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

*Operating Special Items, Net*

|                                                                    |                             |                             |
| ------------------------------------------------------------------ | --------------------------- | --------------------------- |
|                                                                    | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                    | **2018**                    | **2017**                    |
|                                                                    | **(In millions)**           | **(In millions)**           |
| Fleet restructuring expenses  ^(1)^                                | $422                        | $232                        |
| Merger integration expenses  ^(2)^                                 | 268                         | 273                         |
| Severance expenses  ^(3)^                                          | 58                          | —                           |
| Litigation settlement  ^(4)^                                       | 45                          | —                           |
| Intangible asset impairment  ^(5)^                                 | 26                          | —                           |
| Labor contract expenses                                            | 13                          | 46                          |
| Mark\-to\-market adjustments on bankruptcy obligations, net  ^(6)^ | (76)                        | 27                          |
| Employee 2017 Tax Act bonus expense  ^(7)^                         | —                           | 123                         |
| Other operating charges, net                                       | 31                          | 11                          |
| Total mainline operating special items, net                        | 787                         | 712                         |
| Regional operating special items, net                              | —                           | 3                           |
| Total operating special items, net                                 | $787                        | $715                        |

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

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

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

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(4)^ | Settlement of a private party antitrust lawsuit\. See Note 10(e) \- “ *Private Party Antitrust Action Related to Passenger Capacity* ” to American’s Consolidated Financial Statements in Part II, Item 8B for further discussion\.  |

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

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

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

*Nonoperating Results*

|                                 |                                              |                                              |                                              |                                                       |
| ------------------------------- | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- | ----------------------------------------------------- |
|                                 | **Year Ended**

**December 31,**       | **Year Ended**

**December 31,**       | **Increase**

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

**Increase**

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

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

**Increase**

**(Decrease)** |
|                                 | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Interest income                 | $330                                         | $215                                         | $115                                         | 53\.4                                                 |
| Interest expense, net           | (1,028)                                      | (988)                                        | (40)                                         | 4\.1                                                  |
| Other income, net               | 167                                          | 123                                          | 44                                           | 35\.3                                                 |
| Total nonoperating expense, net | $(531)                                       | $(650)                                       | $119                                         | (18\.2)                                               |

American’s short\-term investments in each period consisted of highly liquid investments that provided nominal returns\. Interest income increased $115 million, or 53\.4%, due to higher interest\-bearing related party receivables from American’s parent company, AAG, as well as a 103 basis point increase in average yields in 2018 as compared to 2017\.

In 2018, other nonoperating income, net principally included $309 million of non\-service related pension and other postretirement benefit plan income, which reflects an increase in the expected return on pension plan assets in 2018 as

