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

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

A change in market interest rates would also impact interest income earned on our cash, cash equivalents and short\-term investments\. Assuming our cash, cash equivalents and short\-term investments remain at their average 2017 levels, a 100 basis point increase in interest rates would result in a corresponding increase in the Company’s interest income of approximately $45 million during 2018\.

***Commodity Price Risk (Aircraft Fuel)\.*** The price level of aircraft fuel can significantly affect the Company’s operations, results of operations, financial position and liquidity\.

Our operational and financial results can be significantly impacted by changes in the price and availability of aircraft fuel\. To provide adequate supplies of fuel, the Company routinely enters into purchase contracts that are customarily indexed to market prices for aircraft fuel, and the Company generally has some ability to cover short\-term fuel supply and infrastructure disruptions at some major demand locations\. The price of aircraft fuel has fluctuated substantially in the past several years and in order to lower its exposure to unpredictable increases in the market prices of aircraft fuel, the Company has historically hedged a portion of its planned fuel requirements\. The Company’s current strategy is to not enter into transactions to hedge fuel price volatility, although the Company regularly reviews its policy based on market conditions and other factors\. The Company’s 2018 forecasted fuel consumption is presently approximately four billion gallons, and based on this forecast, a one dollar change in the price of a barrel of crude oil would change the Company’s annual fuel expense by approximately $96 million\.

***Foreign Currency\.*** The Company generates revenues and incurs expenses in numerous foreign currencies\. Changes in foreign currency exchange rates impact the Company’s results of operations through changes in the dollar value of foreign currency\-denominated operating revenues and expenses\. Some of the Company’s more significant foreign currency exposures include the Canadian dollar, Chinese renminbi, European euro, British pound and Japanese yen\. The Company’s current strategy is to not enter into transactions to hedge its foreign currency sales, although the Company regularly reviews its policy based on market conditions and other factors\.

The result of a uniform 10 percent strengthening in the value of the U\.S\. dollar from December 31, 2017 levels relative to each of the currencies in which the Company has foreign currency exposure would result in a decrease in pre\-tax income of approximately $245 million for the year ending December 31, 2018\. This sensitivity analysis was prepared based upon projected 2018 foreign currency\-denominated revenues and expenses as of December 31, 2017\.

46


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

**Contractual Obligations**

The following table provides details of our future cash contractual obligations as of December 31, 2018\. The table does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time\.

|                                                                   |                            |                            |                            |                            |                            |                            |                            |
| ----------------------------------------------------------------- | -------------------------- | -------------------------- | -------------------------- | -------------------------- | -------------------------- | -------------------------- | -------------------------- |
|                                                                   | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** |
|                                                                   | **2019**                   | **2020**                   | **2021**                   | **2022**                   | **2023**                   | **2024 and Thereafter**    | **Total**                  |
| *American*  *^(a)^*                                               |                            |                            |                            |                            |                            |                            |                            |
| Long\-term debt:                                                  |                            |                            |                            |                            |                            |                            |                            |
| Principal amount  ^(b), (d)^  (See Note 3)                        | $2,508                     | $1,815                     | $3,409                     | $1,344                     | $3,892                     | $9,754                     | $22,722                    |
| Interest obligations  ^(c), (d)^                                  | 939                        | 837                        | 731                        | 598                        | 511                        | 1,121                      | 4,737                      |
| Finance lease obligations (See Note 4)                            | 124                        | 120                        | 118                        | 122                        | 105                        | 282                        | 871                        |
| Aircraft and engine purchase commitments  ^(e)^  (See Note 10(a)) | 2,906                      | 1,683                      | 994                        | 1,378                      | 1,450                      | 6,047                      | 14,458                     |
| Operating lease commitments  ^(f)^  (See Note 4)                  | 1,894                      | 1,824                      | 1,625                      | 1,428                      | 1,250                      | 3,611                      | 11,632                     |
| Regional capacity purchase agreements  ^(g)^  (See Note 10(b))    | 1,101                      | 930                        | 765                        | 618                        | 487                        | 1,043                      | 4,944                      |
| Minimum pension obligations  ^(h)^  (See Note 8)                  | 801                        | 625                        | 671                        | 939                        | 909                        | 1,263                      | 5,208                      |
| Retiree medical and other postretirement benefits (See Note 8)    | 23                         | 17                         | 17                         | 17                         | 23                         | 280                        | 377                        |
| Other purchase obligations  ^(i)^  (See Note 10(a))               | 1,873                      | 1,068                      | 1,009                      | 32                         | 7                          | 92                         | 4,081                      |
| Total American Contractual Obligations                            | $12,169                    | $8,919                     | $9,339                     | $6,476                     | $8,634                     | $23,493                    | $69,030                    |
| *AAG Parent and Other AAG Subsidiaries*  *^(a)^*                  |                            |                            |                            |                            |                            |                            |                            |
| Long\-term debt:                                                  |                            |                            |                            |                            |                            |                            |                            |
| Principal amount  ^(b)^  (See Note 5)                             | $750                       | $505                       | $2                         | $2                         | $2                         | $18                        | $1,279                     |
| Interest obligations  ^(c)^                                       | 67                         | 14                         | 2                          | 2                          | 1                          | 4                          | 90                         |
| Minimum pension obligations  ^(h)^  (See Note 10)                 | 6                          | 4                          | 5                          | 5                          | 5                          | 13                         | 38                         |
| Operating lease commitments (See Note 6)                          | 18                         | 14                         | 11                         | 10                         | 5                          | 9                          | 67                         |
| Total AAG Contractual Obligations                                 | $13,010                    | $9,456                     | $9,359                     | $6,495                     | $8,647                     | $23,537                    | $70,504                    |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(a)^ | For additional information, see the Notes to AAG’s and American’s Consolidated Financial Statements in Part II, Items 8A and 8B, respectively, referenced in the table above\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(b)^ | Amounts represent contractual amounts due\. Excludes  $219 million  and  $3 million  of unamortized debt discount, premium and issuance costs as of  December 31, 2018  for American and AAG Parent, respectively\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------- |
| ^(c)^ | For variable\-rate debt, future interest obligations are estimated using the current forward rates at  December 31, 2018 \. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(d)^ | Includes  $11\.6 billion  of future principal payments and  $2\.4 billion  of future interest payments, respectively, as of  December 31, 2018 , related to EETCs associated with mortgage financings for the purchase of certain aircraft\.  |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(e)^ | See Part I, Item 2\. Properties –  *“Aircraft and Engine Purchase Commitments”*  for additional information about the firm commitment aircraft delivery schedule\. Boeing has committed to provide sale\-leaseback financing (in the form of operating leases) for 22 787\-8 aircraft to be delivered in 2020 and 2021\. This financing is reflected in the operating lease commitments line above\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(f)^ | Includes  $352 million  of future minimum lease payments related to EETC leveraged lease financings of certain aircraft as of  December 31, 2018 \. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(g)^ | Represents minimum payments under capacity purchase agreements with third\-party regional carriers\. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and our actual payments could differ materially\. Rental payments under operating leases for certain aircraft flown under these capacity purchase agreements is reflected in the operating lease commitments line above\. |

