Annual Report of Southwest Airlines Co\. for year 2019

|        |                                                                                |
| ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|        | [Supplemental Agreement No\. 98 (incorporated by reference to Exhibit 10\.1(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2016 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000029/luv-12312016xex101a.htm) [Supplemental Agreement No\. 99 (incorporated by reference to Exhibit 10\.1(b) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2016 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000029/luv-12312016xex101b.htm) [Supplemental Agreement No\. 100 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000078/luv-3312017xex101.htm) [Supplemental Agreement No\. 101 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000078/luv-3312017xex102.htm) [Supplemental Agreement No\. 102 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000146/luv-6302017xex101.htm) ; [Supplemental Agreement No\. 103 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex101.htm) ; [Supplemental Letter Agreement No\. 6\-1162\-KLK\-0059R3 (incorporated by reference to Exhibit 10\.4 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex104.htm) ; [Supplemental Agreement No\. 104 (incorporated by reference to Exhibit 10\.1 to the Company's Quarterly Report on Form 10\-Q for the quarter ended March 31, 2018 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000009238018000073/luv-3312018xex101.htm) (1)

 |
| 10\.2  | [Form of Amended and Restated Executive Service Recognition Plan Executive Employment Agreement between the Company and certain Officers of the Company (incorporated by reference to Exhibit 10\.2 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex102.htm)  (2)                                                                                |
| 10\.3  | [Letter Agreement between Southwest Airlines Co\. and Gary C\. Kelly, effective as of February 1, 2011 (incorporated by reference to Exhibit 99\.1 to the Company’s Current Report on Form 8\-K filed February 1, 2011 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312511019263/dex991.htm)  (2)

                                                                                |
| 10\.4  | [Southwest Airlines Co\. Amended and Restated Severance Plan for Directors (as amended and restated effective May 19, 2009) (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2009 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238009000027/ex10_1.htm)

                                                                                |
| 10\.5  | [Southwest Airlines Co\. Outside Director Incentive Plan (as amended and restated effective May 16, 2007) (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2007 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238007000024/ex10_2.htm)

                                                                                |
| 10\.6  | [Southwest Airlines Co\. 2002 SWAPIA Non\-Qualified Stock Option Plan (incorporated by reference to Exhibit 4\.1 to the Company’s Registration Statement on Form S\-8 filed October 30, 2002 (File No\. 333\-100862))\.](http://www.sec.gov/Archives/edgar/data/92380/000095013402013128/d00561exv4w1.txt)                                                                                |
| 10\.7  | [Southwest Airlines Co\. Amended and Restated 2007 Equity Incentive Plan (incorporated by reference to Exhibit 99\.1 to the Company’s Current Report on Form 8\-K filed May 18, 2015(File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312515191553/d927261dex991.htm)  (2)                                                                                |
| 10\.8  | [Southwest Airlines Co\. 2007 Equity Incentive Plan Form of Notice of Grant and Terms and Conditions for Stock Option Grant (incorporated by reference to Exhibit 10\.31 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2007 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000095013408001572/d53331exv10w31.htm) (2)                                                                                |
| 10\.9  | [Southwest Airlines Co\. Excess Benefit Plan (incorporated by reference to Exhibit 10\.32 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex1032.htm)  (2)                                                                                |
| 10\.10 | [Amendment No\. 1 to the Southwest Airlines Co\. Excess Benefit Plan (incorporated by reference to Exhibit 10\.33 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex1033.htm) (2)                                                                                |
| 10\.11 | [Amendment No\. 2 to the Southwest Airlines Co\. Excess Benefit Plan (incorporated by reference to Exhibit 10\.34 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex1034.htm)  (2)                                                                                |
| 10\.12 | [Amended and Restated Southwest Airlines Co\. 2005 Excess Benefit Plan (as amended and restated, effective as of January 1, 2018) (incorporated by reference to Exhibit 10\.5 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017ex105.htm)  (2)                                                                                |
| 10\.13 | [Form of Indemnification Agreement between the Company and its Directors (incorporated by reference to Exhibit 10\.1 to the Company’s Current Report on Form 8\-K filed January 22, 2009 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509009729/dex101.htm)                                                                                |

122


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

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

American’s salaries, wages and benefits expense for the years ended December 31, 2018, 2017 and 2016 included $88 million, $90 million and $102 million, respectively, of share\-based compensation costs\.

During 2018, 2017 and 2016, AAG withheld approximately 0\.8 million, 1\.1 million and 1\.4 million shares of AAG common stock, respectively, and paid approximately $37 million, $51 million and $56 million, respectively, in satisfaction of certain tax withholding obligations associated with employee equity awards\.

***Restricted Stock Unit Awards (RSUs)***

AAG has granted RSUs with service conditions (time vested primarily over three years) and performance conditions\. The grant\-date fair value of RSUs is equal to the market price of the underlying shares of AAG common stock on the date of grant\. For time vested awards, the expense is recognized on a straight\-line basis over the vesting period for the entire award\. For awards with performance conditions, the expense is recognized based on the expected achievement at each reporting period\. Stock\-settled RSUs are classified as equity awards as the vesting results in the issuance of shares of AAG common stock\.

Stock\-settled RSU award activity for all plans for the years ended December 31, 2018, 2017 and 2016 is as follows:

|                                  |                      |                                            |
| -------------------------------- | -------------------- | ------------------------------------------ |
|                                  | **Number of Shares** | **Weighted Average Grant Date Fair Value** |
|                                  | **(In thousands)**   |                                            |
| Outstanding at December 31, 2015 | 5,607                | $38\.08                                    |
| Granted                          | 2,655                | 41\.34                                     |
| Vested and released              | (2,754)              | 34\.83                                     |
| Forfeited                        | (321)                | 40\.15                                     |
| Outstanding at December 31, 2016 | 5,187                | $41\.48                                    |
| Granted                          | 2,309                | 48\.58                                     |
| Vested and released              | (2,708)              | 39\.63                                     |
| Forfeited                        | (464)                | 44\.48                                     |
| Outstanding at December 31, 2017 | 4,324                | $46\.94                                    |
| Granted                          | 2,194                | 47\.65                                     |
| Vested and released              | (1,999)              | 44\.99                                     |
| Forfeited                        | (199)                | 45\.72                                     |
| Outstanding at December 31, 2018 | 4,320                | $44\.29                                    |

As of December 31, 2018, there was $111 million of unrecognized compensation cost related to stock\-settled RSUs\. These costs are expected to be recognized over a weighted average period of one year\. The total fair value of stock\-settled RSUs vested during the years ended December 31, 2018, 2017 and 2016 was $91 million, $123 million and $107 million, respectively\.