61


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

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

**Number** | **Description**                                                                                |
| 4\.96                         | [Revolving Credit Agreement (2016\-2AA), dated as of May 16, 2016, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2016\-2AA, as Borrower, and KfW IPEX\-Bank GmbH, as Liquidity Provider (incorporated by reference to Exhibit 4\.14 to American’s Current Report on Form 8\-K filed on May 17, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516592083/d177635dex414.htm)                                                                                |
| 4\.97                         | [Revolving Credit Agreement (2016\-2A), dated as of May 16, 2016, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2016\-2A, as Borrower, and KfW IPEX\-Bank GmbH, as Liquidity Provider (incorporated by reference to Exhibit 4\.15 to American’s Current Report on Form 8\-K filed on May 17, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516592083/d177635dex415.htm)                                                                                |
| 4\.98                         | [Trust Supplement No\. 2016\-2B, dated as of July 8, 2016, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on July 12, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516646353/d210431dex42.htm)                                                                                |
| 4\.99                         | [Amended and Restated Intercreditor Agreement (2016\-2), dated as of July 8, 2016, among Wilmington Trust Company, as Trustee of the American Airlines Pass Through Trust 2016\-2AA, as Trustee of the American Airlines Pass Through Trust 2016\-2A and as Trustee of the American Airlines Pass Through Trust 2016\-2B, KfW IPEX\-Bank GmbH, as Class AA Liquidity Provider, Class A Liquidity Provider and Class B Liquidity Provider, and Wilmington Trust Company, as Subordination Agent (incorporated by reference to Exhibit 4\.3 to American’s Current Report on Form 8\-K filed on July 12, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516646353/d210431dex43.htm) |
| 4\.100                        | [Amended and Restated Note Purchase Agreement, dated as of July 8, 2016, among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust, National Association, as Escrow Agent, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on July 12, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516646353/d210431dex46.htm)                                                                                |
| 4\.101                        | [Form of Participation Agreement (Participation Agreement among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein) (incorporated by reference to Exhibit B to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on July 12, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516646353/d210431dex46.htm)                                                                                |
| 4\.102                        | [Form of First Amendment to Participation Agreement (First Amendment to Participation Agreement among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein) (incorporated by reference to Exhibit D to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on July 12, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516646353/d210431dex46.htm)                                                                    |
| 4\.103                        | [Form of Indenture and Security Agreement (Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (incorporated by reference to Exhibit C to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on July 12, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516646353/d210431dex46.htm)                                                                                |
| 4\.104                        | [Form of First Amendment to Indenture and Security Agreement (First Amendment to Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (incorporated by reference to Exhibit E to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on July 12, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516646353/d210431dex46.htm)                                                                                |
| 4\.105                        | [Form of Pass Through Trust Certificate, Series 2016\-2B (incorporated by reference to Exhibit A to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on July 12, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516646353/d210431dex42.htm)                                                                                |
| 4\.106                        | [Revolving Credit Agreement (2016\-2B), dated as of July 8, 2016, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2016\-2B, as Borrower, and KfW IPEX Bank GmbH, as Liquidity Provider (incorporated by reference to Exhibit 4\.12 to American’s Current Report on Form 8\-K filed on July 12, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516646353/d210431dex412.htm)                                                                                |
| 4\.107                        | [Trust Supplement No\. 2016\-3AA, dated as of October 3, 2016, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on October 4, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516730454/d359659dex42.htm)                                                                                |
| 4\.108                        | [Trust Supplement No\. 2016\-3A, dated as of October 3, 2016, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.3 to American’s Current Report on Form 8\-K filed on October 4, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516730454/d359659dex43.htm)                                                                                |
| 4\.109                        | [Intercreditor Agreement (2016\-3), dated as of October 3, 2016, among Wilmington Trust Company, as Trustee of the American Airlines Pass Through Trust 2016\-3AA and as Trustee of the American Airlines Pass Through Trust 2016\-3A, KfW IPEX\-Bank GmbH, as Class AA Liquidity Provider and Class A Liquidity Provider, and Wilmington Trust Company, as Subordination Agent (incorporated by reference to Exhibit 4\.4 to American’s Current Report on Form 8\-K filed on October 4, 2016 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516730454/d359659dex44.htm)                                                                                |

171


Annual Report of Southwest Airlines Co\. for year 2019

14 \. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes\. The components of deferred tax assets and liabilities at  December 31, 2019  and  2018 , are as follows:

|                                       |          |          |
| ------------------------------------- | -------- | -------- |
| **(in millions)**                     | **2019** | **2018** |
| **DEFERRED TAX LIABILITIES:**         |          |          |
| Accelerated depreciation              | $3,096   | $3,395   |
| Operating lease right\-of\-use assets | 293      | —        |
| Other                                 | 93       | 92       |
| Total deferred tax liabilities        | 3,482    | 3,487    |
| **DEFERRED TAX ASSETS:**              |          |          |
| Construction obligation               | 38       | 355      |
| Accrued employee benefits             | 346      | 329      |
| Rapid rewards loyalty liability       | 305      | 267      |
| Operating lease liabilities           | 308      | —        |
| Other                                 | 121      | 109      |
| Total deferred tax assets             | 1,118    | 1,060    |
| Net deferred tax liability            | $2,364   | $2,427   |

