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

Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as property, plant and equipment, goodwill, intangible assets and certain other assets and liabilities\. The Company determines the fair value of these items using Level 3 inputs, as described in Note 5\.

***Income Taxes***

The Company uses the asset and liability approach for accounting for and reporting income taxes\. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and for operating loss and tax credit carryforwards\. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled\. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date\. A valuation allowance would be established, if necessary, for the amount of any tax benefits that, based on available evidence, are not expected to be realized\. As of December 31, 2018, there is a partial valuation allowance against net deferred tax assets\. The Company accounts for unrecognized tax benefits in accordance with the applicable accounting standards\.

The Company has substantial federal and state net operating losses (NOLs) for income tax purposes as a result of the acquisition of Virgin America\. The Company's ability to utilize Virgin America's NOLs is limited by previous “ownership changes,” as defined in Section 382 of the Internal Revenue Code and similar state provisions, and could be further limited if there is another ownership change\. In general terms, an ownership change can occur whenever there is a collective shift in the ownership of a company by more than 50% by one or more “5% stockholders” within a three\-year period\. The occurrence of such a change generally limits the amount of NOL carryforwards a company could utilize in a given year to the aggregate fair market value of the company's common stock immediately prior to the ownership change, multiplied by the long\-term tax\-exempt interest rate in effect for the month of the ownership change\. The acquisition constituted an ownership change and the potential for further limitations following the acquisition\. See Note 7 to the consolidated financial statements for more discussion of the calculation\.

***Stock\-Based Compensation***

Accounting standards require companies to recognize as expense the fair value of stock options and other equity\-based compensation issued to employees as of the grant date\. These standards apply to all stock awards that the Company grants to employees as well as the Company’s Employee Stock Purchase Plan (ESPP), which features a look\-back provision and allows employees to purchase stock at a 15% discount\. All stock\-based compensation expense is recorded in wages and benefits in the consolidated statements of operations\.

***Earnings Per Share (EPS)***

Diluted EPS is calculated by dividing net income by the average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of in\-the\-money stock options and restricted stock units, using the treasury\-stock method\. In 2018, 2017, and 2016, anti\-dilutive stock options excluded from the calculation of EPS were not material\.

***Recently Issued Accounting Pronouncements***

In February 2016, the FASB issued ASU 2016\-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for leases currently classified as operating leases\. Under the new standard, a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right\-of\-use\-asset representing its right to use the underlying asset for the lease term\. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities\.

In July 2018, the FASB issued ASU 2018\-11, "Targeted Improvements \- Leases (Topic 842)" which amended Topic 842 to provide companies an alternative transition method which would not require adjusting comparative period financial information\. The Company plans to utilize this alternative transition method and will record a cumulative\-effect adjustment to the opening balance of retained earnings upon adoption on January 1, 2019\.

The Company plans to elect certain practical expedients available under the new standard\. For leases with a term of 12 months or less, the Company will make an accounting policy election not to recognize lease assets and lease liabilities\. Additionally the Company will elect the practical expedient to *not* separate lease and non\-lease components for certain asset classes\. Lastly, the

 65


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

**AMERICAN AIRLINES, INC\.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In millions)**

|                                    |                             |                             |                             |
| ---------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                    | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                    | **2018**                    | **2017**                    | **2016**                    |
| **Operating revenues:**            |                             |                             |                             |
| Passenger                          | $40,676                     | $39,131                     | $37,045                     |
| Cargo                              | 1,013                       | 890                         | 785                         |
| Other                              | 2,841                       | 2,589                       | 2,295                       |
| Total operating revenues           | 44,530                      | 42,610                      | 40,125                      |
| **Operating expenses:**            |                             |                             |                             |
| Aircraft fuel and related taxes    | 8,053                       | 6,128                       | 5,071                       |
| Salaries, wages and benefits       | 12,240                      | 11,942                      | 10,958                      |
| Regional expenses                  | 7,064                       | 6,572                       | 6,009                       |
| Maintenance, materials and repairs | 2,050                       | 1,959                       | 1,834                       |
| Other rent and landing fees        | 1,900                       | 1,806                       | 1,772                       |
| Aircraft rent                      | 1,264                       | 1,197                       | 1,203                       |
| Selling expenses                   | 1,520                       | 1,477                       | 1,323                       |
| Depreciation and amortization      | 1,839                       | 1,702                       | 1,525                       |
| Special items, net                 | 787                         | 712                         | 709                         |
| Other                              | 5,090                       | 4,910                       | 4,641                       |
| Total operating expenses           | 41,807                      | 38,405                      | 35,045                      |
| **Operating income**               | 2,723                       | 4,205                       | 5,080                       |
| **Nonoperating income (expense):** |                             |                             |                             |
| Interest income                    | 330                         | 215                         | 104                         |
| Interest expense, net              | (1,028)                     | (988)                       | (906)                       |
| Other income, net                  | 167                         | 123                         | 18                          |
| Total nonoperating expense, net    | (531)                       | (650)                       | (784)                       |
| **Income before income taxes**     | 2,192                       | 3,555                       | 4,296                       |
| Income tax provision               | 534                         | 2,270                       | 1,607                       |
| **Net income**                     | $1,658                      | $1,285                      | $2,689                      |

See accompanying notes to consolidated financial statements\.

130


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

We have an equity method investment in the entity which owns IAT, our sublessor at Terminal 4\. The Sublease requires us to pay certain fixed management fees\. We determined the investment is a variable interest entity and assessed whether we have a controlling financial interest in IAT\. Our rights under the Sublease, with respect to management of Terminal 4, are consistent with rights granted to an anchor tenant under a standard airport lease\. Accordingly, we do not consolidate in our Consolidated Financial Statements the entity in which we are invested\.

Los Angeles International Airport ("LAX")

During 2016, we executed a modified lease agreement with Los Angeles World Airports ("LAWA"), which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX by 2023\. Based on the lease agreement, we are designing and managing the construction of the initial investment of   $350 million  to renovate gate areas, support space and other amenities for passengers, to upgrade the baggage handling systems in the terminals and to facilitate the relocation of those airlines located in Terminals 2 and 3 to Terminals 5 and 6 and Tom Bradley International Terminal ("TBIT")\. The relocation was completed during 2017\. We are also designing and managing the construction of an expansion of the project, which is expected to cost an additional   $1\.5 billion , of which   $1\.3 billion  has been approved by LAWA\. The expanded project will include (1) redevelopment of Terminal 3 and enhancement of Terminal 2, (2) rebuilding the ticketing and arrival halls and security checkpoint, (3) construction of infrastructure for the planned airport people mover, (4) ramp improvements and (5) construction of a secure connector to the north side of TBIT\.

A substantial majority of the project costs will be funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using an   $800 million  revolving credit facility provided by a group of lenders\. The credit facility was executed during 2017 and we have guaranteed the obligations of the RAIC under the credit facility\. Loans made under the credit facility will be repaid with the proceeds from LAWA’s purchase of completed project assets\. Using funding provided by cash flows from operations and/or the credit facility, we spent approximately   $208 million  on this project during  2018 \.