70


Annual Report of Southwest Airlines Co\. for year 2018

|                                                         |                     |                          |                                |
| ------------------------------------------------------- | ------------------- | ------------------------ | ------------------------------ |
| **(in millions)**                                       |  **Carrying value** | **Estimated fair value** | **Fair value level hierarchy** |
| 2\.75% Notes due November 2019                          | $300                | $299                     | Level 2                        |
| Term Loan Agreement payable through May 2019 \- 6\.315% | 23                  | 23                       | Level 3                        |
| Term Loan Agreement payable through July 2019 \- 4\.84% | 10                  | 10                       | Level 3                        |
| 2\.65% Notes due 2020                                   | 492                 | 486                      | Level 2                        |
| Term Loan Agreement payable through 2020 \- 5\.223%     | 187                 | 187                      | Level 3                        |
| 737 Aircraft Notes payable through 2020                 | 67                  | 67                       | Level 3                        |
| 2\.75% Notes due 2022                                   | 300                 | 293                      | Level 2                        |
| Pass Through Certificates due 2022 \- 6\.24%            | 250                 | 263                      | Level 2                        |
| Term Loan Agreement payable through 2026 \- 3\.88%      | 197                 | 197                      | Level 3                        |
| 3\.00% Notes due 2026                                   | 300                 | 279                      | Level 2                        |
| 3\.45% Notes due 2027                                   | 300                 | 286                      | Level 2                        |
| 7\.375% Debentures due 2027                             | 125                 | 146                      | Level 2                        |

109


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

**ITEM 1A\. RISK FACTORS**

Below are certain risk factors that may affect our business, results of operations and financial condition, or the trading price of our common stock or other securities\. We caution the reader that these risk factors may not be exhaustive\. We operate in a continually changing business environment, and new risks and uncertainties emerge from time to time\. Management cannot predict such new risks and uncertainties, nor can it assess the extent to which any of the risk factors below or any such new risks and uncertainties, or any combination thereof, may impact our business\.

***Downturns in economic conditions could adversely affect our business******\.***

Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, our revenues are heavily influenced by the condition of the U\.S\. economy and economies in other regions of the world\. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by our competitors, all of which in turn have had, and may have in the future, a strong negative effect on our business\. See also *“The airline industry is intensely competitive and dynamic”* below\.

***Our business is very dependent on the price and availability of aircraft fuel\. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity******\.***

Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business\. Market prices for jet fuel have fluctuated substantially over the past several years and prices continue to be highly volatile\.

Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of fuel can have a material effect on our operating results and liquidity\. Due to the competitive nature of the airline industry and unpredictability of the market for air travel, we can offer no assurance that we may be able to increase our fares, impose fuel surcharges or otherwise increase revenues or decrease other operating costs sufficiently to offset fuel price increases\. Similarly, we cannot predict actions that may be taken by our competitors in response to changes in fuel prices\.

Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability, price volatility or cost of aircraft fuel\. Natural disasters (including hurricanes or similar events in the U\.S\. Southeast and on the Gulf Coast where a significant portion of domestic refining capacity is located), political disruptions or wars involving oil\-producing countries, economic sanctions imposed against oil\-producing countries or specific industry participants, changes in fuel\-related governmental policy, the strength of the U\.S\. dollar against foreign currencies, changes in the cost to transport or store petroleum products, changes in access to petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, distribution challenges, additional fuel price volatility and cost increases in the future\. Any of these factors or events could cause a disruption in oil production, refinery operations, pipeline capacity or terminal access and possibly result in significant increases in the price of aircraft fuel and diminished availability of aircraft fuel supply\.

Our aviation fuel purchase contracts generally do not provide meaningful price protection against increases in fuel costs\. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review this policy from time to time based on market conditions and other factors\. Accordingly, as of December 31, 2018, we did not have any fuel hedging contracts outstanding\. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices\. See also the discussion in Part II, Item 7A\. Quantitative and Qualitative Disclosures About Market Risk – *“Aircraft Fuel\.”*

***The airline industry is intensely competitive and dynamic\.***

Our competitors include other major domestic airlines and foreign, regional and new entrant airlines, as well as joint ventures formed by some of these airlines, many of which have more financial or other resources and/or lower cost structures than ours, as well as other forms of transportation, including rail and private automobiles\. In many of our markets we compete with at least one low\-cost carrier (including so\-called ultra\-low cost carriers)\. Our revenues are sensitive to the actions of other carriers in many areas including pricing, scheduling, capacity, amenities, loyalty benefits and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues\. These factors may become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near\-term survival rather than long\-term viability\.

16


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

**ITEM 16\. FORM 10\-K SUMMARY**

None\.

199


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

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

**NOTE 4 \- EARNINGS PER SHARE**

The computations of UAL's basic and diluted earnings per share are set forth below for the years ended December 31 (in millions, except per share amounts):

|                                              |          |              |              |
| -------------------------------------------- | -------- | ------------ | ------------ |
|                                              | **2018** | **2017 (a)** | **2016 (a)** |
| Earnings available to common stockholders    | $2,129   | $2,144       | $2,234       |
| Basic weighted\-average shares outstanding   | 275\.5   | 302\.7       | 329\.9       |
| Effect of employee stock awards              | 1\.2     | 0\.9         | 0\.4         |
| Diluted weighted\-average shares outstanding | 276\.7   | 303\.6       | 330\.3       |
| Earnings per share, basic                    | $7\.73   | $7\.08       | $6\.77       |
| Earnings per share, diluted                  | $7\.70   | $7\.06       | $6\.76       |

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

The number of antidilutive securities excluded from the computation of diluted earnings per share amounts was not material\.

**NOTE 5 \- SHARE\-BASED COMPENSATION PLANS**

UAL maintains several share\-based compensation plans\. These plans provide for grants of non\-qualified stock options, incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986), stock appreciation rights, restricted shares, RSUs, performance compensation awards, performance units, cash incentive awards, other equity\-based and equity\-related awards, and dividends and dividend equivalents\.

All awards are recorded as either equity or a liability in the Company's consolidated balance sheets\. The share\-based compensation expense is recorded in salaries and related costs\.

During 2018, UAL granted share\-based compensation awards pursuant to the United Continental Holdings, Inc\. 2017 Incentive Compensation Plan\. These share\-based compensation awards included approximately 1\.8 million RSUs consisting of 1\.1 million time\-vested RSUs and 0\.7 million performance\-based RSUs\. The time\-vested RSUs vest pro\-rata, a majority of which vest on February 28th of each year over a three\-year period from the date of grant\. These RSUs are generally equity awards settled in stock for domestic employees and liability awards settled in cash for international employees\. The cash payments are based on the 20\-day average closing price of UAL common stock immediately prior to the vesting date\. The performance\-based RSUs vest based on the Company's relative improvement in pre\-tax margin compared to a group of airline industry peers for the three years ending December 31, 2020\. If the performance condition is achieved, cash payments will be made after the end of the performance period based on the 20\-day average closing price of UAL common stock immediately prior to the vesting date and based on the level, if any, of the performance goal achieved\. The Company accounts for the performance\-based RSUs as liability awards\.