The provision (benefit) for income taxes is composed of the following:

|                                          |              |          |                       |
| ---------------------------------------- | ------------ | -------- | --------------------- |
| **(in millions)**                        | **2019**     | **2018** | **2017**              |
| **CURRENT:**                             |              |          |                       |
| Federal                                  | $610         | $338     | $904                  |
| State                                    | 102          | 60       | 72                    |
| Total current                            | 712          | 398      | 976                   |
| **DEFERRED:**                            |              |          |                       |
| Federal                                  | (18

) | 299      | 200                   |
| State                                    | (6

)  | 2        | 2                     |
| Change in federal statutory tax rate (a) | (31

) | —        | (1,270

)       |
| Total deferred                           | (55

) | 301      | (1,068

)       |
|                                          | $657         | $699     | $

(92

) |

(a) The Tax Cuts and Jobs Act was enacted in December 2017, which reduced the U\.S\. federal corporate tax rate from the previous rate of   35 percent  to   21 percent \.

The effective tax rate on income before income taxes differed from the federal income tax statutory rate for the following reasons:

|                                            |              |              |                       |
| ------------------------------------------ | ------------ | ------------ | --------------------- |
| **(in millions)**                          | **2019**     | **2018**     | **2017**              |
| Tax at statutory U\.S\. tax rates          | $621         | $664         | $1,143                |
| State income taxes, net of federal benefit | 76           | 49           | 50                    |
| Change in federal statutory tax rate (a)   | (31

) | —            | (1,270

)       |
| Other, net                                 | (9

)  | (14

) | (15

)          |
| Total income tax provision (benefit)       | $657         | $699         | $

(92

) |

(a) The Tax Cuts and Jobs Act was enacted in December 2017, which reduced the U\.S\. federal corporate tax rate from the previous rate of   35 percent  to   21 percent \.

106


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

Employees and Labor Relations

The airline business is labor intensive\. In  2019 , salaries, wages and benefits were our largest expense and represented  34%  of our total operating expenses\. As of  December 31, 2019 , we had approximately  133,700  active full\-time equivalent employees, approximately  85%  of whom were represented by various labor unions responsible for negotiating the collective bargaining agreements (CBAs) covering them\.

Labor relations in the air transportation industry are regulated under the Railway Labor Act (RLA), which vests in the National Mediation Board (NMB) certain functions with respect to disputes between airlines and labor unions relating to union representation and CBAs\. When an RLA CBA becomes amendable, if either party to the agreement wishes to modify its terms, it must notify the other party in the manner prescribed under the RLA and as agreed by the parties\. Under the RLA, the parties must meet for direct negotiations, and, if no agreement is reached during direct negotiations between the parties, either party may request that the NMB appoint a federal mediator\. The RLA prescribes no timetable for the direct negotiation and mediation processes, and it is not unusual for those processes to last for many months or even several years\. If no agreement is reached in mediation, the NMB in its discretion may declare that an impasse exists and proffer binding arbitration to the parties\. Either party may decline to submit to arbitration and if arbitration is rejected by either party, a 30\-day “cooling off” period commences\. During or after that period, a Presidential Emergency Board (PEB) may be established, which examines the parties’ positions and recommends a solution\. The PEB process lasts for 30 days and is followed by another 30\-day “cooling off” period\. At the end of this “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self\-help,” such as a strike, and the airline may resort to its own “self\-help,” including the imposition of any or all of its proposed amendments to the CBA and the hiring of new employees to replace any striking workers\.

