joint business and code share partners) will continue substantially as we currently conduct them, at least for a transition period, in reliance on reciprocal “basic connectivity” traffic rights proposed by the EU and the United Kingdom and a new air services agreement between the U\.S\. and United Kingdom concluded on November 29, 2018\. However, the precise scope of traffic rights between the EU and the United Kingdom remains uncertain and therefore the continuation of our current services is not assured and could be subject to disruption\. If Brexit is accomplished pursuant to a withdrawal agreement consistent with the agreement presently being discussed between the United Kingdom and the EU, but which has yet to be approved by the United Kingdom, our current air services would continue as we currently conduct them during a transition period running through the end of 2020, with a potential extension of up to two years\. During that transition period, the United Kingdom and the EU would seek to implement a new air services agreement\. We cannot predict the terms of any such successor air services agreement or whether changes in the relationship between the United Kingdom and the EU, including whether or not the United Kingdom withdraws from the EU with or without an agreement, could materially adversely affect our business, results of operations and financial condition\. More generally, changes in U\.S\. or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of route authorities, slots or other assets located abroad, or otherwise adversely affect our international operations\.

***The airline industry is heavily taxed\.***

The airline industry is subject to extensive government fees and taxation that negatively impact our revenue and profitability\. The U\.S\. airline industry is one of the most heavily taxed of all industries\. These fees and taxes have grown significantly in the past decade for domestic flights, and various U\.S\. fees and taxes also are assessed on international flights\. For example, as permitted by federal legislation, most major U\.S\. airports impose a passenger facility charge per passenger on us\. In addition, the governments of foreign countries in which we operate impose on U\.S\. airlines, including us, various fees and taxes, and these assessments have been increasing in number and amount in recent years\. Moreover, we are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation\. We collect the excise tax, along with certain other U\.S\. and foreign taxes and user fees on air transportation (such as passenger security fees), and pass along the collected amounts to the appropriate governmental agencies\. Although these taxes and fees are not our operating expenses, they represent an additional cost to our customers\. There are continuing efforts in Congress and in other countries to raise different portions of the various taxes, fees, and charges imposed on airlines and their passengers, including the passenger facility charge, and we may not be able to recover all of these charges from our customers\. Increases in such taxes, fees and charges could negatively impact our business, results of operations and financial condition\.

Under DOT regulations, all governmental taxes and fees must be included in the prices we quote or advertise to our customers\. Due to the competitive revenue environment, many increases in these fees and taxes have been absorbed by the airline industry rather than being passed on to the customer\. Further increases in fees and taxes may reduce demand for air travel, and thus our revenues\.

25


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

• Our 133 unencumbered aircraft in the operating fleet as of December 31, 2019, that could be financed, if necessary; and

• Our combined bank line\-of\-credit facilities, with no outstanding borrowings, of $400 million\. Information about these facilities can be found in Note 5 to the consolidated financial statements\.

In 2019, we took delivery of four owned B737\-900ER and four owned E175 aircraft, and made net debt payments totaling $608 million, undertaken as part of our broader plan of reducing balance sheet leverage and lowering interest expense\. As part of this overall reduction plan, as of December 31, 2019, we have paid off approximately 75% of the debt sourced to fund the Virgin America acquisition\. We also continued to return capital to our shareholders by paying dividends totaling $173 million and repurchasing $75 million of our common stock\. Because of our strong balance sheet and financial performance, we are one of only three airlines in the U\.S\. with investment grade credit ratings\.

We believe that our current cash and marketable securities balance, combined with future cash flows from operations and other sources of liquidity, will be sufficient to fund our operations and meet our debt payment obligations for the foreseeable future\.

In our cash and marketable securities portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal\. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines\. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy\.

The table below presents the major indicators of financial condition and liquidity:

|                                                                                |                                                                                |                                                                                |                   |                   |  |  |  |                   |                   |  |  |  |        |        |
|:--------------------------------------------------------------------------------------------------------- |:--------------------------------------------------------------------------------------------------------- |:--------------------------------------------------------------------------------------------------------- |:-----------------:|:-----------------:|:- |:- |:- |:-----------------:|:-----------------:|:- |:- |:- |:------:|:------:|
| *(in millions)*                                                                                | *(in millions)*                                                                                | *(in millions)*                                                                                | December 31, 2019 | December 31, 2019 |  |  |  | December 31, 2018 | December 31, 2018 |  |  |  | Change | Change |
| Cash and marketable securities                                                                            | Cash and marketable securities                                                                            | Cash and marketable securities                                                                            |      $1,521       |      $1,521       |  |  |  |      $1,236       |      $1,236       |  |  |  | $285   | $285   |
| Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months revenue | Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months revenue | Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months revenue |       22%         |       22%         |  |  |  |       20%         |       20%         |  |  |  | 2 pts  | 2 pts  |
| Long\-term debt, net of current portion                                                                   | Long\-term debt, net of current portion                                                                   | Long\-term debt, net of current portion                                                                   |      $1,264       |      $1,264       |  |  |  |      $1,617       |      $1,617       |  |  |  | $(353) | $(353) |
| Shareholders’ equity                                                                                | Shareholders’ equity                                                                                | Shareholders’ equity                                                                                |      $4,331       |      $4,331       |  |  |  |      $3,751       |      $3,751       |  |  |  | $580   | $580   |