New York\-LaGuardia Airport

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

In connection with the redevelopment, during 2017, we entered into an amended and restated terminal lease with the Port Authority with a term through 2050\. Pursuant to the lease agreement we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off\-premises supporting facilities, (2) receive a Port Authority contribution of   $600 million  to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers\. We currently expect our net project cost to be approximately   $3\.3 billion  with Delta bearing the risks of project construction, including any potential cost over\-runs\. Using funding provided by cash flows from operations and/or financing arrangements, we spent approximately   $304 million  on this project during  2018 \. See  Note 7 , "Long\-Term Debt," for additional information on the debt issuance related to this redevelopment project\.

 81


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

Liquidity and Capital Resources

As of  December 31, 2019 , the Company had  $4\.9 billion  in unrestricted cash, cash equivalents and short\-term investments, an increase of approximately  $1\.0 billion  from  December 31, 2018 \. The Company had its entire commitment capacity of  $2\.0 billion  under the revolving credit facility of the Credit Agreement available for borrowings as of  December 31, 2019 \.

We have a significant amount of fixed obligations, including debt, aircraft leases, leases of airport property and other facilities and pension funding obligations\. At  December 31, 2019 , the Company had approximately  $14\.8 billion  of debt and finance lease obligations, including  $1\.5 billion  that are due within the next 12 months\. In addition, we have substantial noncancelable commitments for capital expenditures, including the acquisition of new aircraft and related spare engines\. As of  December 31, 2019 , our current liabilities exceeded our current assets by approximately  $6\.7 billion \. However, approximately  $7\.3 billion  of our current liabilities are related to our advance ticket sales and frequent flyer deferred revenue, both of which largely represent revenue to be recognized for travel in the near future and not cash outlays\. The deficit in working capital does not have an adverse impact to our cash flows, liquidity or operations\.

For  2020 , the Company expects approximately $7\.0 billion of gross capital expenditures\. See Note 13 to the financial statements included in Part II, Item 8 of this report for additional information on commitments\.

As of  December 31, 2019 , a substantial portion of the Company's assets, principally aircraft, route authorities and airport slots, was pledged under various loan and other agreements\. Collateral pledged under these loans continues to be sufficient to satisfy the loan covenants\. We must sustain our profitability and/or access the capital markets to meet our significant long\-term debt and finance lease obligations and future commitments for capital expenditures, including the acquisition of aircraft and related spare engines\. See Note 10 to the financial statements included in Part II, Item 8 of this report for additional information on assets provided as collateral by the Company\.

The following is a discussion of the Company's sources and uses of cash for  2019  as compared to  2018 \. See "Liquidity and Capital Resources" in Part II, Item 7\. Management's Discussion and Analysis of Financial Condition and Results of Operations in the  2018  Annual Report for a discussion of the Company's sources and uses of cash in  2018  as compared to 2017\.

Operating Activities\.  Cash flow provided by operations for the year ended December 31, 2019 was  $6\.9 billion  compared to  $6\.2 billion  in the same period in 2018\. The increase is primarily attributable to an increase in operating income which was  $4\.3 billion  for 2019 as compared to  $3\.2 billion  for 2018\.

Investing Activities\.  The Company's capital expenditures were  $4\.5 billion  and  $4\.1 billion  in  2019  and  2018 , respectively\. The Company's capital expenditures for both years were primarily attributable to the purchase of aircraft, aircraft improvements, facility and fleet\-related costs and the purchase of information technology assets\.

In December 2019, United issued the AVH Convertible Loan\. For additional information regarding the AVH Convertible Loan, see Note 8 to the financial statements included in Part II, Item 8 of this report\.

In November 2018, United, as lender, entered into a Term Loan Agreement (the "BRW Term Loan Agreement") with, among others, BRW Aviation Holding LLC and BRW Aviation LLC ("BRW"), as guarantor and borrower, respectively\. BRW Aviation Holding LLC and BRW are affiliates of Synergy Aerospace Corporation, and BRW is the majority shareholder of AVH\. Pursuant to the BRW Term Loan Agreement, United provided to BRW a $456 million term loan (the "BRW Term Loan"), secured by a pledge of BRW's equity, as well as BRW's 516 million common shares of AVH (which are eligible to be converted into the same number of preferred shares, which may be deposited with the depositary for AVH's American Depositary Receipts ("ADRs"), the class of AVH securities that trades on the New York Stock Exchange (the "NYSE"), in exchange for 64\.5 million ADRs) (such equity and shares, collectively, the "BRW Loan Collateral")\. BRW is currently in default under the BRW Term Loan Agreement\. The BRW Term Loan was made in conjunction with a revenue\-sharing joint business agreement among United, Aerovías del Continente Americano S\.A ("Avianca"), a subsidiary of AVH, and Copa as described in Part 1, Item 1 of this report\. For additional information regarding the BRW Term Loan Agreement and related agreements, see Notes 8, 9 and 13 to the financial statements included in Part II, Item 8 of this report\.

In April 2018, through a wholly\-owned subsidiary, the Company invested $138 million in Azul Linhas Aéreas Brasileiras S\.A\. ("Azul") thus increasing its preferred equity stake in Azul to approximately 8% (representing approximately 2% of the total capital stock of Azul)\.

31


Annual Report of Southwest Airlines Co\. for year 2017

**Item 6\.** ***Selected Financial Data***

The following financial information, for the five years ended December 31, 2017, has been derived from the Company’s Consolidated Financial Statements\. This information should be viewed in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere herein\. The Company provides the operating data below because these statistics are commonly used in the airline industry and, therefore, allow readers to compare the Company’s performance against its results for prior periods, as well as against the performance of the Company’s peers\.