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

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

|                                                                                |                                  |                          |                                  |
| ---------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------ | -------------------------------- |
| **Union**                                                                                | **Class or Craft**               | **Employees**  **^(1)^** | **Contract  <br>Amendable Date** |
| **Mainline:**                                                                                |                                  |                          |                                  |
| Allied Pilots Association (APA)                                                                                | Pilots                           | 13,800                   | 2020                             |
| Association of Professional Flight Attendants (APFA)                                                                                | Flight Attendants                | 25,300                   | 2019                             |
| Airline Customer Service Employee Association – Communications Workers of America and International Brotherhood of Teamsters (CWA\-IBT)  | Passenger Service                | 14,050                   | 2020                             |
| Transport Workers Union and International Association of Machinists & Aerospace Workers (TWU\-IAM Association)                           | Mechanics and Related            | 12,650                   | 2018                             |
| TWU\-IAM Association                                                                                | Fleet Service                    | 17,750                   | 2018                             |
| TWU\-IAM Association                                                                                | Stock Clerks                     | 1,850                    | 2018                             |
| TWU\-IAM Association                                                                                | Flight Simulator Engineers       | 150                      | 2021                             |
| TWU\-IAM Association                                                                                | Maintenance Control Technicians  | 200                      | 2018                             |
| TWU\-IAM Association                                                                                | Maintenance Training Instructors | 30                       | 2018                             |
| Professional Airline Flight Control Association (PAFCA)                                                                                | Dispatchers                      | 500                      | 2021                             |
| Transport Workers Union (TWU)                                                                                | Flight Crew Training Instructors | 350                      | 2021                             |
| **Envoy:**                                                                                |                                  |                          |                                  |
| Air Line Pilots Associations (ALPA)                                                                                | Pilots                           | 2,250                    | 2024                             |
| Association of Flight Attendants\-CWA (AFA)                                                                                | Flight Attendants                | 1,650                    | 2020                             |
| TWU                                                                                | Ground School Instructors        | 10                       | 2023                             |
| TWU                                                                                | Mechanics and Related            | 1,400                    | 2020                             |

9


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

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

The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co\-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue)\. Changes in loyalty program liability are as follows (in millions):

|                                     |         |
| ----------------------------------- | ------- |
| Balance at December 31, 2017        | $8,822  |
| Deferral of revenue                 | 3,083   |
| Recognition of revenue  ^(1)^       | (3,366) |
| Balance at December 31, 2018  ^(2)^ | $8,539  |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Principally relates to revenue recognized from the redemption of mileage credits for both air and non\-air travel awards\. Mileage credits are combined in one homogenous pool and are not separately identifiable\. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every  18 months \. As of  December 31, 2018 , our current loyalty program liability was  $3\.3 billion  and represents our current estimate of revenue expected to be recognized in the next twelve months based on historical trends, with the balance reflected in long\-term loyalty program liability expected to be recognized as revenue in periods thereafter\. |

The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel\. The balance in our air traffic liability also fluctuates with seasonal travel patterns\. The contract duration of passenger tickets is one year\. Accordingly, any revenue associated with tickets sold for future travel will be recognized within twelve months\. For 2018, $3\.1 billion of revenue was recognized in passenger revenue that was included in our air traffic liability at December 31, 2017\.

With respect to contract receivables, reflected as accounts receivable, net on the accompanying consolidated balance sheet, these primarily include receivables for tickets sold to individual passengers through the use of major credit cards\. These receivables are short\-term, mostly settled within seven days after sale\. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts\.

***(l) Maintenance, Materials and Repairs***

Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists\.

***(m) Selling Expenses***

Selling expenses include credit card fees, commissions, computerized reservations systems fees and advertising\. Advertising costs are expensed as incurred\. Advertising expense was $128 million, $135 million and $116 million for the years ended December 31, 2018, 2017 and 2016, respectively\.

***(n) Share\-based Compensation***

We account for our share\-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award\. Certain awards have performance conditions that must be achieved prior to vesting and are expensed based on the expected achievement at each reporting period\. The fair value of stock appreciation rights is estimated using a Black\-Scholes option pricing model\. The fair value of restricted stock units is based on the market price of the underlying shares of AAG common stock on the date of grant\. See Note 15 for further discussion of share\-based compensation\.

***(o) Foreign Currency Gains and Losses***

Foreign currency gains and losses are recorded as part of other income, net within total nonoperating expense, net in our consolidated statements of operations\. Foreign currency losses for 2018 and 2017were$55 million and $4 million, respectively, and for 2016, foreign currency gains were $1 million\.

95


Annual Report of Southwest Airlines Co\. for year 2018

revenues are sensitive to the actions of other carriers with respect to pricing, routes, loyalty programs, scheduling, capacity, customer service, operational reliability, comfort and amenities, cost structure, aircraft fleet, and code\-sharing and similar activities\.