**14\. Valuation and Qualifying Accounts (in millions)**

|                                               |                                  |                                                           |                |                            |
| --------------------------------------------- | -------------------------------- | --------------------------------------------------------- | -------------- | -------------------------- |
|                                               | **Balance at Beginning of Year** | **Additions Charged to Statement of Operations Accounts** | **Deductions** | **Balance at End of Year** |
| **Allowance for obsolescence of spare parts** |                                  |                                                           |                |                            |
| Year ended December 31, 2018                  | $717                             | $57                                                       | $(20)          | $754                       |
| Year ended December 31, 2017                  | 720                              | 18                                                        | (21)           | 717                        |
| Year ended December 31, 2016                  | 689                              | 28                                                        | 3              | 720                        |
| **Allowance for uncollectible accounts**      |                                  |                                                           |                |                            |
| Year ended December 31, 2018                  | $21                              | $39                                                       | $(36)          | $24                        |
| Year ended December 31, 2017                  | 35                               | 41                                                        | (55)           | 21                         |
| Year ended December 31, 2016                  | 37                               | 47                                                        | (49)           | 35                         |

171


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

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

We currently have a higher than normal number of pilots eligible for retirement\. Large numbers of pilots in the industry are approaching the FAA’s mandatory retirement age of 65\. Our pilots and other employees are subject to rigorous certification standards, and our pilots and other crew members must adhere to flight time and rest requirements\. Commencing in 2013, the minimum flight hour requirement to achieve a commercial pilot’s license in the United States (an Air Transport Pilot’s certificate) increased from 250 to 1,500 hours, thereby significantly increasing the time and cost commitment required to become licensed to fly commercial aircraft\. Additionally, the number of military pilots being trained by the U\.S\. armed forces and available as commercial pilots upon their retirement from military service has been decreasing\. These and other factors have contributed to a shortage of qualified, entry\-level pilots and increased compensation costs, particularly for our regional subsidiaries and our other regional partners who are being required by market conditions to pay significantly increased wages and large signing bonuses to their pilots in an attempt to achieve desired staffing levels\. The foregoing factors have also led to increased competition from large, mainline carriers attempting to meet their hiring needs\. We believe that this industry\-wide pilot shortage is becoming an increasing problem for airlines in the United States\. Our regional partners have recently been unable to hire adequate numbers of pilots to meet their needs, resulting in a reduction in the number of flights offered, disruptions, increased costs of operations, financial difficulties and other adverse effects, and these circumstances may become more severe in the future and thereby cause a material adverse effect on our business\.

***Increases in insurance costs or reductions in insurance coverage may adversely impact our operations and financial results\.***

The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and a decrease in the insurance coverage available to commercial air carriers\. Accordingly, our insurance costs increased significantly, and our ability to continue to obtain insurance even at current prices remains uncertain\. If we are unable to maintain adequate insurance coverage, our business could be materially and adversely affected\. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the claims paying ability of some insurers\. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost\. Because of competitive pressures in our industry, our ability to pass along additional insurance costs to passengers is limited\. As a result, further increases in insurance costs or reductions in available insurance coverage could have an adverse impact on our financial results\.

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

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

32


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

are issued by United and secured by its aircraft\. The payment obligations under the equipment notes are those of United\. Proceeds received from the sale of pass\-through certificates are initially held by a depositary in escrow for the benefit of the certificate holders until United issues equipment notes to the trust, which purchases such notes with a portion of the escrowed funds\. These escrowed funds are not guaranteed by United and are not reported as debt on United's consolidated balance sheet because the proceeds held by the depositary are not United's assets\. In February 2019, United completed a $1\.0 billion EETC offering to finance certain 2018 and 2019 aircraft deliveries\. See Note 10 to the financial statements included in Part II, Item 8 of this report for additional information\.

***Increased Cost Provisions\.*** In United's financing transactions that include loans, United typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on LIBOR, for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject, in most cases, to obligations of the lenders to take certain limited steps to mitigate the requirement for, or the amount of, such increased costs\. At December 31, 2018, the Company had $3\.5 billion of floating rate debt and $27 million of fixed rate debt, with remaining terms of up to 12 years, that are subject to these increased cost provisions\. In several financing transactions involving loans or leases from non\-U\.S\. entities, with remaining terms of up to 12 years and an aggregate balance of $3\.2 billion, the Company bears the risk of any change in tax laws that would subject loan or lease payments thereunder to non\-U\.S\. entities to withholding taxes, subject to customary exclusions\.

***Fuel Consortia\.***United participates in numerous fuel consortia with other air carriers at major airports to reduce the costs of fuel distribution and storage\. Interline agreements govern the rights and responsibilities of the consortia members and provide for the allocation of the overall costs to operate the consortia based on usage\. The consortia (and in limited cases, the participating carriers) have entered into long\-term agreements to lease certain airport fuel storage and distribution facilities that are typically financed through tax\-exempt bonds, either special facilities lease revenue bonds or general airport revenue bonds, issued by various local municipalities\. In general, each consortium lease agreement requires the consortium to make lease payments in amounts sufficient to pay the maturing principal and interest payments on the bonds\. As of December 31, 2018, approximately $1\.7 billion principal amount of such bonds were secured by significant fuel facility leases in which United participates, as to which United and each of the signatory airlines has provided indirect guarantees of the debt\. As of December 31, 2018, the Company's contingent exposure was approximately $164 million principal amount of such bonds based on its recent consortia participation\. The Company's contingent exposure could increase if the participation of other air carriers decreases\. The guarantees will expire when the tax\-exempt bonds are paid in full, which ranges from 2022 to 2051\. The Company did not record a liability at the time these indirect guarantees were made\.

**Critical Accounting Policies**

Critical accounting policies are defined as those that are affected by significant judgments and uncertainties which potentially could result in materially different accounting under different assumptions and conditions\. The Company has prepared the financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which requires management to make estimates and assumptions that affect the reported amounts in the financial statements\. Actual results could differ from those estimates under different assumptions or conditions\. The Company has identified the following critical accounting policies that impact the preparation of the financial statements\.

***Frequent Flyer Accounting\.*** United's MileagePlus loyalty program builds customer loyalty by offering awards, benefits and services to program participants\. Members in this program earn miles for travel on United, United Express, Star Alliance members and certain other airlines that participate in the program\. Members can also earn miles by purchasing the goods and services of our network of non\-airline partners\. We have contracts to sell miles to these partners with the terms extending from one to eight years\. These partners include domestic and international credit card issuers, retail merchants, hotels, car rental companies and our participating airline partners\. Miles can be redeemed for free (other than taxes and government imposed fees), discounted or upgraded air travel and non\-travel awards\. Miles expire after 18 months of member account inactivity\.