|                                                                      |                             |                             |                             |                             |                             |
| -------------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                      | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** |
|                                                                      | **2017**                    | **2016**                    | **2015**                    | **2014**                    | **2013**                    |
| **Financial Data (in millions, except per share amounts):**          |                             |                             |                             |                             |                             |
| Operating revenues                                                   | $21,171                     | $20,425                     | $19,820                     | $18,605                     | $17,699                     |
| Operating expenses                                                   | 17,656                      | 16,665                      | 15,704                      | 16,380                      | 16,421                      |
| Operating income                                                     | 3,515                       | 3,760                       | 4,116                       | 2,225                       | 1,278                       |
| Other expenses (income) net                                          | 264                         | 213                         | 637                         | 409                         | 69                          |
| Income before taxes                                                  | 3,251                       | 3,547                       | 3,479                       | 1,816                       | 1,209                       |
| Provision for income taxes                                           | (237)                       | 1,303                       | 1,298                       | 680                         | 455                         |
| Net income                                                           | $3,488                      | $2,244                      | $2,181                      | $1,136                      | $754                        |
| Net income per share, basic                                          | $5\.80                      | $3\.58                      | $3\.30                      | $1\.65                      | $1\.06                      |
| Net income per share, diluted                                        | $5\.79                      | $3\.55                      | $3\.27                      | $1\.64                      | $1\.05                      |
| Cash dividends per common share                                      | $0\.4750                    | $0\.3750                    | $0\.2850                    | $0\.2200                    | $0\.1300                    |
| Total assets at period\-end                                          | $25,110                     | $23,286                     | $21,312                     | $19,723                     | $19,177                     |
| Long\-term obligations at period\-end                                | $3,320                      | $2,821                      | $2,541                      | $2,434                      | $2,191                      |
| Stockholders’ equity at period\-end                                  | $10,430                     | $8,441                      | $7,358                      | $6,775                      | $7,336                      |
| **Operating Data:**                                                  |                             |                             |                             |                             |                             |
| Revenue passengers carried                                           | 130,256,190                 | 124,719,765                 | 118,171,211                 | 110,496,912                 | 108,075,976                 |
| Enplaned passengers                                                  | 157,677,218                 | 151,740,357                 | 144,574,882                 | 135,767,188                 | 133,155,030                 |
| Revenue passenger miles (RPMs) (000s) (a)                            | 129,041,420                 | 124,797,986                 | 117,499,879                 | 108,035,133                 | 104,348,216                 |
| Available seat miles (ASMs) (000s) (b)                               | 153,811,072                 | 148,522,051                 | 140,501,409                 | 131,003,957                 | 130,344,072                 |
| Load factor (c)                                                      | 83\.9%                      | 84\.0%                      | 83\.6%                      | 82\.5%                      | 80\.1%                      |
| Average length of passenger haul (miles)                             | 991                         | 1,001                       | 994                         | 978                         | 966                         |
| Average aircraft stage length (miles)                                | 754                         | 760                         | 750                         | 721                         | 703                         |
| Trips flown                                                          | 1,347,893                   | 1,311,149                   | 1,267,358                   | 1,255,502                   | 1,312,785                   |
| Seats flown (d)                                                      | 200,878,967                 | 193,167,695                 | 184,955,094                 | 179,733,055                 | 183,563,527                 |
| Seats per trip (e)                                                   | 149\.03                     | 147\.33                     | 145\.94                     | 143\.16                     | 139\.83                     |
| Average passenger fare (j)                                           | $146\.95                    | $149\.09                    | $154\.85                    | $159\.80                    | $154\.72                    |
| Passenger revenue yield per RPM (cents) (f)(j)                       | 14\.83                      | 14\.90                      | 15\.57                      | 16\.34                      | 16\.02                      |
| Operating revenue per ASM (cents) (g)                                | 13\.76                      | 13\.75                      | 13\.98                      | 14\.20                      | 13\.58                      |
| Passenger revenue per ASM (cents) (h)(j)                             | 12\.44                      | 12\.52                      | 13\.02                      | 13\.48                      | 12\.83                      |
| Operating expenses per ASM (cents) (i)                               | 11\.48                      | 11\.22                      | 11\.18                      | 12\.50                      | 12\.60                      |
| Operating expenses per ASM, excluding fuel (cents)                   | 8\.92                       | 8\.76                       | 8\.60                       | 8\.46                       | 8\.18                       |
| Operating expenses per ASM, excluding fuel and profitsharing (cents) | 8\.56                       | 8\.37                       | 8\.16                       | 8\.19                       | 8\.01                       |
| Fuel costs per gallon, including fuel tax                            | $1\.92                      | $1\.82                      | $1\.90                      | $2\.93                      | $3\.16                      |
| Fuel costs per gallon, including fuel tax, economic                  | $2\.00                      | $1\.92                      | $2\.07                      | $2\.92                      | $3\.12                      |
| Fuel consumed, in gallons (millions)                                 | 2,045                       | 1,996                       | 1,901                       | 1,801                       | 1,818                       |
| Active fulltime equivalent Employees                                 | 56,110                      | 53,536                      | 49,583                      | 46,278                      | 44,381                      |
| Aircraft at end of period                                            | 706                         | 723                         | 704                         | 665                         | 681                         |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | A revenue passenger mile is one paying passenger flown one mile\. Also referred to as "traffic," which is a measure of demand for a given period\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | An available seat mile is one seat (empty or full) flown one mile\. Also referred to as "capacity," which is a measure of the space available to carry passengers in a given period\. |

|     |                                                           |
| --- | --------------------------------------------------------- |
| (c) | Revenue passenger miles divided by available seat miles\. |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (d) | Seats flown is calculated using total number of seats available by aircraft type multiplied by the total trips flown by the same aircraft type during a particular period\. |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------- |
| (e) | Seats per trip is calculated using seats flown divided by trips flown\. Also referred to as "gauge\." |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (f) | Calculated as passenger revenue divided by revenue passenger miles\. Also referred to as "yield," this is the average cost paid by a paying passenger to fly one mile, which is a measure of revenue production and fares\. |

37


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

Retirement Benefits\.  The components of the net (benefit) cost are shown in  Note 10 , "Employee Benefit Plans\."  In 2017, the FASB issued ASU No\. 2017\-07, "Compensation—Retirement Benefits (Topic 715)\." This standard requires an entity to report the service cost component in the same line item as other compensation costs\. The other components of net (benefit) cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations\. We adopted this standard effective January 1, 2018\.  The components of the net (benefit) cost are shown in  Note 10 , "Employee Benefit Plans\."

Impact of Certain Recently Adopted Standards

We recast certain prior period amounts to conform with the adoption of the revenue recognition and retirement benefits standards, as shown in the tables below\.

|                                                    |                                  |                                  |                                  |                                  |                                  |                                  |
| -------------------------------------------------- | -------------------------------- | -------------------------------- | -------------------------------- | -------------------------------- | -------------------------------- | -------------------------------- |
|                                                    | **Year Ended December 31, 2017** | **Year Ended December 31, 2017** | **Year Ended December 31, 2017** | **Year Ended December 31, 2016** | **Year Ended December 31, 2016** | **Year Ended December 31, 2016** |
|

**(in millions, except per share data)** | **As Previously Reported**       | **Adjustments**                  | **Current Presentation**         | **As Previously Reported**       | **Adjustments**                  | **Current Presentation**         |
| **Income statement:**                              |                                  |                                  |                                  |                                  |                                  |                                  |
| Passenger revenue                                  | $34,819                          | $2,128                           | $36,947                          | $33,777                          | $2,037                           | $35,814                          |
| Cargo revenue                                      | 729                              | 15                               | 744                              | 668                              | 16                               | 684                              |
| Other revenue                                      | 5,696                            | (2,249

)                  | 3,447                            | 5,194                            | (2,242

)                  | 2,952                            |
| Total operating revenue                            | 41,244                           | (106

)                    | 41,138                           | 39,639                           | (189

)                    | 39,450                           |
| Operating expense                                  | 35,130                           | 42                               | 35,172                           | 32,687                           | (233

)                    | 32,454                           |
| Non\-operating expense                             | (413

)                    | (53

)                     | (466

)                    | (316

)                    | (327

)                    | (643

)                    |
| Income tax provision                               | (2,124

)                  | (171

)                    | (2,295

)                  | (2,263

)                  | 105                              | (2,158

)                  |
| Net income                                         | $3,577                           | $

(372

)           | $3,205                           | $4,373                           | $

(178

)           | $4,195                           |
| Diluted earnings per share                         | $4\.95                           | $

(0\.52

)         | $4\.43                           | $5\.79                           | $

(0\.24

)         | $5\.55                           |

|                                                           |                            |                       |                          |
| --------------------------------------------------------- | -------------------------- | --------------------- | ------------------------ |
|                                                           | **December 31, 2017**      | **December 31, 2017** | **December 31, 2017**    |
|

**(in millions)**                               | **As Previously Reported** | **Adjustments**       | **Current Presentation** |
| **Balance sheet:**                                        |                            |                       |                          |
| Deferred income taxes, net                                | $935                       | $419                  | $1,354                   |
| Air traffic liability                                     | 4,888                      | (524

)         | 4,364                    |
| Loyalty program deferred revenue (current and noncurrent) | 4,118                      | 2,203                 | 6,321                    |
| Other accrued and other noncurrent liabilities            | 3,969                      | 120                   | 4,089                    |
| Retained earnings                                         | 9,636                      | (1,380

)       | 8,256                    |

Significant Accounting Policies

Our significant accounting policies are disclosed below or included within the topic\-specific notes included herein\.