Debt\-to\-capitalization, adjusted for operating leases

|                                                      |                                                      |                                                      |                   |  |  |  |                   |  |  |  |           |           |
|:---------------------------------------------------- |:---------------------------------------------------- |:---------------------------------------------------- | -----------------:|:- |:- |:- | -----------------:|:- |:- |:- |:---------:|:---------:|
| *(in millions)*                                      | *(in millions)*                                      | *(in millions)*                                      | December 31, 2019 |  |  |  | December 31, 2018 |  |  |  |  Change   |  Change   |
| Long\-term debt, net of current portion              | Long\-term debt, net of current portion              | Long\-term debt, net of current portion              |           $1,264  |  |  |  |           $1,617  |  |  |  |   (22)%   |   (22)%   |
| Capitalized operating leases^(a)^                    | Capitalized operating leases^(a)^                    | Capitalized operating leases^(a)^                    |            1,708  |  |  |  |            1,768  |  |  |  |
^(a)^ |
^(a)^ |
| Adjusted debt                                        | Adjusted debt                                        | Adjusted debt                                        |           $2,972  |  |  |  |           $3,385  |  |  |  |           |           |
| Shareholders' equity                                 | Shareholders' equity                                 | Shareholders' equity                                 |            4,331  |  |  |  |            3,751  |  |  |  |   15%     |   15%     |
| Total invested capital                               | Total invested capital                               | Total invested capital                               |            7,303  |  |  |  |            7,136  |  |  |  |    2%     |    2%     |
| Debt\-to\-capitalization, including operating leases | Debt\-to\-capitalization, including operating leases | Debt\-to\-capitalization, including operating leases |              41%  |  |  |  |               47% |  |  |  |           |           |

(a)  Following the adoption of the new lease accounting standard on January 1, 2019, this represents the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments\. This change had no meaningful impact to the ratio\.

41


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

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

**Number** | **Description**                                                                                |
| 4\.192                        | [Form of Participation Agreement (Participation Agreement among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein) (incorporated by reference to Exhibit B to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on October 6, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517305920/d463889dex46.htm#ex4_6)                                                                                |
| 4\.193                        | [Form of First Amendment to Participation Agreement (First Amendment to Participation Agreement among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein) (incorporated by reference to Exhibit D to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on October 6, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517305920/d463889dex46.htm#ex4_6b)                                                                                |
| 4\.194                        | [Form of Indenture and Security Agreement (Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (incorporated by reference to Exhibit C to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on October 6, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517305920/d463889dex46.htm#ex4_6a)                                                                                |
| 4\.195                        | [Form of Pass Through Trust Certificate, Series 2017\-2B (incorporated by reference to Exhibit A to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on October 6, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517305920/d463889dex42.htm#ex4_2toc463889_35)                                                                                |
| 4\.196                        | [Revolving Credit Agreement (2017\-2B), dated as of October 5, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-2B, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.12 to American’s Current Report on Form 8\-K filed on October 6, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517305920/d463889dex412.htm)                                                                                |
| 10\.1                         | [Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016, amending the Loan Agreement, dated as of May 23, 2013, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\., as borrower), as the borrower, American Airlines Group Inc\., as parent and guarantor (as successor in interest to US Airways Group, Inc\., as parent and guarantor), the lenders from time to time party thereto, Citibank N\.A\., as administrative agent and collateral agent (as successor in interest to Citicorp North America Inc\., as administrative agent and collateral agent), and certain other parties thereto\. (incorporated by reference to Exhibit 10\.1 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/d286458dex101.htm) |
| 10\.2                         | [First Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of November 14, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016, amending the Loan Agreement, dated as of May 23, 2013, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\., as borrower), as the borrower, American Airlines Group Inc\., as parent and guarantor (as successor in interest to US Airways Group, Inc\., as parent and guarantor), the lenders from time to time party thereto, Citibank N\.A\., as administrative agent and collateral agent (as successor in interest to Citicorp North America Inc\., as administrative agent and collateral agent), and certain other parties thereto\.](https://americanairlines.gcs-web.com/email-alerts/ex10210k2017.htm)                                                    |
| 10\.3                         | [First Amendment and Restatement Agreement, dated as of April 20, 2015, in relation to the Credit and Guaranty Agreement, dated as of October 10, 2014 (as amended), among American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.), American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), the Revolving Lenders (as defined therein) party thereto, the 2015 Term Loan Lenders (as defined therein) party thereto and Citibank N\.A\., as administrative agent and collateral agent (incorporated by reference to Exhibit 10\.4 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/d945812dex104.htm)                                                                                |
| 10\.4                         | [First Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of October 26, 2015, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.), the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.6 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/d78287dex106.htm)                                                                                |
| 10\.5                         | [Second Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of September 22, 2016, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.1 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/d247546dex101.htm)                                                                                |
| 10\.6                         | [Third Amendment to the Amended and Restated Credit and Guaranty Agreement, dated as of June 14, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517239325/d416225dex102.htm)                                                                                |
| 10\.7                         | [Fourth Amendment to the Amended and Restated Credit and Guaranty Agreement, dated as of August 21, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto\.](https://americanairlines.gcs-web.com/email-alerts/ex10710k2017.htm) \*\*                                                                                |