*Miles Earned in Conjunction with Travel\.* When frequent flyers earn miles for flights, the Company recognizes a portion of the ticket sales as revenue when the travel occurs and defers a portion of the ticket sale representing the value of the related miles as a separate performance obligation\. The Company determines the estimated selling price of travel and miles as if each element is sold on a separate basis\. The total consideration from each ticket sale is then allocated to each of these elements, individually, on a pro\-rata basis\. At the time of travel, the Company records the portion allocated to the miles to Frequent flyer deferred revenue on the Company's consolidated balance sheet and subsequently recognizes it into revenue when miles are redeemed for air travel and non\-air travel awards\.

The Company's estimated selling price of miles is based on an equivalent ticket value less breakage, which incorporates the expected redemption of miles, as the best estimate of selling price for these miles\. The equivalent ticket value is based on the prior 12 months' weighted average equivalent ticket value of similar fares as those used to settle award redemptions while

34


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

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | offering our guests more travel destinations and better mileage credit/redemption opportunities, including elite qualifying miles on U\.S\. and international airline partners; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | giving our frequent flyer program a competitive advantage because of our partnership with carriers from all three of the major global alliances; |

|   |                                                                      |
| - | -------------------------------------------------------------------- |
| • | giving us access to more connecting traffic from other airlines; and |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | providing members of our alliance partners’ frequent flyer programs an opportunity to travel on Alaska, Virgin America and our regional partners while earning mileage credit in our partners’ programs\. |

Most of our codeshare relationships are free\-sale codeshares, where the marketing carrier sells seats on the operating carrier’s flights from the operating carrier’s inventory, but takes no inventory risk\. Our marketing agreements have various termination dates, and one or more may be in the process of renegotiation at any time\.

The comprehensive summary of Alaska's alliances with other airlines is as follows:

|                                            |                                                    |                                                                                |                                                                                |
| ------------------------------------------ | -------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- |
|                                            |                                                    | **Codeshare**                                                                     | **Codeshare**                                                                       |
|                                            | **Frequent**

**Flyer**

**Agreement** | **Alaska Flight \# on**

**Flights Operated by**

**Other Airline** | **Other Airline Flight \#**

**on Flights Operated by**

**Air Group** |
| **Major U\.S\. or International Airlines** |                                                    |                                                                                |                                                                                |
| American Airlines                          | Yes                                                | Yes                                                                               | Yes                                                                                |
| Air France ^(b)^                           | Yes                                                | No                                                                                | Yes                                                                                |
| British Airways                            | Yes                                                | No                                                                                | Yes                                                                                |
| Cathay Pacific Airways                     | Yes                                                | No                                                                                | Yes                                                                                |
| Condor Airlines ^(a)^                      | Yes                                                | No                                                                                | No                                                                                |
| Emirates                                   | Yes                                                | No                                                                                | Yes                                                                                |
| Finnair                                    | Yes                                                | No                                                                                | No                                                                                |
| Icelandair                                 | Yes                                                | No                                                                                | Yes                                                                                |
| Hainan Airlines                            | Yes                                                | No                                                                                | No                                                                                |
| Japan Airlines                             | Yes                                                | No                                                                                | No                                                                                |
| KLM ^(b)^                                  | Yes                                                | No                                                                                | Yes                                                                                |
| Korean Air                                 | Yes                                                | No                                                                                | Yes                                                                                |
| LATAM                                      | Yes                                                | No                                                                                | Yes                                                                                |
| Fiji Airways ^(a)^                         | Yes                                                | No                                                                                | Yes                                                                                |
| Qantas                                     | Yes                                                | No                                                                                | Yes                                                                                |
| Singapore Airlines                         | Yes                                                | No                                                                                | No                                                                                |
| **Regional Airlines**                      |                                                    |                                                                                |                                                                                |
| Ravn Alaska ^(c)^                          | Yes                                                | Yes                                                                               | No                                                                                |
| PenAir ^(a)^                               | Yes                                                | Yes                                                                               | No                                                                                |
| China Airlines ^(d)^                       | No                                                 | No                                                                                | Yes                                                                                |
| China Eastern ^(d)^                        | No                                                 | No                                                                                | Yes                                                                                |
| China Southern ^(d)^                       | No                                                 | No                                                                                | Yes                                                                                |
| Virgin Australia ^(d)^                     | No                                                 | No                                                                                | Yes                                                                                |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | These airlines do not have their own frequent flyer program\. However, Alaska's Mileage Plan ^TM^  members can earn and redeem miles on these airlines' route systems\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------- |
| (b) | Codeshare agreements with Air France & KLM terminate on March 31, 2018; frequent flyer agreements terminate on April 30, 2018\. |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (c) | Alaska has temporarily suspended codeshare activity with Ravn (effective July 1, 2017) while Ravn takes steps to address certain operational considerations\. The Frequent Flyer Agreement with Ravn has remained in place during this time\.  |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (d) | These codeshare agreements were established with Virgin America on their reservations platform\. After the conversion to a single Passenger Service System (PSS) in Q2 2018, these agreements will no longer exist\.  |

 9


Annual Report of Southwest Airlines Co\. for year 2017

treating Customers fairly, honestly, and respectfully, with its low fares and no unexpected bag fees, change fees, or hidden fees\.

Southwest continues to be the only major U\.S\. airline that offers to all ticketed Customers up to two checked bags that fly free (weight and size limits apply)\. Through both its national and local marketing campaigns, Southwest has continued to aggressively promote this point of differentiation from its competitors with its "Bags Fly Free®" message\. The Company believes its decision not to charge for first and second checked bags, as reinforced by the Company's related marketing, has driven an increase in the Company's market share and a resulting net increase in revenues\.

Southwest is also the only major U\.S\. airline that does not charge a fee on any of its fares for a Customer change in flight reservations\. The Company has continued to incorporate this key point of differentiation in its marketing campaigns\. The campaigns highlight the importance to Southwest of Customer Service by showing that Southwest understands plans can change and therefore does not charge a change fee\. While a Customer may pay a difference in airfare, the Customer will not be charged a change fee on top of any difference in airfare\.

Also unlike many of its competitors, Southwest does not impose additional fees for items such as seat selection, snacks, curb\-side check\-in, and telephone reservations\. In addition, Southwest allows each ticketed Customer to check one stroller and one car seat free of charge, in addition to the two free checked bags\.

The Company also continues to promote all of the many other reasons to fly Southwest such as its low fares, network size, Customer Service, free live television offerings, and its Rapid Rewards frequent flyer program\.

The Company's visual expression of its brand \- Heart \- is a part of the Company's aircraft livery, airport experience, and logo, and symbolizes the Company's care, trust, and belief in providing exceptional Hospitality, and its Employees' dedication to connecting Customers with what is important in their lives\. The Company's 737\-800 and 737 MAX 8 aircraft include a Heart cabin interior, which gives Southwest Customers a look and feel of the future, with bold blue seats and additional seat width and legroom, an adjustable headrest, enhanced back comfort, and extra room for personal belongings\. In addition, in 2017, the Company launched the final major element of its Heart brand refresh when front\-line Employees began wearing Employee\-designed uniforms that highlight the Company's red and blue Heart brand\.