Cash and Cash Equivalents and Short\-Term Investments

Short\-term, highly liquid investments with maturities of three months or less when purchased are classified as cash and cash equivalents\.Investments with maturities of greater than three months, but not in excess of one year, when purchased are classified as short\-term investments\. Investments with maturities beyond one year when purchased may be classified as short\-term investments if they are expected to be available to support our short\-term liquidity needs\. Our short\-term investments are classified as fair value investments and gains and losses are recorded in non\-operating expense\.

Inventories

Fuel\.  Refined product, feedstock and blendstock inventories, all of which are finished goods, are carried at recoverable cost\. We use jet fuel in our airline operations that is produced by the refinery and procured through the exchange with third parties of gasoline, diesel and other refined products ("non\-jet fuel products") the refinery produces\. Cost is determined using the first\-in, first\-out method\. Costs include the raw material consumed plus direct manufacturing costs (such as labor, utilities and supplies) incurred and an applicable portion of manufacturing overhead\.

 60


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

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | contain covenants requiring us to maintain an aggregate of at least $2\.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities; |

|   |                                           |
| - | ----------------------------------------- |
| • | contain restrictive covenants that could: |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------- |
| • | limit our ability to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make investments and pay dividends; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | significantly constrain our ability to respond, or respond quickly, to unexpected disruptions in our own operations, the U\.S\. or global economies, or the businesses in which we operate, or to take advantage of opportunities that would improve our business, operations, or competitive position versus other airlines; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------- |
| • | limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions; and |

|   |                                                        |
| - | ------------------------------------------------------ |
| • | result in an event of default under our indebtedness\. |

Further, a substantial portion of our long\-term indebtedness bears interest at fluctuating interest rates, primarily based on the London interbank offered rate for deposits of U\.S\. dollars (LIBOR)\. LIBOR tends to fluctuate based on general interest rates, rates set by the Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions\. We have not hedged our interest rate exposure with respect to our floating rate debt\. Accordingly, our interest expense for any particular period will fluctuate based on LIBOR and other variable interest rates\. On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021\. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021\. The U\.S\. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U\.S\. dollar LIBOR with a newly created index, calculated with a broad set of short\-term repurchase agreements backed by treasury securities\. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere\. To the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected\. See also the discussion of interest rate risk in Part II, Item 7A\. Quantitative and Qualitative Disclosures About Market Risk – “*Interest*\.”

These obligations also impact our ability to obtain additional financing, if needed, and our flexibility in the conduct of our business, and could materially adversely affect our liquidity, results of operations and financial condition\.

***We will need to obtain sufficient financing or other capital to operate successfully\.***

Our business plan contemplates continued significant investments related to modernizing our fleet, improving the experience of our customers and updating our facilities\. Significant capital resources will be required to execute this plan\. We estimate that, based on our commitments as of December 31, 2017, our planned aggregate expenditures for aircraft purchase commitments and certain engines on a consolidated basis for calendar years 2018\-2022 would be approximately $12\.3 billion\. Accordingly, we will need substantial financing or other capital resources to finance such aircraft and engines\. If we are unable to arrange financing for such aircraft at customary advance rates and on terms and conditions acceptable to us, we may need to use cash from operations or cash on hand to purchase such aircraft or may seek to negotiate deferrals for such aircraft with the aircraft manufacturers\. Depending on numerous factors, many of which are out of our control, such as the state of the domestic and global economies, the capital and credit markets’ view of our prospects and the airline industry in general, and the general availability of debt and equity capital at the time we seek capital, the financing or other capital resources that we will need may not be available to us, or may be available only on onerous terms and conditions\. There can be no assurance that we will be successful in obtaining financing or other needed sources of capital to operate successfully\. An inability to obtain necessary financing on acceptable terms would have a material adverse impact on our business, results of operations and financial condition\.

18


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

|                                                    |
| -------------------------------------------------- |
| **ITEM 6\. SELECTED FINANCIAL AND OPERATING DATA** |

We have recast our financial information for fiscal years 2017 and 2016 to reflect the impacts of the new revenue recognition accounting standard and retirement benefits accounting standard which both became applicable beginning January 1, 2018\. Fiscal years 2015 and 2014 were not recast to reflect the impacts of these standards, and are presented as they were previously reported\.