190


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

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are those that require significant judgments and estimates\. Accordingly, the actual results may differ materially from these estimates\. For a discussion of these and other accounting policies, see  Note 1  of the Notes to the Consolidated Financial Statements\.

Loyalty Program

Our SkyMiles loyalty program generates customer loyalty by rewarding customers with incentives to travel on Delta\. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and other airlines that participate in the loyalty program\. When traveling, customers earn redeemable mileage credits based on the passenger's loyalty program status and travel fare paid\. Customers can also earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies\. To facilitate transactions with participating companies, we sell mileage credits to non\-airline businesses, customers and other airlines\. Mileage credits are redeemable by customers in future periods for air travel on Delta and other participating airlines, membership in our Sky Club and other program awards\.

To reflect the mileage credits earned, the loyalty program includes two types of transactions that are considered revenue arrangements with multiple performance obligations: (1) mileage credit earned with travel and (2) mileage credit sold to participating companies\.

Passenger Ticket Sales Earning Mileage Credits\.  Passenger ticket sales earning mileage credits under our loyalty program provide customers with (1) mileage credits earned and (2) air transportation\. We value each performance obligation on a standalone basis\. To value the mileage credits earned, we consider the quantitative value a passenger receives by redeeming miles for a ticket rather than paying cash, which is referred to as equivalent ticket value ("ETV")\. Our estimate of ETV is adjusted for mileage credits that are not likely to be redeemed ("breakage")\. Management uses statistical models to estimate breakage based on historical redemption patterns\. A change in assumptions as to the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years\. We recognize breakage proportionally during the period in which the remaining mileage credits are actually redeemed\.

At  December 31, 2018 , the aggregate deferred revenue balance associated with the SkyMiles program was  $6\.6 billion \. A hypothetical 10% change in the number of outstanding miles estimated to be redeemed would result in an approximately $200 million impact on annual revenue recognized\.

We defer revenue for the mileage credits when earned and recognize loyalty travel awards in passenger revenue as the miles are redeemed and services are provided\. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize passenger revenue when we provide transportation or if the ticket goes unused\.  A hypothetical 10% increase in our estimate of the ETV of a mileage credit would decrease annual passenger revenue by approximately $100 million, as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales\.

Sale of Mileage Credits\.  Customers may earn mileage credits based on their spending with participating companies such as credit card companies, hotels and car rental agencies with which we have marketing agreements to sell mileage credits\. Our contracts to sell mileage credits under these marketing agreements have multiple performance obligations\. Payments are typically due monthly based on the volume of miles sold during the period, and the terms of our marketing contracts are generally from one to eight years\.  During the years ended  December 31, 2018  and  2017 , total cash sales from marketing agreements were  $3\.5 billion  and  $3\.2 billion , respectively, which are allocated to travel and other performance obligations, as discussed below\.

Our most significant contract to sell mileage credits relates to our co\-brand credit card relationship with American Express\. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta\-American Express co\-branded credit card holders ("cardholders") and American Express Membership Rewards program participants, and allow American Express to market using our customer database\. Cardholders earn mileage credits for making purchases using co\-branded cards, may check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive other benefits while traveling on Delta\. Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the loyalty program\. We sell mileage credits at agreed\-upon rates to American Express which are then provided to their customers under the co\-brand credit card program and the Membership Rewards program\.

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