**Technology Initiatives**

The Company has committed significant resources to technology improvements in support of its ongoing operations and initiatives\. In 2017, the Company completed a multi\-year initiative to completely transition its reservation system to the Amadeus Altéa Passenger Service System\. The new reservation system, which represented the single largest technology project in the Company's history, was designed to improve flight scheduling and inventory management, enable operational enhancements to manage flight disruptions, such as those caused by extreme weather conditions, enable revenue enhancements, further schedule optimization, support additional international growth, and enable other foundational and operational capabilities\.

The Company continues to invest significantly in technology resources including, among others, the Company's systems related to (i) aircraft maintenance record keeping, (ii) flight planning and scheduling, (iii) crew scheduling, and (iv) technical operations\.

**Regulation**

The airline industry is heavily regulated, especially by the federal government, and there are a significant number of governmental agencies and legislative bodies that have the ability to directly or indirectly affect the Company and/or the airline industry financially and/or operationally\. Examples of regulations affecting the Company and/or the airline industry, imposed by several of these governmental agencies and legislative bodies, are discussed below\.

10


Annual Report of Southwest Airlines Co\. for year 2017

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2017, and December 31, 2016:

|                                         |                       |                                                                                |                                                               |                                                           |
| --------------------------------------- | --------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------------------- | --------------------------------------------------------- |
|                                         |                       | **Fair value measurements at reporting date using:**                           | **Fair value measurements at reporting date using:**          | **Fair value measurements at reporting date using:**      |
|                                         |                       | **Quoted prices in**

**active markets**

**for identical assets** | **Significant**

**other observable**

**inputs** | **Significant**

**unobservable**

**inputs** |
| **Description**                         | **December 31, 2017** | **(Level 1)**                                                                  | **(Level 2)**                                                 | **(Level 3)**                                             |
| **Assets**                              | (in millions)         | (in millions)                                                                  | (in millions)                                                 | (in millions)                                             |
| Cash equivalents                        |                       |                                                                                |                                                               |                                                           |
| Cash equivalents (a)                    | $1,133                | $1,133                                                                         | $—                                                            | $—                                                        |
| Commercial paper                        | 350                   | —                                                                              | 350                                                           | —                                                         |
| Certificates of deposit                 | 12                    | —                                                                              | 12                                                            | —                                                         |
| Short\-term investments:                |                       |                                                                                |                                                               |                                                           |
| Treasury bills                          | 1,491                 | 1,491                                                                          | —                                                             | —                                                         |
| Certificates of deposit                 | 287                   | —                                                                              | 287                                                           | —                                                         |
| Fuel derivatives:                       |                       |                                                                                |                                                               |                                                           |
| Option contracts (b)                    | 283                   | —                                                                              | —                                                             | 283                                                       |
| Other available\-for\-sale securities   | 107                   | 107                                                                            | —                                                             | —                                                         |
| **Total assets**                        | $3,663                | $2,731                                                                         | $649                                                          | $283                                                      |
| **Liabilities**                         |                       |                                                                                |                                                               |                                                           |
| Fuel derivatives:                       |                       |                                                                                |                                                               |                                                           |
| Option contracts (b)                    | (35)                  | —                                                                              | —                                                             | (35)                                                      |
| Interest rate derivatives (see Note 10) | (22)                  | —                                                                              | (22)                                                          | —                                                         |
| **Total liabilities**                   | $(57)                 | $—                                                                             | $(22)                                                         | $(35)                                                     |

(a) Cash equivalents are primarily composed of money market investments\.

(b) In the Consolidated Balance Sheet amounts are presented as a net asset\. See Note 10\.

101


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

If we are unable to obtain and maintain adequate facilities and infrastructure throughout our system and, at some airports, adequate slots, we may be unable to operate our existing flight schedule and to expand or change our route network in the future, which may have a material adverse impact on our operations\.

In order to operate our existing and proposed flight schedule and, where desirable, add service along new or existing routes, we must be able to maintain and/or obtain adequate gates, check\-in counters, operations areas, operations control facilities and administrative support space\. As airports around the world become more congested, it may not be possible for us to ensure that our plans for new service can be implemented in a commercially viable manner, given operating constraints at airports throughout our network, including those imposed by inadequate facilities at desirable airports\.

In light of constraints on existing facilities, there is presently a significant amount of capital spending underway at major airports in the United States, including large projects underway at a number of airports where we have significant operations, such as DCA, LAX, LGA and ORD\. This spending is expected to result in increased costs to airlines and the traveling public that use those facilities as the airports seek to recover their investments through increased rental, landing and other facility costs\. In some circumstances, such costs could be imposed by the relevant airport authority without our approval\. Accordingly, our operating costs are expected to increase significantly at many airports at which we operate, including a number of our hubs and gateways, as a result of capital spending projects currently underway and additional projects that we expect to commence over the next several years \.

In addition, operations at three major domestic airports, certain smaller domestic airports and many foreign airports we serve are regulated by governmental entities through allocations of slots or similar regulatory mechanisms that limit the rights of carriers to conduct operations at those airports\. Each slot represents the authorization to land at or take off from the particular airport during a specified time period and may have other operational restrictions as well\. In the U\.S\., the DOT and the FAA currently regulate the allocation of slots or slot exemptions at DCA and two New York City airports: JFK and LGA\. Our operations at these airports generally require the allocation of slots or similar regulatory authority\. In addition to slot restrictions, operations at DCA and LGA are also limited based on a so\-called “perimeter rule” which generally limits the stage length of the flights that can be operated from those airports to 1,250 and 1,500 miles, respectively\. Similarly, our operations at LHR, international airports in Beijing, Frankfurt, Paris, Tokyo and other airports outside the U\.S\. are regulated by local slot authorities pursuant to the IATA Worldwide Scheduling Guidelines and/or applicable local law\. Termination of slot controls at some or all of the foregoing airports could affect our operational performance and competitive position\. We currently have sufficient slots or analogous authorizations to operate our existing flights and we have generally, but not always, been able to obtain the rights to expand our operations and to change our schedules\. However, there is no assurance that we will be able to obtain sufficient slots or analogous authorizations in the future or as to the cost of acquiring such rights because, among other reasons, such allocations are often sought after by other airlines and are subject to changes in governmental policies\. We cannot provide any assurance that regulatory changes regarding the allocation of slots, the continued enforcement of a perimeter rule or similar regulatory authority will not have a material adverse impact on our operations\.