The following table provides information related to UAL's share\-based compensation plan cost for the years ended December 31 (in millions):

|                    |          |          |          |
| ------------------ | -------- | -------- | -------- |
|                    | **2018** | **2017** | **2016** |
| Compensation cost: |          |          |          |
| RSUs               | $98      | $63      | $58      |
| Restricted stock   | 2        | 8        | 11       |
| Stock options      | 1        | 2        | 1        |
| Total              | $101     | $73      | $70      |

65


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

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

In October 2016, ICAO formally adopted a global, market\-based emissions offset program known as the Carbon Offsetting and Reduction Scheme for International Aviation\. This program is designed to achieve a medium\-term goal for the aviation industry of achieving carbon\-neutral growth in international aviation beginning in 2020\. A pilot phase of the offset program will begin in 2021, followed by a first phase of the program beginning in 2024 and a second phase beginning in 2027\. Countries can voluntarily participate in the pilot and first phase, but participation in the second phase is mandatory\. In 2016, ICAO also adopted new aircraft certification standards to reduce carbon dioxide (CO ~2~ ) emissions from aircraft\. The new aircraft certification standards will apply to new aircraft types in 2020 and to new in\-production aircraft starting in 2023 but no later than 2028\. It is important to note that the standards will not apply to existing in\-service aircraft\. However, exemption from the certification requirement would provide no protection from taxation schemes based on CO ~2~  emissions\.

In July 2016, the U\.S\. Environmental Protection Agency ("EPA") issued a final finding under the Clean Air Act that greenhouse gases threaten the public health and welfare, and further determined that aircraft cause or contribute to greenhouse gases\. The endangerment finding does not establish standards, but triggers an obligation for the EPA to regulate greenhouse gas emissions from aircraft\. The EPA has historically implemented air emissions control standards adopted by ICAO; therefore, the ICAO aircraft engine certification standards are expected to influence the development of any EPA greenhouse gas emission standards for aircraft\.

We may face additional regulation of aircraft emissions in the U\.S\. and abroad and become subject to further taxes, charges or additional requirements to obtain permits or purchase allowances or emission credits for greenhouse gas emissions in various jurisdictions\. Additional regulation could result in taxation or permitting requirements from multiple jurisdictions for the same operations and significant costs for us and the airline industry\. In addition to direct costs, such regulation could result in increased fuel costs passed through from fuel suppliers affected by any such regulations\. We are monitoring and evaluating the potential impact of such legislative and regulatory developments\.

We seek to minimize the impact of greenhouse gas emissions from our operations through reductions in our fuel consumption and other efforts, and have realized reductions in our greenhouse gas emission levels since 2005\. We have reduced the fuel needs of our aircraft fleet through the retirement of older, less fuel efficient aircraft and replacement with newer, more fuel efficient aircraft\. In addition, we have implemented fuel saving procedures in our flight and ground support operations that further reduce carbon emissions\. We are also supporting efforts to develop alternative fuels and efforts to modernize the air traffic control system in the U\.S\. as part of our efforts to reduce our emissions and minimize our impact on the environment\.

Noise \. The Airport Noise and Capacity Act of 1990 recognizes the rights of operators of airports with noise problems to implement local noise abatement programs so long as such programs do not interfere unreasonably with interstate or foreign commerce or the national air transportation system\. This statute generally provides that local noise restrictions on Stage 3 aircraft first effective after October 1, 1990, require FAA approval\. While we have had sufficient scheduling flexibility to accommodate local noise restrictions in the past, our operations could be adversely impacted if locally\-imposed regulations become more restrictive or widespread\. In addition, foreign governments may allow airports to enact similar restrictions, which could adversely impact our international operations or require significant expenditure in order for our aircraft to comply with the restrictions\.

Refinery Matters \. Monroe's operation of the Trainer refinery is subject to numerous environmental laws and extensive regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures and greenhouse gas emissions\.

Under the Energy Independence and Security Act of 2007, the EPA has adopted Renewable Fuel Standards ("RFS") that mandate the blending of renewable fuels into gasoline and on\-road diesel ("Transportation Fuels")\. Renewable Identification Numbers ("RINs") are assigned to renewable fuels produced or imported into the U\.S\. that are blended into Transportation Fuels to demonstrate compliance with this obligation\. A refinery may meet its obligation under RFS by blending the necessary volumes of renewable fuels with Transportation Fuels or by purchasing RINs in the open market or through a combination of blending and purchasing RINs\. Because the refinery operated by Monroe does not blend renewable fuels, it must purchase its RINs requirement in the secondary market or obtain a waiver from the EPA\.

Other Environmental Matters \. We are subject to certain environmental laws and contractual obligations governing the management and release of regulated substances, which may require the investigation and remediation of affected sites\. Soil and/or ground water impacts have been identified at certain of our current or former leaseholds at several domestic airports\. To address these impacts, we have a program in place to investigate and, if appropriate, remediate these sites\. Although the ultimate outcome of these matters cannot be predicted with certainty, we believe that the resolution of these matters will not have a material adverse effect on our Consolidated Financial Statements\.

 9


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

Other Information

The table below presents supplemental cash flow information related to leases during 2018\.

|                                                                        |                       |
| ---------------------------------------------------------------------- | --------------------- |
|                                                                        | **Year Ended**        |
| **(in millions)**                                                      | **December 31, 2018** |
| Cash paid for amounts included in the measurement of lease liabilities |                       |
| Operating cash flows for operating leases                              | $1,271                |
| Operating cash flows for finance leases                                | 22                    |
| Financing cash flows for finance leases                                | 108                   |

Undiscounted Cash Flows

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the balance sheet\.

|                                                      |                      |                    |
| ---------------------------------------------------- | -------------------- | ------------------ |
| **(in millions)**                                    | **Operating Leases** | **Finance Leases** |
| 2019                                                 | $1,172               | $127               |
| 2020                                                 | 1,000                | 89                 |
| 2021                                                 | 819                  | 75                 |
| 2022                                                 | 692                  | 33                 |
| 2023                                                 | 654                  | 27                 |
| Thereafter                                           | 4,200                | 111                |
| Total minimum lease payments                         | 8,537                | 462                |
| Less: amount of lease payments representing interest | (1,781

)      | (59

)       |
| Present value of future minimum lease payments       | 6,756                | 403                |
| Less: current obligations under leases               | (955

)        | (109

)      |
| Long\-term lease obligations                         | $5,801               | $294               |

As of December 31, 2018 we have additional leases that have not yet commenced of   $189 million \. These leases will commence between 2019 and 2020 with lease terms of   1  year to   17  years\.

NOTE 9 \. AIRPORT REDEVELOPMENT

New York\-JFK Airport Redevelopment

In 2015, we completed our redevelopment project at New York\-JFK's Terminal 4 to facilitate convenient connections for our passengers and improve coordination with our SkyTeam alliance partners\. Terminal 4 is operated by JFK International Air Terminal LLC ("IAT"), a private party, under its lease with the Port Authority of New York and New Jersey ("Port Authority")\. In December 2010, we entered into a   33 \-year agreement with IAT ("Sublease") to sublease space in Terminal 4\. Also, in 2010, the Port Authority issued approximately   $800 million  principal amount of special project bonds to fund the majority of the project\.

We managed the project and bore the construction risk, including cost overruns\. We previously accounted for this project by recording an asset for project costs (e\.g\., design, permitting, labor and other general construction costs), regardless of funding source, and a construction obligation equal to project costs funded by parties other than us\. Our rental payments reduced the construction obligation and resulted in the recording of interest expense, calculated using the effective interest method\. At  December 31, 2017 , we recorded   $691 million  as property and equipment and   $744 million  as the related construction obligation\. Upon adoption of the new lease standard, these amounts were derecognized and we recorded a transition adjustment that increased equity by   $40 million  (net of tax)\. Following derecognition of these assets and liabilities, we recognized a ROU asset and lease liability representing the fixed component of the lease payments\.