|                                                                        |              |          |          |          |          |
| ---------------------------------------------------------------------- | ------------ | -------- | -------- | -------- | -------- |
| ***Year Ended December 31 (in millions, except per\-share amounts):*** | **2018**     | **2017** | **2016** | **2015** | **2014** |
| **CONSOLIDATED OPERATING RESULTS**  *(audited)*                        |              |          |          |          |          |
| Operating Revenues                                                     | **$8,264**   | $7,894   | $5,925   | $5,598   | $5,368   |
| Operating Expenses                                                     | **7,621**    | 6,686    | 4,619    | 4,300    | 4,406    |
| Operating Income                                                       | **643**      | 1,208    | 1,306    | 1,298    | 962      |
| Nonoperating income (expense), net of interest capitalized ^(a)^       | **(58)**     | (49)     | 10       | 14       | 13       |
| Income before income tax                                               | **585**      | 1,159    | 1,316    | 1,312    | 975      |
| Net Income                                                             | **$437**     | $960     | $797     | $848     | $605     |
| Average basic shares outstanding                                       | **123\.230** | 123\.211 | 123\.557 | 128\.373 | 135\.445 |
| Average diluted shares outstanding                                     | **123\.975** | 123\.854 | 124\.389 | 129\.372 | 136\.801 |
| Basic earnings per share                                               | **$3\.55**   | $7\.79   | $6\.45   | $6\.61   | $4\.47   |
| Diluted earnings per share                                             | **$3\.52**   | $7\.75   | $6\.41   | $6\.56   | $4\.42   |
| Cash dividends declared per share                                      | **$1\.28**   | $1\.20   | $1\.10   | $0\.80   | 0\.50    |
| **CONSOLIDATED FINANCIAL POSITION**  *(audited)*                       |              |          |          |          |          |
| *At End of Period (in millions):*                                      |              |          |          |          |          |
| Total assets                                                           | **$10,912**  | $10,746  | $9,968   | $6,530   | $6,059   |
| Long\-term debt, including current portion                             | **$2,103**   | $2,569   | $2,964   | $683     | $798     |
| Shareholders' equity                                                   | **$3,751**   | $3,460   | $2,744   | $2,411   | $2,127   |
| **OPERATING STATISTICS**  *(unaudited)* ^(d)^                          |              |          |          |          |          |
| **Consolidated:** **^(b)^**                                            |              |          |          |          |          |
| Revenue passengers (000)                                               | **45,802**   | 44,005   | 34,289   | 31,883   | 29,287   |
| RPMs (000,000) "traffic"                                               | **54,673**   | 52,338   | 37,209   | 33,578   | 30,718   |
| ASMs (000,000) "capacity"                                              | **65,335**   | 62,072   | 44,135   | 39,914   | 36,078   |
| Load factor                                                            | **83\.7%**   | 84\.3%   | 84\.3%   | 84\.1%   | 85\.1%   |
| Yield                                                                  | **13\.96¢**  | 13\.95¢  | 14\.49¢  | 14\.27¢  | 14\.91¢  |
| RASM                                                                   | **12\.65¢**  | 12\.72¢  | 13\.43¢  | 14\.03¢  | 14\.88¢  |
| CASMex ^(c)^                                                           | **8\.50¢**   | 8\.25¢   | 8\.32¢   | 8\.30¢   | 8\.36¢   |
| **Mainline:**                                                          |              |          |          |          |          |
| Revenue passengers (000)                                               | **35,603**   | 34,510   | 24,838   | 22,869   | 20,972   |
| RPMs (000,000) "traffic"                                               | **49,781**   | 48,236   | 33,489   | 30,340   | 27,778   |
| ASMs (000,000) "capacity"                                              | **59,187**   | 56,945   | 39,473   | 35,912   | 32,430   |
| Load factor                                                            | **84\.1%**   | 84\.7%   | 84\.8%   | 84\.5%   | 85\.7%   |
| Yield                                                                  | **13\.01¢**  | 13\.02¢  | 13\.18¢  | 12\.98¢  | 13\.58¢  |
| CASMex ^(c)^                                                           | **7\.73¢**   | 7\.50¢   | 7\.39¢   | 7\.39¢   | 7\.45¢   |
| **Regional**  **^(b)^** **:**                                          |              |          |          |          |          |
| Revenue passengers (000)                                               | **10,199**   | 9,495    | 9,452    | 9,015    | 8,306    |
| RPMs (000,000) "traffic"                                               | **4,892**    | 4,101    | 3,720    | 3,238    | 2,940    |
| ASMs (000,000) "capacity"                                              | **6,148**    | 5,127    | 4,662    | 4,002    | 3,648    |
| Load factor                                                            | **79\.6%**   | 80\.0%   | 79\.8%   | 80\.9%   | 80\.6%   |
| Yield                                                                  | **23\.66¢**  | 24\.96¢  | 26\.26¢  | 26\.37¢  | 27\.40¢  |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | Capitalized interest was  $18 million ,  $17 million ,  $25 million ,  $34 million  and  $20 million  for  2018 ,  2017 ,  2016 ,  2015  and  2014 \. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------ |
| (b) | Includes flights under Capacity Purchase Agreements operated by SkyWest and PenAir\. |

 29


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

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the  23rd day of  February, 2018  by the following persons on behalf of the registrant and in the capacities indicated\.

|                            |                                                                                |
| -------------------------- | ----------------------------------------------------------------------------------------- |
| **Signature**              | **Title**                                                                                |
| /s/ Edward H\. Bastian     | Chief Executive Officer and Director

(Principal Executive Officer)                 |
| Edward H\. Bastian         | Chief Executive Officer and Director

(Principal Executive Officer)                 |
| /s/ Paul A\. Jacobson      | Executive Vice President and Chief Financial Officer

(Principal Financial Officer) |
| Paul A\. Jacobson          | Executive Vice President and Chief Financial Officer

(Principal Financial Officer) |
| /s/ Craig M\. Meynard      | Vice President and Chief Accounting Officer (Principal Accounting Officer)                |
| Craig M\. Meynard          | Vice President and Chief Accounting Officer (Principal Accounting Officer)                |
| /s/ Francis S\. Blake      | Chairman of the Board                                                                     |
| Francis S\. Blake          | Chairman of the Board                                                                     |
| /s/ Daniel A\. Carp        | Director                                                                                |
| Daniel A\. Carp            | Director                                                                                |
| /s/ Ashton B\. Carter      | Director                                                                                |
| Ashton B\. Carter          | Director                                                                                |
| /s/ David G\. DeWalt       | Director                                                                                |
| David G\. DeWalt           | Director                                                                                |
| /s/ William H\. Easter III | Director                                                                                |
| William H\. Easter III     | Director                                                                                |
| /s/ Mickey P\. Foret       | Director                                                                                |
| Mickey P\. Foret           | Director                                                                                |
| /s/ Jeanne P\. Jackson     | Director                                                                                |
| Jeanne P\. Jackson         | Director                                                                                |
| /s/ George N\. Mattson     | Director                                                                                |
| George N\. Mattson         | Director                                                                                |
| /s/ Douglas R\. Ralph      | Director                                                                                |
| Douglas R\. Ralph          | Director                                                                                |
| /s/ Sergio A\.L\. Rial     | Director                                                                                |
| Sergio A\.L\. Rial         | Director                                                                                |
| /s/ Kathy N\. Waller       | Director                                                                                |
| Kathy N\. Waller           | Director                                                                                |

 98


Annual Report of Southwest Airlines Co\. for year 2017

**Southwest Airlines Co\.**

**Consolidated Statement of Cash Flows**

(in millions)