***The Company's future results will suffer if it does not effectively manage its expanded international operations and/or Extended Operations ("ETOPS")\.***

The Company's international flight offerings are subject to U\.S\. Customs and Border Protection ("CBP") mandated procedures, which can affect the Company's operations, costs, and Customer experience\. The Company has made, and is continuing to make, significant investments in facilities, equipment, and technologies at certain airports in order to improve the Customer experience and to assist CBP with its inspection and processing duties; however, the Company is not able to predict the impact, if any, that various CBP measures or the lack of CBP resources will have on Company revenues and costs, either in the short\-term or the long\-term\.

International flying requires the Company to modify certain processes, as the airport environment is dramatically different in certain international locations with respect to, among other things, common\-use ticket counters and gate areas, local operating requirements, and cultural preferences\. In addition, international flying exposes the Company to certain foreign currency risks to the extent the Company chooses to, or is required to, transact in currencies other than the U\.S\. dollar\. To the extent the Company seeks to serve additional foreign destinations in the future, or to renew its authority to serve certain routes, it may be required to obtain necessary authority from the DOT and/or approvals from the FAA, as well as any applicable foreign government entity\.

The Company's operations in non\-U\.S\. jurisdictions may subject the Company to the laws of those jurisdictions rather than, or in addition to, U\.S\. laws\. Laws in some jurisdictions differ in significant respects from those in the United States, and these differences can affect the Company's ability to react to changes in its business, and its rights or ability to enforce rights may be different than would be expected under U\.S\. laws\. Furthermore, enforcement of laws in some jurisdictions can be inconsistent and unpredictable, which can affect both the Company's ability to enforce its rights and to undertake activities that it believes are beneficial to its business\. As a result, the Company's ability to generate revenue and its expenses in non\-U\.S\. jurisdictions may differ from what would be expected if U\.S\. laws governed these operations\. Although the Company has policies and procedures in place that are designed to promote compliance with the laws of the jurisdictions in which it operates, a violation by the Company's Employees, contractors, or agents or other intermediaries could nonetheless occur\. Any violation (or alleged or perceived violation), even if prohibited by the Company's policies, could have an adverse effect on the Company's reputation and/or its results of operations\.

In January 2018, the Company submitted a formal application to the FAA for authorization to conduct ETOPS using Boeing 737\-800 aircraft, in connection with the Company’s plans to begin service to Hawaii\. Due to the government shutdown in late 2018 and early 2019, the Company's ETOPS application process was delayed subject to the government reopening and the FAA's related ability to resume normal certification activities\. If the Company receives FAA authorization and commences ETOPS, the Company will be subject to additional, ongoing, ETOPS\-specific regulatory and procedural requirements, which could add operational and compliance risks to the Company’s business, including costs associated therewith\. Further, as discussed above under "Business \- Competition," the longer stage length of the Company's expected Hawaiian routes, as compared with the Company's average stage length of its other routes, could put pressure on the Company's revenues per available seat mile\.

***The Company is currently subject to pending litigation, and if judgment were to be rendered against the Company in the litigation, such judgment could adversely affect the Company's operating results\.***

As discussed below under "Legal Proceedings," the Company is subject to pending litigation\.

Regardless of merit, these litigation matters and any potential future claims against the Company may be both time consuming and disruptive to the Company's operations and cause significant expense and diversion of management attention\. Should the Company fail to prevail in these or other matters, the Company may be faced with significant monetary damages or injunctive relief that could materially adversely affect its business and might materially affect its financial condition and operating results\.

***The Company’s reputation and brand could be harmed if it were to experience significant negative publicity, including through social media\.***

27


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

Employees could also engage in job actions such as slow\-downs, work\-to\-rule campaigns, sick\-outs or other actions designed to disrupt our normal operations in an attempt to pressure us to acquiesce to wage or other demands during Section 6 negotiations or transition agreement discussions\. Although the Railway Labor Act makes such “self\-help” unlawful until the National Mediation Board releases the parties following lengthy mediation attempts, such actions could cause significant harm even if we were ultimately successful in seeking injunctive relief or other remedies\.