 80


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

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

operate American’s business, even a relatively small increase or decrease in the price of fuel can have a material effect on American’s operating results and liquidity\.

These additional factors could impact American’s results of operations, financial performance and liquidity:

***(a) Credit Risk***

Most of American’s receivables relate to tickets sold to individual passengers through the use of major credit cards or to tickets sold by other airlines and used by passengers on American\. These receivables are short\-term, mostly settled within seven days after sale\. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts\. American does not believe it is subject to any significant concentration of credit risk\.

***(b) Interest Rate Risk***

American has exposure to market risk associated with changes in interest rates related primarily to its variable rate debt obligations\. Interest rates on $9\.9 billion principal amount of long\-term debt as of December 31, 2018 are subject to adjustment to reflect changes in floating interest rates\. The weighted average effective interest rate on American’s variable rate debt was 4\.3% at December 31, 2018\. American does not currently have an interest rate hedge program\.

***(c) Foreign Currency Risk***

American is exposed to the effect of foreign exchange rate fluctuations on the U\.S\. dollar value of foreign currency\-denominated operating revenues and expenses\. American’s largest exposure comes from the British pound, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real\. American does not currently have a foreign currency hedge program\. See Part I, Item 1A\. Risk Factors – *“We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control”* for unaudited additional discussion of this risk\.

**7\. Fair Value Measurements and Other Investments**

***Assets Measured at Fair Value on a Recurring Basis***

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i\.e\. an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability\. Accounting standards include disclosure requirements around fair values used for certain financial instruments and establish a fair value hierarchy\. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market\. Each fair value measurement is reported in one of three levels:

|   |                                                                      |
| - | -------------------------------------------------------------------- |
| • | Level 1 – Observable inputs such as quoted prices in active markets; |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------- |
| • | Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions\. |

When available, American uses quoted market prices to determine the fair value of its financial assets\. If quoted market prices are not available, American measures fair value using valuation techniques that use, when possible, current market\-based or independently\-sourced market parameters, such as interest rates and currency rates\.

American utilizes the market approach to measure fair value for its financial assets\. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets\. American’s short\-term investments classified as Level 2 primarily utilize broker quotes in a non\-active market for valuation of these securities\. No changes in valuation techniques or inputs occurred during the year ended December 31, 2018\.

156


Annual Report of Southwest Airlines Co\. for year 2018

by Southwest, it is particularly exposed to competition from surface transportation in these instances\. The airline industry is also subject to technology advancements that may limit the demand for air travel, including competition from alternatives to air travel such as videoconferencing and the Internet, which can increase in the event of travel inconveniences and economic downturns\. The Company is subject to the risk that air travel inconveniences and economic downturns may, in some cases, result in permanent changes to consumer behavior in favor of surface transportation and electronic communications\.

**Seasonality**

The Company's business is seasonal\. Generally, in most markets the Company serves, demand for air travel is greater during the summer months, and, therefore, revenues in the airline industry tend to be stronger in the second (April 1 \- June 30) and third (July 1 \- September 30) quarters of the year than in the first (January 1 \- March 31) and fourth (October 1 \- December 31) quarters of the year\. As a result, in many cases, the Company's results of operations reflect this seasonality\. Factors that could alter this seasonality include, among others, the price of fuel, general economic conditions, extreme or severe weather and natural disasters, fears of terrorism or war, or changes in the competitive environment\. Therefore, the Company's quarterly operating results are not necessarily indicative of operating results for the entire year, and historical operating results in a quarterly or annual period are not necessarily indicative of future operating results\.

**Employees**

At December 31, 2018, the Company had approximately 58,800 active fulltime equivalent Employees, consisting of approximately 24,900 flight, 3,000 maintenance, 20,800 ground, Customer, and fleet service, and 10,100 management, technology, finance, marketing, and clerical personnel (associated with non\-operational departments)\. Approximately 83 percent of these Employees were represented by labor unions\. The Railway Labor Act establishes the right of airline employees to organize and bargain collectively\. Under the Railway Labor Act, collective\-bargaining agreements between an airline and a labor union generally do not expire, but instead become amendable as of an agreed date\. By the amendable date, if either party wishes to modify the terms of the agreement, it must notify the other party in the manner required by the Railway Labor Act and/or described in the agreement\. After receipt of the notice, the parties must meet for direct negotiations\. If no agreement is reached, either party may request the National Mediation Board to appoint a federal mediator\. If no agreement is reached in mediation, the National Mediation Board may determine an impasse exists and offer binding arbitration to the parties\. If either party rejects binding arbitration, a 30\-day "cooling off" period begins\. At the end of this 30\-day period, the parties may engage in "self\-help," unless a Presidential Emergency Board is established to investigate and report on the dispute\. The appointment of a Presidential Emergency Board maintains the "status quo" for an additional period of time\. If the parties do not reach agreement during this period, the parties may then engage in "self\-help\." "Self\-help" includes, among other things, a strike by the union or the airline’s imposition of any or all of its proposed amendments and the hiring of new employees to replace any striking workers\.

19


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

|                                     |              |              |             |                                     |                                  |                             |                  |
| ----------------------------------- | ------------ | ------------ | ----------- | ----------------------------------- | -------------------------------- | --------------------------- | ---------------- |
| **Year Ended December 31, 2015**    | **Mainline** | **Regional** | **Horizon** | **Consolidating & Other** **^(b)^** | **Air Group Adjusted** **^(c)^** | **Special Items** **^(d)^** | **Consolidated** |
| **Operating revenues**              |              |              |             |                                     |                                  |                             |                  |
| Passenger                           |              |              |             |                                     |                                  |                             |                  |
| Mainline                            | $3,939       | $—           | $—          | $—                                  | $3,939                           | $—                          | $3,939           |
| Regional                            | —            | 854          | —           | —                                   | 854                              | —                           | 854              |
| Total passenger revenues            | 3,939        | 854          | —           | —                                   | 4,793                            | —                           | 4,793            |
| CPA revenues                        | —            | —            | 408         | (408)                               | —                                | —                           | —                |
| Freight and mail                    | 103          | 5            | —           | —                                   | 108                              | —                           | 108              |
| Other\-net                          | 621          | 72           | 4           | —                                   | 697                              | —                           | 697              |
| **Total operating revenues**        | 4,663        | 931          | 412         | (408)                               | 5,598                            | —                           | 5,598            |
| **Operating expenses**              |              |              |             |                                     |                                  |                             |                  |
| Operating expenses, excluding fuel  | 2,653        | 695          | 375         | (409)                               | 3,314                            | 32                          | 3,346            |
| Fuel expense                        | 823          | 131          | —           | —                                   | 954                              | —                           | 954              |
| **Total operating expenses**        | 3,476        | 826          | 375         | (409)                               | 4,268                            | 32                          | 4,300            |
| **Nonoperating income (expense)**   |              |              |             |                                     |                                  |                             |                  |
| Interest income                     | 19           | —            | —           | 2                                   | 21                               | —                           | 21               |
| Interest expense                    | (28)         | —            | (10)        | (4)                                 | (42)                             | —                           | (42)             |
| Other                               | 28           | —            | 1           | 6                                   | 35                               | —                           | 35               |
|                                     | 19           | —            | (9)         | 4                                   | 14                               | —                           | 14               |
| **Income (loss) before income tax** | $1,206       | $105         | $28         | $5                                  | $1,344                           | $(32)                       | $1,312           |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | As the acquisition of Virgin America closed on December 14, 2016, Mainline financial results, presented above include Virgin America for the twelve months ended  December 31, 2017 , and not for the prior period\. Financial results also reflect the impacts of purchase accounting\.  |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------- |
| (b) | Includes consolidating entries, Parent Company, McGee Air Services, and other immaterial business units\.  |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (c) | The Air Group Adjusted column excludes certain charges described in  (d)  and represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations\.  |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (d) | Includes accounting adjustments related to mark\-to\-market fuel hedge accounting charges (all years), merger\-related costs (2017 and 2016), pension settlement charge (2015), and a litigation\-related matter (2015)\. |