|                                                                                |                             |                             |                             |
| --------------------------------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                                | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** |
|                                                                                | **2017**                    | **2016**                    | **2015**                    |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                               |                             |                             |                             |
| Net income                                                                              | $3,488                      | $2,244                      | $2,181                      |
| Adjustments to reconcile net income to cash provided by (used in) operating activities: |                             |                             |                             |
| Depreciation and amortization                                                           | 1,218                       | 1,221                       | 1,015                       |
| Loss on asset impairment                                                                | —                           | 21                          | —                           |
| Aircraft grounding charge                                                               | 63                          | —                           | —                           |
| Unrealized/realized (gain) loss on fuel derivative instruments                          | (50)                        | (200)                       | 113                         |
| Deferred income taxes                                                                   | (1,212)                     | 455                         | (109)                       |
| Changes in certain assets and liabilities:                                              |                             |                             |                             |
| Accounts and other receivables                                                          | (102)                       | (50)                        | (88)                        |
| Other assets                                                                            | (262)                       | (119)                       | 103                         |
| Accounts payable and accrued liabilities                                                | 246                         | 226                         | 961                         |
| Air traffic liability                                                                   | 345                         | 125                         | 94                          |
| Cash collateral received from (provided to) derivative counterparties                   | 316                         | 535                         | (570)                       |
| Other, net                                                                              | (121)                       | (165)                       | (462)                       |
| Net cash provided by operating activities                                               | 3,929                       | 4,293                       | 3,238                       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                               |                             |                             |                             |
| Capital expenditures                                                                    | (2,123)                     | (2,038)                     | (2,041)                     |
| Assets constructed for others                                                           | (126)                       | (109)                       | (102)                       |
| Purchases of short\-term investments                                                    | (2,380)                     | (2,388)                     | (1,986)                     |
| Proceeds from sales of short\-term and other investments                                | 2,221                       | 2,263                       | 2,223                       |
| Other, net                                                                              | —                           | —                           | (7)                         |
| Net cash used in investing activities                                                   | (2,408)                     | (2,272)                     | (1,913)                     |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                               |                             |                             |                             |
| Proceeds from issuance of long\-term debt                                               | 600                         | 515                         | 500                         |
| Proceeds from Employee stock plans                                                      | 29                          | 29                          | 46                          |
| Reimbursement for assets constructed for others                                         | 126                         | 107                         | 24                          |
| Proceeds from termination of interest rate derivative instrument                        | —                           | —                           | 12                          |
| Payments of long\-term debt and capital lease obligations                               | (592)                       | (523)                       | (213)                       |
| Payments of convertible debt                                                            | —                           | (68)                        | —                           |
| Payments of cash dividends                                                              | (274)                       | (222)                       | (180)                       |
| Repayment of construction obligation                                                    | (10)                        | (9)                         | (10)                        |
| Repurchase of common stock                                                              | (1,600)                     | (1,750)                     | (1,180)                     |
| Other, net                                                                              | 15                          | (3)                         | (23)                        |
| Net cash used in financing activities                                                   | (1,706)                     | (1,924)                     | (1,024)                     |
| **NET CHANGE IN CASH AND CASH EQUIVALENTS**                                             | (185)                       | 97                          | 301                         |
| **CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**                                    | 1,680                       | 1,583                       | 1,282                       |
| **CASH AND CASH EQUIVALENTS AT END OF PERIOD**                                          | $1,495                      | $1,680                      | $1,583                      |
| **CASH PAYMENTS FOR:**                                                                  |                             |                             |                             |
| Interest, net of amount capitalized                                                     | $81                         | $100                        | $105                        |
| Income taxes                                                                            | $992                        | $902                        | $1,440                      |
| **SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:**                                    |                             |                             |                             |
| Flight equipment acquired through the assumption of debt                                | $—                          | $20                         | $—                          |
| Flight equipment under capital leases                                                   | $233                        | $307                        | $193                        |
| Assets constructed for others                                                           | $197                        | $196                        | $192                        |

See accompanying notes\.

74


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

Assumptions

We used the following actuarial assumptions to determine our benefit obligations and our net periodic benefit cost for the periods presented:

|                                |                                |                                |              |              |              |              |  |  |  |
|:------------------------------ |:------------------------------ |:------------------------------ | ------------:| ------------:| ------------:| ------------:|:- |:- |:- |
|                                |                                |                                | December 31, | December 31, | December 31, | December 31, |  |  |  |
| Benefit Obligations^(1)^       | Benefit Obligations^(1)^       | Benefit Obligations^(1)^       |         2019 |         2019 |         2018 |         2018 |
| Weighted average discount rate | Weighted average discount rate | Weighted average discount rate |      3\.40 % |      3\.40 % |      4\.33 % |      4\.33 % |

|                                                                    |                                                                    |                                                                    |                         |                         |                         |                         |                         |                         |  |  |  |  |  |  |
|:------------------------------------------------------------------ |:------------------------------------------------------------------ |:------------------------------------------------------------------ | -----------------------:| -----------------------:| -----------------------:| -----------------------:| -----------------------:| -----------------------:|:- |:- |:- |:- |:- |:- |
|                                                                    |                                                                    |                                                                    | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, |  |  |  |  |  |  |
| Net Periodic Benefit Cost^(1)^                                     | Net Periodic Benefit Cost^(1)^                                     | Net Periodic Benefit Cost^(1)^                                     |                    2019 |                    2019 |                    2018 |                    2018 |                    2017 |                    2017 |
| Weighted average discount rate \- pension benefit                  | Weighted average discount rate \- pension benefit                  | Weighted average discount rate \- pension benefit                  |                 4\.33 % |                 4\.33 % |                 3\.69 % |                 3\.69 % |                 4\.14 % |                 4\.14 % |
| Weighted average discount rate \- other postretirement benefit     | Weighted average discount rate \- other postretirement benefit     | Weighted average discount rate \- other postretirement benefit     |                 4\.32 % |                 4\.32 % |                 3\.69 % |                 3\.69 % |                 4\.19 % |                 4\.19 % |
| Weighted average discount rate \- other postemployment benefit     | Weighted average discount rate \- other postemployment benefit     | Weighted average discount rate \- other postemployment benefit     |                 4\.32 % |                 4\.32 % |                 3\.65 % |                 3\.65 % |                 4\.14 % |                 4\.14 % |
| Weighted average expected long\-term rate of return on plan assets | Weighted average expected long\-term rate of return on plan assets | Weighted average expected long\-term rate of return on plan assets |                 8\.97 % |                 8\.97 % |                 8\.97 % |                 8\.97 % |                 8\.96 % |                 8\.96 % |
| Assumed healthcare cost trend rate for the next year^(2)^          | Assumed healthcare cost trend rate for the next year^(2)^          | Assumed healthcare cost trend rate for the next year^(2)^          |                 6\.50 % |                 6\.50 % |                 6\.75 % |                 6\.75 % |                 7\.00 % |                 7\.00 % |

^(1)^ Future employee compensation levels do not impact our frozen defined benefit pension plans or other postretirement plans and impact only a small portion of our other postemployment obligation\.

^(2)^ Healthcare cost trend rate is assumed to decline gradually to 5\.00% by 2026 and remain unchanged thereafter\.

Expected Long\-Term Rate of Return\.  Our expected long\-term rate of return on plan assets is based primarily on plan\-specific investment studies using historical market return and volatility data\. Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically\. We also expect to receive a premium for investing in less liquid private markets\. We review our rate of return on plan assets assumptions annually\. Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation\. The investment strategy for our defined benefit pension plan assets is to earn a long\-term return that meets or exceeds our annualized return target while taking an acceptable level of risk and maintaining sufficient liquidity to pay current benefits and other cash obligations of the plan\. This is achieved by investing in a globally diversified mix of public and private equity, fixed income, real assets, hedge funds and other assets and instruments\. Our weighted average expected long\-term rate of return on assets for net periodic benefit cost for the year ended December 31, 2019 was 8\.97%\.

Healthcare Cost Trend Rate\.  Assumed healthcare cost trend rates have an effect on the amounts reported for the other postretirement benefit plans\. A 1% change in the healthcare cost trend rate used in measuring the plan benefit obligation for these plans would have the following effects:

|                                                                |                                                                |                                                                |             |               |
|:-------------------------------------------------------------- |:-------------------------------------------------------------- |:-------------------------------------------------------------- | -----------:| -------------:|
| (in millions)                                                  | (in millions)                                                  | (in millions)                                                  | 1% Increase | 1% (Decrease) |
| Increase (decrease) in total service and interest cost         | Increase (decrease) in total service and interest cost         | Increase (decrease) in total service and interest cost         |         $ 1 |         $ (2) |
| Increase (decrease) in the accumulated plan benefit obligation | Increase (decrease) in the accumulated plan benefit obligation | Increase (decrease) in the accumulated plan benefit obligation |           4 |          (14) |

Life Expectancy \. Changes in life expectancy may significantly impact our benefit obligations and future net periodic benefit cost\. We use the Society of Actuaries ("SOA") published mortality data and other publicly available information to develop our best estimate of life expectancy\. The SOA publishes updated mortality tables for U\.S\. plans and updated improvement scales\. Each year we consider updates by the SOA in setting our mortality assumptions for purposes of measuring pension and other postretirement and postemployment benefit obligations\.