***The inability to attract, retain and train regional pilots could result in guest impact and adversely affect our business and results of operations\.***

In recent years, there have been shortages of pilots for hire in the regional market, and there is an anticipated pilot shortage in hiring in the mainline markets in the next two to three years\. Attrition beyond normal levels, or the inability to attract new pilots, could negatively impact our operating results, and our business prospects could be harmed\. In addition, the ability to train pilot candidates in a timely manner to support Alaska’s operational needs may continue to be a challenge for Horizon Air\. Due to the high volume of turnover, partially driven by the hiring needs of mainline carriers, pilot training may face added stress associated with ensuring initial training, recurrent training and upgrades from first officer to captain are accomplished in a manner timely enough to support Alaska’s operational needs\. Any of these outcomes would possibly result in guest impact and harm to our business, financial condition and results of operations\.

|                                         |
| --------------------------------------- |
| **ITEM 1B\. UNRESOLVED STAFF COMMENTS** |

 None\.

|                         |
| ----------------------- |
| **ITEM 2\. PROPERTIES** |

**AIRCRAFT**

The following table describes the aircraft we operate and their average age at December 31, 2017:

|                      |           |           |            |           |                                                |
| -------------------- | --------- | --------- | ---------- | --------- | ---------------------------------------------- |
| **Aircraft Type**    | **Seats** | **Owned** | **Leased** | **Total** | **Average**

**Age in**

**Years** |
| B737 Freighters      | —         | 3         | —          | 3         | 17\.5                                          |
| B737 NextGen         | 124\-181  | 141       | 10         | 151       | 7\.5                                           |
| A319                 | 119       | —         | 10         | 10        | 10\.2                                          |
| A320                 | 146\-149  | 10        | 43         | 53        | 7\.3                                           |
| A321neo              | 185       | —         | 4          | 4         | 0\.4                                           |
| Total Mainline Fleet |           | 154       | 67         | 221       | 7\.6                                           |
| Q400                 | 76        | 35        | 15         | 50        | 11\.0                                          |
| E175                 | 76        | 10        | 23         | 33        | 1\.2                                           |
| Total Regional Fleet |           | 45        | 38         | 83        | 7\.1                                           |
| Total                |           | 199       | 105        | 304       | 7\.4                                           |

“Management’s Discussion and Analysis of Financial Condition and Results of Operations" discusses future orders and options for additional aircraft\. “Liquidity and Capital Resources" provides more information about aircraft that are used to secure long\-term debt arrangements or collateralize credit facilities\.

Alaska’s leased B737 aircraft have lease expiration dates between 2018 and 2026\. Virgin America's leased A319, A320, and A321neo aircraft have expiration dates between 2019 and 2029\. Horizon’s leased Q400 aircraft have expiration dates between 2018 and 2021\. The leased E175 aircraft are through our capacity purchase agreement with SkyWest\. Alaska, Virgin America and Horizon have the option to extend some of the leases for additional periods, or the right to purchase the aircraft at the end of the lease term, usually at the fair\-market value of the aircraft\.

 27


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

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

in value or entitles American to participate in increases in the value of the aircraft\. American does not provide residual value guarantees to the bondholders or equity participants in the trusts\. Some leases have a fair market value or a fixed price purchase option that allows American to purchase the aircraft at or near the end of the lease term\. However, the option price approximates an estimate of the aircraft’s fair value at the option date\. Under this feature, American does not participate in any increases in the value of the aircraft\. American concluded it is not the primary beneficiary under these arrangements\. Therefore, American accounts for the majority of its EETC leveraged lease financings as operating leases\. American’s total future payments to the trusts of each of the relevant EETCs under these leveraged lease financings are $352 million as ofDecember 31, 2018, which are reflected in the operating lease obligations in Note 4\.

*Letters of Credit and Other*

American provides financial assurance, such as letters of credit, surety bonds or restricted cash and investments, primarily to support projected workers’ compensation obligations and airport commitments\. As of December 31, 2018, American had $460 million of letters of credit and surety bonds securing various obligations\. The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2022\.

***(e) Legal Proceedings***

*Chapter 11 Cases*\. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court)\. On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan)\. On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger\.