|                                |             |          |          |
| ------------------------------ | ----------- | -------- | -------- |
|                                | **2017**    | **2016** | **2015** |
| Depreciation and amortization: |             |          |          |
| Mainline                       | **$308**    | $296     | $268     |
| Horizon                        | **64**      | 67       | 52       |
| Consolidated                   | **$372**    | $363     | $320     |
| Capital expenditures:          |             |          |          |
| Mainline                       | **$734**    | $608     | $821     |
| Horizon                        | **292**     | 70       | 10       |
| Consolidated                   | **$1,026**  | $678     | $831     |
| Total assets at end of period: |             |          |          |
| Mainline                       | **$16,650** | $15,260  |          |
| Horizon                        | **929**     | 690      |          |
| Consolidating & Other          | **(6,839)** | (5,988)  |          |
| Consolidated                   | **$10,740** | $9,962   |          |

 93


Annual Report of Southwest Airlines Co\. for year 2017

The Company enters into financial derivative instruments with third party institutions in "over\-the\-counter" markets\. Since the majority of the Company’s financial derivative instruments are not traded on a market exchange, the Company estimates their fair values\. Depending on the type of instrument, the values are determined by the use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets\. Also, since there is not a reliable forward market for jet fuel beyond approximately 24 months, the Company must estimate the future prices of jet fuel in order to measure the effectiveness of the hedging instruments in offsetting changes to those prices\. Forward jet fuel prices are estimated through the observation of similar commodity futures prices (such as crude oil, heating oil, and unleaded gasoline) and adjusted based on variations of those like commodities to the Company’s ultimate expected price to be paid for jet fuel at the specific locations in which the Company hedges\.

Fair values for financial derivative instruments and forward jet fuel prices are estimated prior to the time that the financial derivative instruments settle and the time that jet fuel is purchased and consumed, respectively\. However, once settlement of the financial derivative instruments occurs and the hedged jet fuel is purchased and consumed, all values and prices are known and are recognized in the financial statements\. Although the Company continues to use a prospective assessment to determine that commodities continue to qualify for hedge accounting in specific locations where the Company hedges, there are no assurances that these commodities will continue to qualify in the future\. This is due to the fact that future price changes in these refined products may not be consistent with historical price changes\. Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results\.

Estimating the fair value of these fuel derivative instruments and forward prices for jet fuel will also result in changes in their fair values from period to period and thus determine their accounting treatment\. To the extent that the change in the estimated fair value of a fuel derivative instrument differs from the change in the estimated price of the associated jet fuel to be purchased, both on a cumulative and a period\-to\-period basis, ineffectiveness of the fuel hedge can result\. This could result in the immediate recording of non\-cash charges or income, representing the change in the fair value of the derivative, even though the derivative instrument may not expire/settle until a future period\. Likewise, if a derivative contract ceases to qualify for hedge accounting, the change in the fair value of the derivative instrument is recorded every period to Other (gains) and losses, net in the Consolidated Statement of Income in the period of the change\.

Under current hedge accounting guidance, ineffectiveness is inherent in hedging jet fuel with derivative positions based in other crude oil related commodities, especially given the past volatility in the prices of refined products\. Due to the volatility in markets for crude oil and related products, the Company is unable to predict the amount of ineffectiveness each period, including the loss of hedge accounting, which could be determined on a derivative by derivative basis or in the aggregate for a specific commodity\. This may result, and has historically resulted, in increased volatility in the Company’s financial statements\. The amount of hedge ineffectiveness and unrealized gains and losses due to the change in fair value of derivative contracts settling in future periods, recorded during historical periods, has been due to a number of factors\. These factors include: the significant fluctuation in energy prices, the number of derivative positions the Company holds, significant weather events that have affected refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses for mitigation of fuel price volatility\. The discontinuation of hedge accounting for specific hedges and for specific refined products, such as unleaded gasoline, can also be a result of these factors\. Depending on the level at which the Company is hedged at any point in time, as the fair value of the Company’s hedge positions fluctuate in amount from period to period, there could be continued variability recorded in the Consolidated Statement of Income, and furthermore, the amount of hedge ineffectiveness and unrealized gains or losses recorded in earnings may be material\. This is primarily because small differences in the correlation of crude oil related products could be leveraged over large volumes\.

The Company continually looks for better and more accurate methodologies in forecasting expected future cash flows relating to its jet fuel hedging program\. These estimates are an important component used in the measurement of effectiveness for the Company’s fuel hedges\. The current methodology used by the Company in forecasting forward jet fuel prices is primarily based on the idea that different types of commodities are statistically better predictors of