Benefit Payments

Benefit payments in the table below are based on the same assumptions used to measure the related benefit obligations\. Actual benefit payments may vary significantly from these estimates\. Benefits earned under our pension plans and certain postemployment benefit plans are expected to be paid from funded benefit plan trusts, while our other postretirement benefits are funded from current assets\.

83


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

connection with or subsequent to Brexit, cannot be predicted, including whether or not regulators will continue to approve or impose material conditions on our business activities\. Any of these effects, and others we cannot anticipate, could materially adversely affect our business, results of operations and financial condition\.

We may be adversely affected by conflicts overseas or terrorist attacks; the travel industry continues to face ongoing security concerns\.

Acts of terrorism or fear of such attacks, including elevated national threat warnings, wars or other military conflicts, may depress air travel, particularly on international routes, and cause declines in revenues and increases in costs\. The attacks of September 11, 2001 and continuing terrorist threats, attacks and attempted attacks materially impacted and continue to impact air travel\. Increased security procedures introduced at airports since the attacks of September 11, 2001 and any other such measures that may be introduced in the future generate higher operating costs for airlines\. The Aviation and Transportation Security Act mandated improved flight deck security, deployment of federal air marshals on board flights, improved airport perimeter access security, airline crew security training, enhanced security screening of passengers, baggage, cargo, mail, employees and vendors, enhanced training and qualifications of security screening personnel, additional provision of passenger data to the U\.S\. Customs and Border Protection Agency and enhanced background checks\. A concurrent increase in airport security charges and procedures, such as restrictions on carry\-on baggage, has also had and may continue to have a disproportionate impact on short\-haul travel, which constitutes a significant portion of our flying and revenue\. Implementation of and compliance with increasingly\-complex security and customs requirements will continue to result in increased costs for us and our passengers, and have caused and likely will continue to cause periodic service disruptions and delays\. We have at times found it necessary or desirable to make significant expenditures to comply with security\-related requirements while seeking to reduce their impact on our customers, such as expenditures for automated security screening lines at airports\. As a result of competitive pressure, and the need to improve security screening throughput to support the pace of our operations, it is unlikely that we will be able to capture all security\-related costs through increased fares\. In addition, we cannot forecast what new security requirements may be imposed in the future, or their impact on our business\.

We are subject to risks associated with climate change, including increased regulation of our CO ~2~  emissions and the potential increased impacts of severe weather events on our operations and infrastructure\.

There is increasing global regulatory focus on climate change and emissions of GHGs, including CO ~2~ \. In particular, ICAO is in the process of adopting rules, including CORSIA, that will require American to limit the CO ~2~  emissions of a significant majority of our international flights to a baseline level equal to our 2019\-2020 average emissions from such flights\.

At this time, the costs of our obligations under CORSIA are uncertain and cannot be fully predicted\. For example, we will not directly control our CORSIA compliance costs during the CORSIA Pilot and First Phases because such phases include a sharing mechanism for the growth in emissions for the global aviation sector\. In addition, there is uncertainty with respect to the future supply, demand and price of sustainable or lower carbon aircraft fuel, carbon offset credits and technologies that could allow airlines to reduce their emissions of CO ~2~ \. Due to the competitive nature of the airline industry and unpredictability of the market for air travel, we can offer no assurance that we may be able to increase our fares, impose surcharges or otherwise increase revenues or decrease other operating costs sufficiently to offset our costs of meeting obligations under CORSIA\.

In the event that CORSIA does not come into force as expected, American and other airlines could become subject to an unpredictable and inconsistent array of national or regional emissions restrictions, creating a patchwork of complex regulatory requirements that will often affect global competitors differently and frequently offer no meaningful aviation environmental improvements\. Concerns over climate change are likely to result in the continued adoption of municipal, state, regional, and federal requirements or in changing business environments that may result in increased costs to the airline industry and us\. In addition, several countries and U\.S\. states have adopted or are considering adopting programs to regulate GHG emissions\. Finally, certain airports have adopted, and others could in the future adopt, GHG emission or climate\-neutral goals that could impact our operations or require us to make changes or investments in our infrastructure\.

All such climate change\-related regulatory activity and developments may adversely affect our business and financial results by requiring us to reduce our emissions, make capital investments to modernize certain aspects of our operations, purchase carbon offset credits, or otherwise pay for our emissions\. Such activity may also impact us indirectly by increasing our operating costs, including fuel costs\.

25


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

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

based on a consideration of the account's historical behavior\. The Company uses a logit regression model to estimate the probability that an account will redeem its current miles balance\. The Company reviews its breakage estimates annually based upon the latest available information\. The Company's estimate of the expected breakage of miles requires significant management judgment\. Current and future changes to breakage assumptions, or to program rules and program redemption opportunities, may result in material changes to the deferred revenue balance as well as recognized revenues from the program\. For the portion of the outstanding miles that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining miles are redeemed\.

Co\-Brand Agreement \. United has a significant contract (the "Co\-Brand Agreement") to sell MileagePlus miles to its co\-branded credit card partner JPMorgan Chase Bank, N\.A\. ("Chase")\. Chase awards miles to MileagePlus members based on their credit card activity\. United identified the following significant separately identifiable performance obligations in the Co\-Brand Agreement:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | MileagePlus miles awarded – United has a performance obligation to provide MileagePlus cardholders with miles to be used for air travel and non\-travel award redemptions\. The Company records Passenger revenue related to the travel awards when the transportation is provided and records Other revenue related to the non\-travel awards when the goods or services are delivered\. The Company records the cost associated with non\-travel awards in Other operating revenue\.  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Marketing – United has a performance obligation to provide Chase access to United's customer list and the use of United's brand\. Marketing revenue is recorded to Other operating revenue as miles are delivered to Chase\.  |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Advertising – United has a performance obligation to provide advertising in support of the MileagePlus card in various customer contact points such as United's website, email promotions, direct mail campaigns, airport advertising and in\-flight advertising\. Advertising revenue is recorded to Other operating revenue as miles are delivered to Chase\.  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Other travel\-related benefits – United's performance obligations are comprised of various items such as waived bag fees, seat upgrades and lounge passes\. Lounge passes are recorded to Other operating revenue as customers use the lounge passes\. Bag fees and seat upgrades are recorded to Passenger revenue at the time of the associated travel\.  |

We account for all the payments received (including monthly and one\-time payments) under the Co\-Brand Agreement by allocating them to the separately identifiable performance obligations\. The fair value of the separately identifiable performance obligations is determined using management's estimated selling price of each component\. The objective of using the estimated selling price based methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand\-alone basis\. Accordingly, we determine our best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, volume discounts, published selling prices, number of miles awarded and number of miles redeemed\. The Company estimated the selling prices and volumes over the term of the Co\-Brand Agreement in order to determine the allocation of proceeds to each of the components to be delivered\. We also evaluate volumes on an annual basis, which may result in a change in the allocation of the estimated consideration from the Co\-Brand Agreement on a prospective basis\.