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims\. The shares of AAG common stock issued to the Disputed Claims Reserve were originally issued on December 13, 2013 and have at all times since been included in the number of shares issued and outstanding as reported by AAG from time to time in its quarterly and annual reports, including for purposes of calculating earnings per share\. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve\. However, American is not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution in the Disputed Claims Reserve are not sufficient to fully pay any additional allowed unsecured claims\. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to AAG but rather will be distributed to former AMR stockholders and former convertible noteholders treated as stockholders under the Plan\. On February 12, 2019, in accordance with the approval granted by the Bankruptcy Court on December 6, 2018, an aggregate of approximately 17\.3 million shares of AAG common stock were distributed from the Disputed Claims Reserve to former AMR shareholders and convertible noteholders\. After giving effect to this distribution, the Disputed Claims Reserve holds approximately 7\.2 million shares of AAG common stock\.

*Private Party Antitrust Action Related to Passenger Capacity\.* American, along with Delta Air Lines, Inc\., Southwest Airlines Co\., United Airlines, Inc\. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity\. The U\.S\. lawsuits have been consolidated in the Federal District Court for the District of Columbia (the DC Court)\. On June 15, 2018, American reached a preliminary settlement agreement with the plaintiffs in the amount of $45 million that, once approved, will resolve all claims in the U\.S\. lawsuits\. That settlement received preliminary approval from the DC Court on June 18, 2018\.

*Private Party Antitrust Action Related to the Merger*\. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al\., v\. AMR Corporation, et al\., was filed in the United States Bankruptcy Court for the Southern District of New York\. The complaint named as defendants US Airways Group, US Airways, AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture\. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger\. On August 29, 2018, the Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross\-motion for summary judgment\. A bench trial is presently scheduled for March 2019\. American believes this lawsuit is without merit and intends to vigorously defend against the allegations\.

*DOJ Investigation Related to the United States Postal Service*\. In April 2015, the Department of Justice (DOJ) informed American of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air\. In October 2015, American received a Civil Investigative Demand from the DOJ seeking certain

168


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

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

During 2018, the Company recorded a one\-time termination charge of $64 million ($50 million net of tax) related to one of its engine maintenance service agreements\.

During 2018, the Company recorded severance and benefit costs related to a voluntary early\-out program for its technicians and related employees represented by the IBT of $22 million ($17 million net of taxes)\. In the first quarter of 2017, approximately 1,000 technicians and related employees elected to voluntarily separate from the Company and receive a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates through the end of 2018\. Also during 2018, the Company recorded other management severance of $19 million ($15 million net of taxes)\.

During 2018, the Company recorded gains of $28 million ($22 million net of taxes) for the change in market value of certain of its equity investments\. Also, the Company recorded losses of $33 million ($26 million net of taxes) for the change in fair value of certain derivative assets related to equity of Avianca Holdings S\.A\. For equity investments and derivative assets subject to MTM accounting, the Company records gains and losses as part of Nonoperating income (expense): Miscellaneous, net in its statements of consolidated operations\.

***2017***

During 2017 the Company recorded a $10 million ($6 million net of taxes) impairment charge related to obsolete spare parts inventory and a $15 million ($10 million net of taxes) intangible asset impairment charge related to a maintenance service agreement\.

During 2017, the Company recorded $83 million ($53 million net of taxes) of severance and benefit costs related to the voluntary early\-out program for its technicians and related employees represented by the IBT as described above\. Also during 2017, the Company recorded $33 million ($21 million net of taxes) of other management severance\.

***2016***

In April 2016, the Federal Aviation Administration ("FAA") announced that it will designate Newark Liberty International Airport ("Newark") as a Level 2 schedule\-facilitated airport under the International Air Transport Association Worldwide Slot Guidelines\. The designation was associated with an updated demand and capacity analysis of Newark by the FAA\. In 2016, the Company determined that the FAA's action impaired the entire value of its Newark slots because the slots are no longer the mechanism that governs take\-off and landing rights\. Accordingly, the Company recorded a $412 million special charge ($264 million net of taxes) to write off the intangible asset\.