Our ability to provide service can also be impaired at airports, such as LAX and ORD where the airport gate and other facilities are currently inadequate to accommodate all of the service that we would like to provide, or airports such as Dallas Love Field Airport where we have no access to gates at all\.

Any limitation on our ability to acquire or maintain adequate gates, ticketing facilities, operations areas, operations control facilities, slots (where applicable), or office space could have a material adverse effect on our business, results of operations and financial condition\.

Interruptions or disruptions in service at one of our key facilities could have a material adverse impact on our operations\.

We operate principally through our hubs and gateways in Charlotte, Chicago, Dallas/Fort Worth, London Heathrow, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D\.C\. Substantially all of our flights either originate at or fly into one of these locations\. A significant interruption or disruption in service at one of our hubs, gateways or other airports where we have a significant presence, resulting from ATC delays, weather conditions, natural disasters, growth constraints, performance by third\-party service providers (such as electric utility or telecommunications providers), failure of computer systems, disruptions at airport facilities or other key facilities used by us to manage our operations (such as occurred in the United Kingdom at LGW on December 20, 2018 and LHR on January 8, 2019 due to unauthorized drone activity), labor relations, power supplies, fuel supplies, terrorist activities, or otherwise could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe impact on our business, results of operations and financial condition\. We have limited control, particularly in the short term, over the operation, quality or maintenance of many of the services on which our operations depend and over whether vendors of such services will improve or continue to provide services that are essential to our business\.

30


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

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

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

***(a) Basis of Presentation***

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

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

***(b) Recent Accounting Pronouncements***

*Standards Adopted in 2018*

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

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

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

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

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

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

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

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

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

135


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

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

generation of future taxable income\. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets\. Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond American’s control, such as the health of the economy, the level and volatility of fuel prices and travel demand\.

***(i) Goodwill***

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and liabilities assumed\. Goodwill is not amortized but assessed for impairment annually on October 1^st^ or more frequently if events or circumstances indicate that goodwill may be impaired\. American has one consolidated reporting unit\.

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill\. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill\. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded\. Based upon American’s annual assessment, there was no goodwill impairment in 2018\. The carrying value of the goodwill on American’s consolidated balance sheets was $4\.1 billion as of December 31, 2018 and 2017\.

***(j) Other Intangibles, Net***

Intangible assets consist primarily of domestic airport slots, customer relationships, marketing agreements, international slots and route authorities, airport gate leasehold rights and tradenames\.

*Finite\-Lived Intangible Assets*

Finite\-lived intangible assets are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable\.

The following table provides information relating to American’s amortizable intangible assets as of December 31, 2018 and 2017 (in millions):

|                               |                  |                  |
| ----------------------------- | ---------------- | ---------------- |
|                               | **December 31,** | **December 31,** |
|                               | **2018**         | **2017**         |
| Domestic airport slots        | $365             | $365             |
| Customer relationships        | 300              | 300              |
| Marketing agreements          | 105              | 105              |
| Tradenames                    | 35               | 35               |
| Airport gate leasehold rights | 137              | 137              |
| Accumulated amortization      | (663)            | (622)            |
| Total                         | $279             | $320             |

Certain domestic airport slots and airport gate leasehold rights are amortized on a straight\-line basis over 25 years\. The customer relationships and marketing agreements were identified as intangible assets subject to amortization and are amortized on a straight\-line basis over approximately nine years and 30 years, respectively\. Tradenames are fully amortized\.

American recorded amortization expense related to these intangible assets of $41 million, $44 million and $76 million for the years ended December 31, 2018, 2017 and 2016, respectively\. American expects to record annual amortization expense for these intangible assets as follows (in millions):

|                     |      |
| ------------------- | ---- |
| 2019                | $41  |
| 2020                | 41   |
| 2021                | 41   |
| 2022                | 41   |
| 2023                | 7    |
| 2024 and thereafter | 108  |
| Total               | $279 |