Frequent Flyer Deferred Revenue\. Miles in MileagePlus members' accounts are combined into one homogeneous pool and are thus not separately identifiable, for award redemption purposes, between miles earned in the current period and those in their beginning balance\. Of the miles expected to be redeemed, the Company expects the majority of these miles to be redeemed within   two years \. The table below presents a roll forward of Frequent flyer deferred revenue (in millions):

|                                                            |                                           |                                           |
| ---------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- |
|                                                            | **Twelve Months Ended
December 31,** | **Twelve Months Ended
December 31,** |
|                                                            | **2019**                                  | **2018**                                  |
| Total Frequent flyer deferred revenue \- beginning balance | $5,005                                    | $4,783                                    |
| Total miles awarded                                        | 2,621                                     | 2,451                                     |
| Travel miles redeemed (Passenger revenue)                  | (2,213

)                           | (2,068

)                           |
| Non\-travel miles redeemed (Other operating revenue)       | (137

)                             | (161

)                             |
| Total Frequent flyer deferred revenue \- ending balance    | $5,276                                    | $5,005                                    |

57


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

***Aircraft Purchase Commitments***

Aircraft purchase commitments include non\-cancelable contractual commitments for aircrafts and engines\. As of December 31, 2017, the Company had commitments to purchase 44 B737 aircraft (12 B737 NextGen aircraft and 32 B737 MAX aircraft, with deliveries in 2018 through 2023) and 23 E175 aircraft with deliveries in 2018 through 2019\. The Company also has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2020 through 2022\. In addition, the Company has options to purchase 37 B737 aircraft and 30 E175 aircraft\. The cancelable purchase commitments and option payments are not reflected in the table above\.

The Company expects to defer certain purchase commitments in 2019 and beyond, which is not currently reflected in the contractual aircraft purchase commitments above\.

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

At December 31, 2017, Alaska had CPAs with three carriers, including the Company's wholly\-owned subsidiary, Horizon\. Horizon sells 100% of its capacity under a CPA with Alaska\. In addition, Alaska has CPAs with SkyWest to fly certain routes in the Lower 48 and Canada and with Peninsula Airways, Inc\. (PenAir) to fly certain routes in the state of Alaska\. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services\. Future payments (excluding Horizon) are based on minimum levels of flying by the third\-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights such as fuel\.

***Aircraft Maintenance Deposits***

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

***Aircraft Maintenance and Parts Management***

Through its acquisition of Virgin America, the Company has a separate maintenance\-cost\-per\-hour contract for management and repair of certain rotable parts to support Airbus airframe and engine maintenance and repair\. On October 1, 2017, Alaska entered into a similar contract for maintenance on its B737\-800 aircraft engines\. These agreements require monthly payments based upon utilization, such as flight hours, cycles and age of the aircraft, and, in turn, the agreement transfers certain risks to the third\-party service provider\. There are minimum payments under both agreements, which are reflected in the table above\. Accordingly, payments could differ materially based on actual aircraft utilization\.

***Contingencies***

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

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws\. Plaintiffs received class certification in November 2016\. Virgin America filed a motion for summary judgment seeking to dismiss all claims on various federal preemption grounds\. In January 2017, the Court denied in part and granted in part Virgin America’s motion\. In January 2018, Virgin America filed a motion to decertify the class and Plaintiffs filed a motion for summary judgment seeking the court to rule in their favor on all remaining claims\. The Company believes the claims in this case are without factual and legal merit and intends to defend this lawsuit\.

Management believes the ultimate disposition of these matters is not likely to materially affect the Company's financial position or results of operations\. This forward\-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of arbitrators, judges and juries\.

 87


Annual Report of Southwest Airlines Co\. for year 2018

**Southwest Airlines Co\.**

**Consolidated Statement of Comprehensive Income**

(in millions)

|                                                                                |                             |                             |                             |
| ------------------------------------------------------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                                | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** |
|                                                                                | **2018**                    | **2017**                    | **2016**                    |
|                                                                                |                             | **As Recast**               | **As Recast**               |
| **NET INCOME**                                                                                | $2,465                      | $3,357                      | $2,183                      |
| Unrealized gain (loss) on fuel derivative instruments, net of

 deferred taxes of ($7), $185, and $432 | (26)                        | 317                         | 735                         |
| Unrealized gain on interest rate derivative instruments, net of

 deferred taxes of $1, $4, and $5      | 6                           | 7                           | 7                           |
| Unrealized gain (loss) on defined benefit plan items, net of deferred

 taxes of $15, $2, and ($13)     | 52                          | 3                           | (23)                        |
| Other, net of deferred taxes of ($2), $5, and $5                                                              | (6)                         | 8                           | 9                           |
| **OTHER COMPREHENSIVE INCOME**                                                                                | $26                         | $335                        | $728                        |
| **COMPREHENSIVE INCOME**                                                                                | $2,491                      | $3,692                      | $2,911                      |

See accompanying notes\.

69


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

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

**UNITED AIRLINES, INC\.**

**CONSOLIDATED BALANCE SHEETS**

**(In millions, except shares)**

|                                                                                |                     |                     |
| --------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------------------- |
|                                                                                | **At December 31,** | **At December 31,** |
| **LIABILITIES AND STOCKHOLDER'S EQUITY**                                                                                | **2018**            | **2017 (a)**        |
| Current liabilities:                                                                                |                     |                     |
| Advance ticket sales                                                                                | $4,381              | $3,940              |
| Frequent flyer deferred revenue                                                                                | 2,286               | 2,192               |
| Accounts payable                                                                                | 2,363               | 2,196               |
| Accrued salaries and benefits                                                                                | 2,184               | 2,166               |
| Current maturities of long\-term debt                                                                                | 1,230               | 1,565               |
| Current maturities of capital leases                                                                                | 149                 | 128                 |
| Other                                                                                | 624                 | 581                 |
| Total current liabilities                                                                                | 13,217              | 12,768              |
| Long\-term debt                                                                                | 12,215              | 11,703              |
| Long\-term obligations under capital leases                                                                                | 1,134               | 996                 |
| Other liabilities and deferred credits:                                                                                |                     |                     |
| Frequent flyer deferred revenue                                                                                | 2,719               | 2,591               |
| Postretirement benefit liability                                                                                | 1,295               | 1,602               |
| Pension liability                                                                                | 1,576               | 1,921               |
| Deferred income taxes                                                                                | 842                 | 231                 |
| Other                                                                                | 1,831               | 1,832               |
| Total other liabilities and deferred credits                                                                                | 8,263               | 8,177               |
| Commitments and contingencies                                                                                |
              |
              |
| Stockholder's equity:                                                                                |                     |                     |
| Common stock at par, $0\.01 par value; authorized 1,000 shares; issued and outstanding 1,000 shares at December 31, 2018 and 2017 | —                   | —                   |
| Additional capital invested                                                                                | 598                 | 1,787               |
| Retained earnings                                                                                | 10,272              | 8,146               |
| Accumulated other comprehensive loss                                                                                | (803)               | (1,147)             |
| Receivable from related parties                                                                                | (110)               | (90)                |
| Total stockholder's equity                                                                                | 9,957               | 8,696               |
| Total liabilities and stockholder's equity                                                                                | $44,786             | $42,340             |

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

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

51