62


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

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

|           |                 |                                                                                |
| ---------:|:--------------- |:------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| \*†10\.50 | UAL             | [Third Amendment to Incentive Plan 2000, dated as of September 14, 2006 (filed as Exhibit 10\.1 to Continental’s Form  10\-Q for the quarter ended September 30, 2006, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968706000073/fexhibit101.htm)                                                                                |
| \*†10\.51 | UAL             | [Form of Outside Director Stock Option Agreement pursuant to Incentive Plan 2000 (filed as Exhibit 10\.14(b) to Continental’s Form  10\-K for the year ended December 31, 2000, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968701500005/exhibit1014b.htm)                                                                                |
| \*†10\.52 | UAL             | [Form of Outside Director Stock Option Grant pursuant to Incentive Plan 2000 (filed as Exhibit 10\.1 to Continental’s Form  10\-Q for the quarter ended March 31, 2008, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968708000020/f1st10qfileexh101.htm)                                                                                |
| \*†10\.53 | UAL             | [Form of  Non\-Employee Director Option Grant Document pursuant to Continental Airlines, Inc\. Incentive Plan 2010, as amended and restated through February 17, 2010 (filed as Exhibit 10\.12(a) to Continental’s Form  10\-K for the year ended December 31, 2009, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968710000011/fexh1012a.htm) |
| \*†10\.54 | UAL             | [United Air Lines, Inc\. Management Cash Direct & Cash Match Program (amended and restated effective January 1, 2014) (filed as Exhibit 10\.64 to UAL’s Form  10\-K for the year ended December 31, 2013, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312514060695/d624298dex1064.htm)                                                       |
| \*†10\.55 | UAL             | [United Continental Holdings, Inc\. Executive Severance Plan (effective October 1, 2014) (filed as Exhibit 10\.1 to UAL’s Form  8\-K filed June 20, 2014, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312514243977/d743918dex101.htm)                                                                                |
| \*†10\.56 | UAL  <br>United | [Separation Agreement, dated as of February 9, 2017, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and Julia Haywood (filed as Exhibit 10\.2 to UAL’s  Form 10\-Q for the quarter ended March 31, 2017, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517127429/d334701dex102.htm)                                 |
| \*†10\.57 | UAL             | [First Amendment to the United Continental Holdings, Inc\. 2006 Director Equity Incentive Plan (as amended and restated on February 20, 2014) (filed as Exhibit 10\.3 to UAL’s  Form 10\-Q for the quarter ended March 31, 2017, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517127429/d334701dex103.htm)                                  |
| \*†10\.58 | UAL             | [United Continental Holdings, Inc\. 2017 Incentive Compensation Plan (filed as Exhibit 10\.1 to UAL’s  Form 8\-K  filed on May 30, 2017, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517187534/d378920dex101.htm)                                                                                |
| \*†10\.59 | UAL             | [Form of Restricted Stock Unit Award Notice pursuant to the United Continental Holdings, Inc\. 2017 Incentive Compensation Plan (filed as Exhibit 10\.6 to UAL’s Form  10\-Q for the quarter ended June 30, 2017, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517231250/d414345dex106.htm)                                                 |
| \*†10\.60 | UAL             | [Form of Stock Option Award Notice pursuant to the United Continental Holdings, Inc\. 2017 Incentive Compensation Plan (filed as Exhibit 10\.7 to UAL’s Form  10\-Q for the quarter ended June 30, 2017, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517231250/d414345dex107.htm)                                                          |
| \*†10\.61 | UAL             | [United Continental Holdings, Inc\. Performance\-Based RSU Program (adopted pursuant to the United Continental Holdings, Inc\. 2017 Incentive Compensation Plan) (filed as Exhibit 10\.8 to UAL’s Form  10\-Q for the quarter ended June 30, 2017, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517231250/d414345dex108.htm)                |

116


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

When available, we use the rate implicit in the lease to discount lease payments to present value; however, we have an insignificant number of leases representing an immaterial portion of our lease liability that provide readily determinable implicit rates\. When the rate implicit in the lease is not available, we use our incremental borrowing rate, which is based on the estimated interest rate for collateralized borrowing over a similar term of the lease at commencement date\.

Some of our aircraft lease agreements include provisions for residual value guarantees\. These provisions primarily relate to our regional aircraft and the amounts are not significant\. We do not have other forms of variable interests with the lessors of our leased assets, other than at New York\-JFK, in which we are not the primary beneficiary as discussed in Note 9, "Airport Redevelopment," and one lessor, in which we have a variable interest in certain immaterial aircraft leases, that we have consolidated\.

Aircraft

As of December 31, 2019, including aircraft operated by our regional carriers, we leased 343 aircraft, of which 130 were under finance leases and 213 were operating leases\. Our aircraft leases had remaining lease terms of one month to 12 years\. Aircraft finance leases continue to be reported on our balance sheet, while operating leases were added to the balance sheet in 2018 with the adoption of the new standard\.

In addition, we have regional aircraft leases that are embedded within our capacity purchase agreements and included in the right\-of\-use ("ROU") asset and lease liability\. We allocated the consideration in each capacity purchase agreement to the lease and nonlease components based on their relative standalone value\. Lease components of these agreements consist of 162 aircraft as of December 31, 2019 and nonlease components primarily consist of flight operations, in\-flight and maintenance services\. We determined our best estimate of the standalone value of the individual components by considering observable information including rates paid by our wholly owned subsidiary, Endeavor Air, Inc\., and rates published by independent valuation firms\. See Note 11, "Commitments and Contingencies," for additional information about our capacity purchase agreements\.

With the adoption of the new lease standard in 2018, we determined that the CRJ\-200 fleet operated by our wholly\-owned subsidiary, Endeavor, was impaired due to insufficient future cash flows projected for the fleet\. Therefore, we recorded a transition adjustment that reduced equity by $284 million (net of tax) as of January 1, 2018, which reflects the difference in fair value compared to the basis of the ROU asset\.

Airport Facilities

Our facility leases are primarily for space at approximately 300 airports around the world that we serve\. These leases are classified as operating leases and reflect our use of airport terminals, office space, cargo warehouses and maintenance facilities\. We generally lease space from government agencies that control the use of the airport\. The remaining lease terms vary from one month to 31 years\. At the majority of the U\.S\. airports, the lease rates depend on airport operating costs or use of the facilities and are reset at least annually\. Because of the variable nature of the rates, these leases are not recorded on our balance sheet as a ROU asset and lease liability\.

Some airport facilities have fixed payment schedules, the most significant of which are New York\-LaGuardia and New York\-JFK\. For those airport leases, we have recorded a ROU asset and lease liability representing the fixed component of the lease payment\. See Note 9, "Airport Redevelopment," for more information on our significant airport redevelopment projects\.

Other Ground Property and Equipment

We lease certain IT assets (including servers, mainframes, etc\.), ground support equipment (including tugs, tractors, fuel trucks and de\-icers), and various other equipment\. The remaining lease terms range from one month to seven years\. Certain leased IT assets are embedded within various service agreements\. The lease components included in those agreements are included in the ROU asset and lease liability, and the amounts are not significant\.

76


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

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

Assets measured at fair value on a recurring basis are summarized below (in millions):

|                                                    |                                                     |                                                     |                                                     |                                                     |
| -------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- |
|                                                    | **Fair Value Measurements as of December 31, 2017** | **Fair Value Measurements as of December 31, 2017** | **Fair Value Measurements as of December 31, 2017** | **Fair Value Measurements as of December 31, 2017** |
|                                                    | **Total**                                           | **Level 1**                                         | **Level 2**                                         | **Level 3**                                         |
| Short\-term investments  ^(1) (2)^ :               |                                                     |                                                     |                                                     |                                                     |
| Money market funds                                 | $186                                                | $186                                                | $—                                                  | $—                                                  |
| Corporate obligations                              | 1,620                                               | —                                                   | 1,620                                               | —                                                   |
| Bank notes/certificates of deposit/time deposits   | 2,662                                               | —                                                   | 2,662                                               | —                                                   |
| Repurchase agreements                              | 300                                                 | —                                                   | 300                                                 | —                                                   |
|                                                    | 4,768                                               | 186                                                 | 4,582                                               | —                                                   |
| Restricted cash and short\-term investments  ^(1)^ | 318                                                 | 108                                                 | 210                                                 | —                                                   |
| Total                                              | $5,086                                              | $294                                                | $4,792                                              | $—                                                  |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Unrealized gains or losses on short\-term investments and restricted cash and short\-term investments are recorded in accumulated other comprehensive income (loss) at each measurement date\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | All short\-term investments are classified as available\-for\-sale and stated at fair value\. American’s short\-term investments mature in one year or less except for  $700 million  of bank notes/certificates of deposit/time deposits and  $341 million  of corporate obligations\. |