140


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

**American Airlines Group Inc\.**

**American Airlines, Inc\.**

**Form 10\-K**

**Year Ended December 31, 2017**

**Table of Contents**

|                                                                                |                                                                                |                                                                                |
| --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- |
|                                                                                |                                                                                | **Page**                                                                                |
| [**PART I**](https://americanairlines.gcs-web.com/email-alerts#sC6438DB3BB6F5766867258A59EF4E47F)   | [**PART I**](https://americanairlines.gcs-web.com/email-alerts#sC6438DB3BB6F5766867258A59EF4E47F)                                                                                | [**PART I**](https://americanairlines.gcs-web.com/email-alerts#sC6438DB3BB6F5766867258A59EF4E47F)   |
| [Item 1\.](https://americanairlines.gcs-web.com/email-alerts#s22D137DC0B035787B6AE5E9864620657)     | [Business](https://americanairlines.gcs-web.com/email-alerts#s22D137DC0B035787B6AE5E9864620657)                                                                                |
[5](https://americanairlines.gcs-web.com/email-alerts#s22D137DC0B035787B6AE5E9864620657)        |
| [Item 1A\.](https://americanairlines.gcs-web.com/email-alerts#sD860B8EB41E15371BCE52FF8C03BAE67)    | [Risk Factors](https://americanairlines.gcs-web.com/email-alerts#sD860B8EB41E15371BCE52FF8C03BAE67)                                                                                |
[15](https://americanairlines.gcs-web.com/email-alerts#sD860B8EB41E15371BCE52FF8C03BAE67)       |
| [Item 1B\.](https://americanairlines.gcs-web.com/email-alerts#s1737C3F2B95059FFB9D29BF190199068)    | [Unresolved Staff Comments](https://americanairlines.gcs-web.com/email-alerts#s1737C3F2B95059FFB9D29BF190199068)                                                                                |
[32](https://americanairlines.gcs-web.com/email-alerts#s1737C3F2B95059FFB9D29BF190199068)       |
| [Item 2\.](https://americanairlines.gcs-web.com/email-alerts#sDD3474DA60A65342A8230DD399FE68AD)     | [Properties](https://americanairlines.gcs-web.com/email-alerts#sDD3474DA60A65342A8230DD399FE68AD)                                                                                |
[33](https://americanairlines.gcs-web.com/email-alerts#sDD3474DA60A65342A8230DD399FE68AD)       |
| [Item 3\.](https://americanairlines.gcs-web.com/email-alerts#s7639617A7A5259E5B4B710B53953B6D4)     | [Legal Proceedings](https://americanairlines.gcs-web.com/email-alerts#s7639617A7A5259E5B4B710B53953B6D4)                                                                                |
[36](https://americanairlines.gcs-web.com/email-alerts#s7639617A7A5259E5B4B710B53953B6D4)       |
| [Item 4\.](https://americanairlines.gcs-web.com/email-alerts#sC5689EA608AC51648C311B66722B6E4F)     | [Mine Safety Disclosures](https://americanairlines.gcs-web.com/email-alerts#sC5689EA608AC51648C311B66722B6E4F)                                                                                |
[37](https://americanairlines.gcs-web.com/email-alerts#sC5689EA608AC51648C311B66722B6E4F)       |
| [**PART II**](https://americanairlines.gcs-web.com/email-alerts#sB109289CD5D55FD4A894E7360DFE3683)  | [**PART II**](https://americanairlines.gcs-web.com/email-alerts#sB109289CD5D55FD4A894E7360DFE3683)                                                                                | [**PART II**](https://americanairlines.gcs-web.com/email-alerts#sB109289CD5D55FD4A894E7360DFE3683)  |
| [Item 5\.](https://americanairlines.gcs-web.com/email-alerts#s15A7843CE2785D63AE899502CEF0DF09)     | [Market for American Airlines Group’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities](https://americanairlines.gcs-web.com/email-alerts#s15A7843CE2785D63AE899502CEF0DF09) |
[38](https://americanairlines.gcs-web.com/email-alerts#s15A7843CE2785D63AE899502CEF0DF09)       |
| [Item 6\.](https://americanairlines.gcs-web.com/email-alerts#s4A13A7BE348E5DB6B73778B69CA2E9FC)     | [Selected Consolidated Financial Data](https://americanairlines.gcs-web.com/email-alerts#s4A13A7BE348E5DB6B73778B69CA2E9FC)                                                                                |
[41](https://americanairlines.gcs-web.com/email-alerts#s4A13A7BE348E5DB6B73778B69CA2E9FC)       |
| [Item 7\.](https://americanairlines.gcs-web.com/email-alerts#sE35985CC7ED256E694287EB05E76907E)     | [Management’s Discussion and Analysis of Financial Condition and Results of Operations](https://americanairlines.gcs-web.com/email-alerts#s3A659A65446651C381749707FB9C4963)                                    |
[45](https://americanairlines.gcs-web.com/email-alerts#s3A659A65446651C381749707FB9C4963)       |
| [Item 7A\.](https://americanairlines.gcs-web.com/email-alerts#sCCD06D1050C65134A4AA20137BE93518)    | [Quantitative and Qualitative Disclosures About Market Risk](https://americanairlines.gcs-web.com/email-alerts#sCCD06D1050C65134A4AA20137BE93518)                                                               |
[78](https://americanairlines.gcs-web.com/email-alerts#sCCD06D1050C65134A4AA20137BE93518)       |
| [Item 8A\.](https://americanairlines.gcs-web.com/email-alerts#s592150812651520D96FAD74650EC14DE)    | [Consolidated Financial Statements and Supplementary Data of American Airlines Group Inc\.](https://americanairlines.gcs-web.com/email-alerts#s592150812651520D96FAD74650EC14DE)                                |
[80](https://americanairlines.gcs-web.com/email-alerts#s592150812651520D96FAD74650EC14DE)       |
| [Item 8B\.](https://americanairlines.gcs-web.com/email-alerts#s57556CCC82905BFEB197E8EEDDF9F0F6)    | [Consolidated Financial Statements and Supplementary Data of American Airlines, Inc\.](https://americanairlines.gcs-web.com/email-alerts#s57556CCC82905BFEB197E8EEDDF9F0F6)                                     |
[125](https://americanairlines.gcs-web.com/email-alerts#s57556CCC82905BFEB197E8EEDDF9F0F6)      |
| [Item 9\.](https://americanairlines.gcs-web.com/email-alerts#sA5E40990C2BA5DD1A9ADF8F63F396B0B)     | [Changes In and Disagreements with Accountants on Accounting and Financial Disclosure](https://americanairlines.gcs-web.com/email-alerts#sA5E40990C2BA5DD1A9ADF8F63F396B0B)                                     |
[170](https://americanairlines.gcs-web.com/email-alerts#sA5E40990C2BA5DD1A9ADF8F63F396B0B)      |
| [Item 9A\.](https://americanairlines.gcs-web.com/email-alerts#s1C3B4BA46F845832BFD44D2413D4935C)    | [Controls and Procedures](https://americanairlines.gcs-web.com/email-alerts#s1C3B4BA46F845832BFD44D2413D4935C)                                                                                |
[170](https://americanairlines.gcs-web.com/email-alerts#s1C3B4BA46F845832BFD44D2413D4935C)      |
| [**PART III**](https://americanairlines.gcs-web.com/email-alerts#sE80BFD5C27C5588A84D818CE3824E119) | [**PART III**](https://americanairlines.gcs-web.com/email-alerts#sE80BFD5C27C5588A84D818CE3824E119)                                                                                | [**PART III**](https://americanairlines.gcs-web.com/email-alerts#sE80BFD5C27C5588A84D818CE3824E119) |
| [Item 10\.](https://americanairlines.gcs-web.com/email-alerts#s898CAAC9D5065DD19DBF646184DC100C)    | [Directors, Executive Officers and Corporate Governance](https://americanairlines.gcs-web.com/email-alerts#s898CAAC9D5065DD19DBF646184DC100C)                                                                   |
[174](https://americanairlines.gcs-web.com/email-alerts#s898CAAC9D5065DD19DBF646184DC100C)      |
| [Item 11\.](https://americanairlines.gcs-web.com/email-alerts#s6DF5B21DD18453708321F543541045FC)    | [Executive Compensation](https://americanairlines.gcs-web.com/email-alerts#s6DF5B21DD18453708321F543541045FC)                                                                                |
[174](https://americanairlines.gcs-web.com/email-alerts#s6DF5B21DD18453708321F543541045FC)      |
| [Item 12\. ](https://americanairlines.gcs-web.com/email-alerts#sA04D26B82CCE5F56A5B9AFAFE9EF06EB)   | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](https://americanairlines.gcs-web.com/email-alerts#sA04D26B82CCE5F56A5B9AFAFE9EF06EB)                           |
[174](https://americanairlines.gcs-web.com/email-alerts#sA04D26B82CCE5F56A5B9AFAFE9EF06EB)      |
| [Item 13\.](https://americanairlines.gcs-web.com/email-alerts#sFAA79469CAFC5BD58682EBA9F7BACC0B)    | [Certain Relationships and Related Transactions, and Director Independence](https://americanairlines.gcs-web.com/email-alerts#sFAA79469CAFC5BD58682EBA9F7BACC0B)                                                |
[174](https://americanairlines.gcs-web.com/email-alerts#sFAA79469CAFC5BD58682EBA9F7BACC0B)      |
| [Item 14\.](https://americanairlines.gcs-web.com/email-alerts#s1933420891D5558C8C28D1447F9F328C)    | [Principal Accountant Fees and Services](https://americanairlines.gcs-web.com/email-alerts#s1933420891D5558C8C28D1447F9F328C)                                                                                |
[174](https://americanairlines.gcs-web.com/email-alerts#s1933420891D5558C8C28D1447F9F328C)      |
| [**PART IV**](https://americanairlines.gcs-web.com/email-alerts#s8EB99F25A6E457ACAFB323B96CB8A22B)  | [**PART IV**](https://americanairlines.gcs-web.com/email-alerts#s8EB99F25A6E457ACAFB323B96CB8A22B)                                                                                | [**PART IV**](https://americanairlines.gcs-web.com/email-alerts#s8EB99F25A6E457ACAFB323B96CB8A22B)  |
| [Item 15\.](https://americanairlines.gcs-web.com/email-alerts#s318AB8FA7B885A4F8A2180128EF23F3E)    | [Exhibits and Financial Statement Schedules](https://americanairlines.gcs-web.com/email-alerts#s318AB8FA7B885A4F8A2180128EF23F3E)                                                                               |
[175](https://americanairlines.gcs-web.com/email-alerts#s318AB8FA7B885A4F8A2180128EF23F3E)      |
| [Item 16\.](https://americanairlines.gcs-web.com/email-alerts#s7F20A34BFA475D0FAC69389DD7EEC674)    | [Form 10\-K Summary](https://americanairlines.gcs-web.com/email-alerts#s7F20A34BFA475D0FAC69389DD7EEC674)                                                                                |
[197](https://americanairlines.gcs-web.com/email-alerts#s7F20A34BFA475D0FAC69389DD7EEC674)      |
| [SIGNATURES](https://americanairlines.gcs-web.com/email-alerts#sCD1AEDE6BFAB5FB2A064734989CCB92B)   | [SIGNATURES](https://americanairlines.gcs-web.com/email-alerts#sCD1AEDE6BFAB5FB2A064734989CCB92B)                                                                                |
[198](https://americanairlines.gcs-web.com/email-alerts#sCD1AEDE6BFAB5FB2A064734989CCB92B)      |