|                                                    |                                                     |                                                     |                                                     |                                                     |
| -------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- |
|                                                    | **Fair Value Measurements as of December 31, 2016** | **Fair Value Measurements as of December 31, 2016** | **Fair Value Measurements as of December 31, 2016** | **Fair Value Measurements as of December 31, 2016** |
|                                                    | **Total**                                           | **Level 1**                                         | **Level 2**                                         | **Level 3**                                         |
| Short\-term investments  ^(1)^  ^(2)^ :            |                                                     |                                                     |                                                     |                                                     |
| Money market funds                                 | $587                                                | $587                                                | $—                                                  | $—                                                  |
| Corporate obligations                              | 2,550                                               | —                                                   | 2,550                                               | —                                                   |
| Bank notes/certificates of deposit/time deposits   | 2,897                                               | —                                                   | 2,897                                               | —                                                   |
|                                                    | 6,034                                               | 587                                                 | 5,447                                               | —                                                   |
| Restricted cash and short\-term investments  ^(1)^ | 638                                                 | 638                                                 | —                                                   | —                                                   |
| Total                                              | $6,672                                              | $1,225                                              | $5,447                                              | $—                                                  |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Unrealized gains or losses on short\-term investments and restricted cash and short\-term investments are recorded in accumulated other comprehensive income (loss) at each measurement date\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | All short\-term investments are classified as available\-for\-sale and stated at fair value\. American’s short\-term investments mature in one year or less except for  $385 million  of bank notes/certificates of deposit/time deposits and  $230 million  of corporate obligations\. |

***Fair Value of Debt***

The fair value of American’s long\-term debt was estimated using quoted market prices or discounted cash flow analyses, based on American’s current estimated incremental borrowing rates for similar types of borrowing arrangements\. If American’s long\-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy\.

The carrying value and estimated fair value of American’s long\-term debt, including current maturities, were as follows (in millions):

|                                               |                               |                           |                               |                           |
| --------------------------------------------- | ----------------------------- | ------------------------- | ----------------------------- | ------------------------- |
|                                               | **December 31, 2017**         | **December 31, 2017**     | **December 31, 2016**         | **December 31, 2016**     |
|                                               | **Carrying**

**Value** | **Fair**

**Value** | **Carrying**

**Value** | **Fair**

**Value** |
| Long\-term debt, including current maturities | $23,294                       | $24,029                   | $22,577                       | $23,181                   |

150


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

Plan assets are invested in common commingled trust funds invested in equity and fixed income securities and in certain real estate assets\. The target and actual asset allocation of the funds in the qualified defined\-benefit plans, by asset category, are as follows:

|                               |                               |                               |                    |                    |                    |                    |                    |                    |                    |                    |                    |                    |                    |                    |  |  |  |             |             |  |  |  |       |       |  |  |  |                 |                 |                 |                 |                 |                 |                 |                 |                 |                 |                 |                 |                 |                 |  |  |  |  |  |  |  |  |  |  |  |  |
|:----------------------------- |:----------------------------- |:----------------------------- | ------------------:| ------------------:|:------------------ |:------------------ |:------------------ | ------------------:| ------------------:|:------------------ |:------------------ |:------------------ | ------------------:| ------------------:|:- |:- |:- | -----------:| -----------:|:- |:- |:- | -----:| -----:|:- |:- |:- | ---------------:| ---------------:|:---------------:|:---------------:|:---------------:|:---------------:|:---------------:|:---------------:|:---------------:|:---------------:|:---------------:|:---------------:|:---------------:|:---------------:|:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |
|                               |                               |                               | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ | Salaried Plan^(a)^ |  |  |  |             |             |  |  |  |       |       |  |  |  | All other plans | All other plans | All other plans | All other plans | All other plans | All other plans | All other plans | All other plans | All other plans | All other plans | All other plans | All other plans | All other plans | All other plans |  |  |  |  |  |  |  |  |  |  |  |  |
|                               |                               |                               |             Target |             Target |                    |                    |                    |               2019 |               2019 |                    |                    |                    |               2018 |               2018 |  |  |  |      Target |      Target |  |  |  |  2019 |  2019 |  |  |  |            2018 |            2018 |
| Asset category:               | Asset category:               | Asset category:               |                    |                    |                    |                    |                    |                    |                    |                    |                    |                    |                    |                    |  |  |  |             |             |  |  |  |       |       |  |  |  |                 |                 |
| Domestic equity securities    | Domestic equity securities    | Domestic equity securities    |         2% \- 12%  |         2% \- 12%  |                    |                    |                    |                7 % |                7 % |                    |                    |                    |                6 % |                6 % |  |  |  | 36% \- 46%  | 36% \- 46%  |  |  |  |  41 % |  41 % |  |  |  |            28 % |            28 % |
| Non\-U\.S\. equity securities | Non\-U\.S\. equity securities | Non\-U\.S\. equity securities |          0% \- 5%  |          0% \- 5%  |                    |                    |                    |                3 % |                3 % |                    |                    |                    |                3 % |                3 % |  |  |  | 13% \- 23%  | 13% \- 23%  |  |  |  |  18 % |  18 % |  |  |  |            12 % |            12 % |
| Fixed income securities       | Fixed income securities       | Fixed income securities       |        85% \- 95%  |        85% \- 95%  |                    |                    |                    |               90 % |               90 % |                    |                    |                    |               91 % |               91 % |  |  |  | 26% \- 46%  | 26% \- 46%  |  |  |  |  35 % |  35 % |  |  |  |            53 % |            53 % |
| Real estate                   | Real estate                   | Real estate                   |                — % |                — % |                    |                    |                    |                — % |                — % |                    |                    |                    |                — % |                — % |  |  |  |  0% \- 10%  |  0% \- 10%  |  |  |  |   6 % |   6 % |  |  |  |             7 % |             7 % |
| Plan assets                   | Plan assets                   | Plan assets                   |                    |                    |                    |                    |                    |              100 % |              100 % |                    |                    |                    |              100 % |              100 % |  |  |  |             |             |  |  |  | 100 % | 100 % |  |  |  |           100 % |           100 % |

(a) As our Salaried Plan is frozen and fully funded, our investment strategies differ significantly from that of our other outstanding plans\. Investments are in lower\-risk securities, with earnings designed to maintain a fully\-funded status\.

The Company’s investment policy focuses on achieving maximum returns at a reasonable risk for pension assets over a full market cycle\. The Company determines the strategic allocation between equities, fixed income and real estate based on current funded status and other characteristics of the plans\. As the funded status improves, the Company increases the fixed income allocation of the portfolio and decreases the equity allocation\. Actual asset allocations are reviewed regularly and periodically rebalanced as appropriate\.

Plan assets invested in common commingled trust funds are fair valued using the net asset values of these funds to determine fair value as allowed using the practical expedient method outlined in the accounting standards\. Fair value estimates for real estate are calculated using the present value of expected future cash flows based on independent appraisals, local market conditions and current and projected operating performance\.

Plan assets by fund category (in millions):

|                                         |                                         |                                         |         |  |  |  |         |  |  |  |                      |                      |
|:--------------------------------------- |:--------------------------------------- |:--------------------------------------- | -------:|:- |:- |:- | -------:|:- |:- |:- |:--------------------:|:--------------------:|
|                                         |                                         |                                         |    2019 |  |  |  |    2018 |  |  |  | Fair Value Hierarchy | Fair Value Hierarchy |
| Fund type:                              | Fund type:                              | Fund type:                              |         |  |  |  |         |  |  |  |                      |                      |
| U\.S\. equity market fund               | U\.S\. equity market fund               | U\.S\. equity market fund               |   $ 773 |  |  |  |   $ 431 |  |  |  |          1           |          1           |
| Non\-U\.S\. equity fund                 | Non\-U\.S\. equity fund                 | Non\-U\.S\. equity fund                 |     344 |  |  |  |     183 |  |  |  |          1           |          1           |
| Credit bond index fund                  | Credit bond index fund                  | Credit bond index fund                  |   1,009 |  |  |  |   1,135 |  |  |  |          1           |          1           |
| Plan assets in common commingled trusts | Plan assets in common commingled trusts | Plan assets in common commingled trusts | $ 2,126 |  |  |  | $ 1,749 |  |  |  |                      |                      |
| Real estate                             | Real estate                             | Real estate                             |     102 |  |  |  |     104 |  |  |  |         (a)          |         (a)          |
| Cash equivalents                        | Cash equivalents                        | Cash equivalents                        |      11 |  |  |  |       5 |  |  |  |          1           |          1           |
| Total plan assets                       | Total plan assets                       | Total plan assets                       | $ 2,239 |  |  |  | $ 1,858 |  |  |  |                      |                      |

(a) In accordance with Subtopic 820\-10, certain investments that are measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy\.

74


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

off” period commences\. During or after that period, a Presidential Emergency Board (PEB) may be established, which examines the parties’ positions and recommends a solution\. The PEB process lasts for 30 days and is followed by another 30\-day “cooling off” period\. At the end of this “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self\-help,” such as a strike, and the airline may resort to its own “self\-help,” including the imposition of any or all of its proposed amendments to the CBA and the hiring of new employees to replace any striking workers\.

None of the unions representing our employees presently may lawfully engage in concerted slowdowns or refusals to work, such as strikes, sick\-outs or other similar activity, against us\. Nonetheless, there is a risk that disgruntled employees, either with or without union involvement, could engage in one or more concerted refusals to work that could individually or collectively harm the operation of our airline and impair our financial performance\.

The following table shows our domestic airline employee groups that are represented by unions:

|                                                                                |                                  |                          |                                          |
| --------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------ | ---------------------------------------- |
| **Union**                                                                                | **Class or Craft**               | **Employees**  **^(1)^** | **Contract
Amendable Date**         |
| **Mainline:**                                                                                |                                  |                          |                                          |
| Allied Pilots Association (APA)                                                                                | Pilots                           | 13,600                   | 2020                                     |
| Association of Professional Flight Attendants (APFA)                                                                                | Flight Attendants                | 24,800                   | 2019                                     |
| Airline Customer Service Employee Association – Communications Workers of America and International Brotherhood of Teamsters (CWA\-IBT) | Passenger Service                | 15,050                   | 2020                                     |
| Transport Workers Union and International Association of Machinists & Aerospace Workers (TWU\-IAM Association)                          | Mechanics and Related            | 12,450                   | 2018                                     |
| TWU\-IAM Association                                                                                | Fleet Service                    | 16,800                   | 2018                                     |
| TWU\-IAM Association                                                                                | Stock Clerks                     | 1,900                    | 2018                                     |
| TWU\-IAM Association                                                                                | Flight Simulator Engineers       | 150                      | 2021                                     |
| TWU\-IAM Association                                                                                | Maintenance Control Technicians  | 200                      | 2018                                     |
| TWU\-IAM Association                                                                                | Maintenance Training Instructors | 50                       | 2018                                     |
| Professional Airline Flight Control Association (PAFCA)                                                                                | Dispatchers                      | 400                      | 2021                                     |
| Transport Workers Union (TWU)                                                                                | Flight Crew Training Instructors | 300                      | 2021                                     |
| **Envoy:**                                                                                |                                  |                          |                                          |
| Air Line Pilots Associations (ALPA)                                                                                | Pilots                           | 2,300                    | 2024                                     |
| Association of Flight Attendants\-CWA (AFA)                                                                                | Flight Attendants                | 1,400                    | 2020                                     |
| TWU                                                                                | Ground School Instructors        | 10                       | 2019                                     |
| TWU                                                                                | Mechanics and Related            | 1,350                    | 2020                                     |
| TWU                                                                                | Stock Clerks                     | 150                      | 2020                                     |
| TWU                                                                                | Fleet Service Clerks             | 3,700                    | 2019                                     |
| TWU                                                                                | Dispatchers                      | 70                       | 2019                                     |
| Communications Workers of America (CWA)                                                                                | Passenger Service                | 4,800                    | Tentative Initial
Agreement Reached |

9


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

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

As of December 31, 2018, UAL and United were in compliance with their respective debt covenants\. The collateral, covenants and cross default provisions of the Company's principal debt instruments that contain such provisions are summarized in the table below:

|                                                                                |                                                                                |
| -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Debt Instrument**                                                                          | **Collateral, Covenants and Cross Default Provisions**                                                                                |
| Various equipment notes and other notes payable                                              | Secured by certain aircraft\. The indentures contain events of default that are customary for aircraft financing, including in certain cases cross default to other related aircraft\.                                                                                |
| Credit Agreement

                                                               | Secured by certain of United's international route authorities, specified take\-off and landing slots at certain airports and certain other assets\.

The Credit Agreement requires the Company to maintain at least $2\.0 billion of unrestricted liquidity at all times, which includes unrestricted cash, short\-term investments and any undrawn amounts under any revolving credit facility, and to maintain a minimum ratio of appraised value of collateral to the outstanding obligations under the Credit Agreement of 1\.6 to 1\.0 at all times\. The Credit Agreement contains covenants that, among other things, restrict the ability of UAL and its restricted subsidiaries (as defined in the Credit Agreement) to incur additional indebtedness and to pay dividends on or repurchase stock, although, as of December 31, 2018, the Company had ample ability under these restrictions to repurchase stock under the Company's share repurchase program\.

The Credit Agreement contains events of default customary for this type of financing, including a cross default and cross acceleration provision to certain other material indebtedness of the Company\. |
| 6% Senior Notes due 2020

4\.25% Senior Notes due 2022

5% Senior Notes due 2024 | The indentures for these notes contain covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries (as defined in the indentures) to incur additional indebtedness and pay dividends on or repurchase stock, although the Company currently has ample ability under these restrictions to repurchase stock under the Company's share repurchase program\.                                                                                |

**NOTE 11 \- LEASES AND CAPACITY PURCHASE AGREEMENTS**

United leases aircraft, airport passenger terminal space, aircraft hangars and related maintenance facilities, cargo terminals, other airport facilities, other commercial real estate, office and computer equipment and vehicles\.

In 2018, United entered into a new Airline Use and Lease Agreement at Chicago O'Hare International Airport ("Chicago O'Hare") with the City of Chicago with a lease term of approximately 15 years, effective May 12, 2018 through December 31, 2033\. United also entered into several new ground and facility leases at Chicago O'Hare, effective May 12, 2018, for hangars, a ground equipment maintenance building, and employee parking with lease terms ranging from 15 years to 30 years\.

At December 31, 2018, United's scheduled future minimum lease payments under operating leases having initial or remaining noncancelable lease terms of more than one year, aircraft leases, including aircraft rent under CPAs and capital leases

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