3


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

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

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, 2019\. 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 stock options have a ten\-year term and vest pro\-rata over the third, fourth and fifth anniversaries of the date of grant\.

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

|                    |            |            |            |
|:------------------ | ----------:| ----------:| ----------:|
|                    |  **2017**  |  **2016**  |  **2015**  |
| Compensation cost: |            |            |            |
| RSUs               |       $63  |       $58  |       $52  |
| Restricted stock   |         8  |        11  |         6  |
| Stock options      |         2  |         1  |         —  |
| Total              |       $73  |       $70  |       $58  |

The table below summarizes UAL’s unearned compensation and weighted\-average remaining period to recognize costs for all outstanding share\-based awards that are probable of being achieved as of December 31, 2017 (in millions, except as noted):

|                  |                                |                                                                                |
|:---------------- | ------------------------------:| ----------------------------------------------------------------------------------:|
|                  | **Unearned
Compensation** | **Weighted\-**
**Average**
**Remaining
Period**
**(in years)** |
| RSUs             |                           $46  |                                                                              1\.9  |
| Stock options    |                             4  |                                                                              3\.9  |
| Restricted stock |                             3  |                                                                              1\.2  |
| Total            |                           $53  |                                                                                |

RSUs and Restricted Stock\. All performance\-based RSUs, as well as a portion of the outstanding time\-vested RSUs, will be settled in cash\. As of December 31, 2017, UAL had recorded a liability of $38 million related to its RSUs\. UAL paid $50 million, $69 million and $85 million related to its RSUs during 2017, 2016 and 2015, respectively\.

71


Annual Report of Southwest Airlines Co\. for year 2017

with a points earning multiplier, and points for flights are calculated by multiplying the fare for the flight by the fare class multiplier\. Likewise, the amount of points required to be redeemed for a flight is based on the fare and fare class purchased\. Under the program, (i) Members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates; and (ii) points do not expire so long as the Rapid Rewards Member has points\-earning activity during a 24\-month time period\. In addition, Southwest co\-branded Chase Visa credit card holders are able to redeem their points for items other than travel on Southwest Airlines, such as international flights on other airlines, cruises, hotel stays, rental cars, gift cards, event tickets, and more\. In addition to earning points for revenue flights and qualifying purchases with Rapid Rewards Partners, Rapid Rewards Members also have the ability to purchase, gift, and transfer points, as well as the ability to donate points to selected charities\.

The Company utilizes the incremental cost method of accounting for points earned through flights taken in its frequent flyer program\. Liabilities are recorded for the estimated incremental cost of providing free travel as points are being earned and companion passes earned\. The liabilities recorded represent the total number of points expected to be redeemed by Members, regardless of whether the Members may have enough to qualify for a full travel award\. The incremental cost liabilities are primarily composed of direct Passenger costs such as fuel, food, and other operational costs, but do not include any contribution to fixed overhead costs or profit\. At December 31, 2017, the incremental cost liabilities were approximately $76 million\. As previously discussed, the Company will adopt ASU No\. 2014\-09, Revenue from Contracts with Customers, as of January 1, 2018\. See Note 2 to the Consolidated Financial Statements for further information\.

The Company also sells frequent flyer points and related services to business partners participating in the frequent flyer program\. The majority of the points sold to business partners are through the Southwest co\-branded Chase Visa credit card\. Prior to third quarter 2015, funds received from the sale of points associated with these agreements were accounted for under the residual method\. Under the residual method, the Company estimated the percent of the amount received from frequent flyer points sold associated with Southwest’s co\-branded Chase Visa credit card that related to free travel\. The estimated amounts associated with free travel were deferred and recognized as Passenger revenue when the ultimate free travel awards were flown\. During third quarter 2015, the Company executed an amended co\-branded credit card agreement ("Agreement") with Chase Bank USA, N\.A\. ("Chase"), which materially modified the previously existing agreement between Chase and the Company\. Consideration received as part of this Agreement is subject to ASU No\. 2009\-13, Multiple\-Deliverable Revenue Arrangements \- a consensus of the FASB Emerging Issues Task Force\. The modified Agreement has the following multiple elements: travel points to be awarded; use of the Southwest Airlines’ brand and access to Rapid Reward Member lists; advertising elements; and the Company’s resource team\. Under ASU No\. 2009\-13, these deliverables are accounted for separately and allocation of consideration from the Agreement is determined based on the relative selling price of each deliverable\. The application of ASU No\. 2009\-13 to the Agreement decreases the relative value of the air transportation deliverables that the Company records as deferred revenue (and ultimately Passenger revenues when redeemed awards are flown) and increases the relative value of the marketing\-related deliverables recorded in Other revenues at the time these marketing\-related deliverables are provided\. This is principally due to the previous application of the residual method, which effectively applied the entire discount associated with the agreement to the marketing deliverables\.

Significant management judgment was used to estimate the selling price of each of the deliverables\. The objective was to determine the price at which the Company would transact a sale if the product or service was sold on a stand\-alone basis\. The Company determined the best estimate of selling price by considering multiple inputs and methods including, but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of points awarded, and the number of points redeemed\. The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple deliverables\. The Company records passenger revenue related to air transportation and certificates for discounted companion travel when the transportation is delivered\. A one percent increase or decrease in the Company's estimate of the standalone selling prices, implemented as of January 1, 2017, resulting in an allocation of proceeds to air transportation would have changed the Company's Operating revenues by less than $17 million for 2017\.

The Company followed the transition approach of ASU No\. 2009\-13, which required that the Company's existing deferred revenue balance, classified within Air traffic liability, be adjusted to reflect the value, on a relative selling

64


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

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

UNITED AIRLINES HOLDINGS, INC\.

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

|                                                                                |                     |                     |
| ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------- | ------------------- |
|                                                                                | **At December 31,** | **At December 31,** |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                | **2019**            | **2018 (a)**        |
| Current liabilities:                                                                                |                     |                     |
| Advance ticket sales                                                                                | $4,819              | $4,381              |
| Accounts payable                                                                                | 2,703               | 2,363               |
| Frequent flyer deferred revenue                                                                                | 2,440               | 2,286               |
| Accrued salaries and benefits                                                                                | 2,271               | 2,184               |
| Current maturities of long\-term debt                                                                                | 1,407               | 1,230               |
| Current maturities of finance leases                                                                                | 46                  | 123                 |
| Current maturities of operating leases                                                                                | 686                 | 719                 |
| Other                                                                                | 566                 | 553                 |
| Total current liabilities                                                                                | 14,938              | 13,839              |
| Long\-term debt                                                                                | 13,145              | 12,215              |
| Long\-term obligations under finance leases                                                                                | 220                 | 224                 |
| Long\-term obligations under operating leases                                                                                | 4,946               | 5,276               |
| Other liabilities and deferred credits:                                                                                |                     |                     |
| Frequent flyer deferred revenue                                                                                | 2,836               | 2,719               |
| Postretirement benefit liability                                                                                | 789                 | 1,295               |
| Pension liability                                                                                | 1,446               | 1,576               |
| Deferred income taxes                                                                                | 1,736               | 828                 |
| Other                                                                                | 1,024               | 1,010               |
| Total other liabilities and deferred credits                                                                                | 7,831               | 7,428               |
| Commitments and contingencies                                                                                |
              |
              |
| Stockholders' equity:                                                                                |                     |                     |
| Preferred stock                                                                                | —                   | —                   |
| Common stock at par, $0\.01 par value; authorized 1,000,000,000 shares; outstanding 251,216,381 and 269,914,769 shares at December 31, 2019 and 2018, respectively | 3                   | 3                   |
| Additional capital invested                                                                                | 6,129               | 6,120               |
| Stock held in treasury, at cost                                                                                | (3,599

)     | (1,993

)     |
| Retained earnings                                                                                | 9,716               | 6,715               |
| Accumulated other comprehensive loss                                                                                | (718

)       | (803

)       |
| Total stockholders' equity                                                                                | 11,531              | 10,042              |
| Total liabilities and stockholders' equity                                                                                | $52,611             | $49,024             |

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

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

46


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

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

|            |                 |                                                                                |
| ----------:|:--------------- |:-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| \*^10\.194 | UAL
United | [Supplemental Agreement No\. 5 to Purchase Agreement No\. 03776, dated January 20, 2016, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.1 to UAL’s Form  10\-Q for the quarter ended March 31, 2016, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312516550432/d116267dex101.htm)                                   |
| \*^10\.195 | UAL
United | [Supplemental Agreement No\. 6 to Purchase Agreement No\. 03776, dated February 8, 2016, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.3 to UAL’s Form  10\-Q for the quarter ended March 31, 2016, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312516550432/d116267dex103.htm)                                   |
| \*^10\.196 | UAL
United | [Supplemental Agreement No\. 7 to Purchase Agreement No\. 03776, dated December 27, 2016, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.183 to UAL’s Form  10\-K for the year ended December 31, 2016, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517054129/d300268dex10183.htm)                              |
| \*^10\.197 | UAL
United | [Supplemental Agreement No\. 8, including exhibits and side letters, to Purchase Agreement No\. 03776, dated June 7, 2017, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.3 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/d414345dex103.htm)  |
| \*^10\.198 | UAL
United | [Supplemental Agreement No\. 9, including exhibits and side letters, to Purchase Agreement No\. 03776, dated June 15, 2017, between The Boeing Company and United Airlines, Inc\. (filed as Exhibit 10\.4 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/d414345dex104.htm) |
| \*^10\.199 | UAL
United | [Letter Agreement No\.    6\-1162\-KKT\-080, dated July 12, 2012, among Boeing, United Continental Holdings, Inc\., United Air Lines, Inc\., and Continental Airlines, Inc\. (filed as Exhibit 10\.4 to UAL’s Form  10\-Q for the quarter ended September 30, 2012, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312512435658/d408868dex104.htm) |
| \*^10\.200 | UAL
United | [Purchase Agreement No\. 3860, dated September 27, 2012, between Boeing and United Air Lines, Inc\. (filed as Exhibit 10\.6 to UAL’s Form  10\-Q for the quarter ended September 30, 2012, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312512435658/d408868dex106.htm)                                                                          |
| \*^10\.201 | UAL
United | [Supplemental Agreement No\. 1 to Purchase Agreement No\. 3860, dated June 17, 2013 (filed as Exhibit 10\.6 to UAL’s Form  10\-Q for the quarter ended June 30, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex106.htm)                                                                                |
| \*^10\.202 | UAL
United | [Supplemental Agreement No\. 2 to Purchase Agreement No\. 3860, dated December 16, 2013 (filed as Exhibit 10\.1 to UAL’s Form  10\-Q for the quarter ended June 30, 2014, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312514278970/d732259dex101.htm)                                                                                |
| \*^10\.203 | UAL
United | [Supplemental Agreement No\. 3 to Purchase Agreement No\. 3860, dated as of July 22, 2014 (filed as Exhibit 10\.3 to UAL’s Form  10\-Q for the quarter ended September 30, 2014, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312514380216/d787177dex103.htm)                                                                                |
| \*^10\.204 | UAL
United | [Supplemental Agreement No\. 4 to Purchase Agreement No\. 3860, dated as of January 14, 2015 (filed as Exhibit 10\.6 to UAL’s Form  10\-Q for the quarter ended March 31, 2015, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312515144255/d891332dex106.htm)                                                                                |

128