During 2016, the Company recorded $37 million ($24 million net of taxes) of severance and benefit costs related to a voluntary early\-out program for the Company's flight attendants and other severance agreements\. In 2014, more than 2,500 flight attendants elected to voluntarily separate from the Company for a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates through the end of 2016\.

In 2016, the City of Cleveland agreed to amend the Company's lease, which runs through 2029, associated with certain excess airport terminal space (principally Terminal D) and related facilities at Hopkins International Airport ("Cleveland")\. The Company recorded an accrual for remaining payments under the lease for facilities that the Company no longer uses and will continue to incur costs under the lease without economic benefit to the Company\. This liability was measured and recorded at its fair value when the Company ceased its right to use such facilities leased to it pursuant to the lease\. The Company recorded a net charge of $74 million ($47 million net of taxes) related to the amended lease\.

The fleet service, passenger service, storekeeper and other employees represented by the International Association of Machinists and Aerospace Workers (the "IAM") ratified seven new contracts with the Company which extended the contracts through 2021\. The technicians and related employees represented by the IBT ratified a six\-year joint collective bargaining agreement which extended the contract through 2022\. During 2016, the Company recorded $171 million ($110 million net of taxes) of special charges primarily for payments in conjunction with the IAM and IBT agreements described above\.

As part of the ratified contract with the IBT, the Company amended some of its technicians and related employees' postretirement medical plans\. The amendments triggered curtailment accounting, resulting in the recognition of a one\-time $60 million gain ($38 million net of taxes) for accelerated recognition of a prior service credit in one of the plans\. Also, as part of the ratified contract with the Association of Flight Attendants, the Company amended two of its flight attendant postretirement medical plans\. The amendments triggered curtailment accounting, resulting in the recognition of a one\-time $47 million gain ($30 million net of taxes) for accelerated recognition of a prior service credit\.

87


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

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

14\. Operating Segments and Related Disclosures

We are managed as a single business unit that provides air transportation for passengers and cargo\. This allows us to benefit from an integrated revenue pricing and route network that includes American and our wholly\-owned and third\-party regional carriers that fly under capacity purchase agreements operating as American Eagle\. The flight equipment of all these carriers is combined to form   one  fleet that is deployed through a single route scheduling system\. Financial information and annual operational plans and forecasts are prepared and reviewed by the chief operating decision maker at the consolidated level\. When making operational decisions, the chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but is indifferent to the results of the individual wholly\-owned regional carriers\. The objective in making operational decisions is to maximize consolidated financial results, not the individual results of American or American Eagle\.

 See Note 1(k) for our passenger revenue by geographic region\. Our tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated\.

15\. Share\-based Compensation

The 2013 AAG Incentive Award Plan (the 2013 Plan) provides that awards may be in the form of an option, restricted stock award, restricted stock unit award, performance award, dividend equivalent award, deferred stock award, deferred stock unit award, stock payment award or stock appreciation right\. The 2013 Plan initially authorized the grant of awards for the issuance of up to   40 million  shares\. Any shares underlying awards granted under the 2013 Plan that are forfeited, terminate or are settled in cash (in whole or in part) without the delivery of shares will again be available for grant\.

Our salaries, wages and benefits expense for the years ended  December 31, 2019 ,  2018  and  2017  included   $95 million ,   $88 million  and   $90 million , respectively, of share\-based compensation costs\.

During  2019 ,  2018  and  2017 , we withheld approximately   0\.8 million ,   0\.8 million  and   1\.1 million  shares of AAG common stock, respectively, and paid approximately   $25 million ,   $37 million  and   $51 million , respectively, in satisfaction of certain tax withholding obligations associated with employee equity awards\.

Restricted Stock Unit Awards (RSUs)

The majority of our RSUs have service conditions (time vested primarily over   three years )\. The grant\-date fair value of these RSUs is equal to the market price of the underlying shares of AAG common stock on the date of grant\. The expense for these RSUs is recognized on a straight\-line basis over the vesting period for the entire award\. RSUs are classified as equity awards as the vesting results in the issuance of shares of AAG common stock\.

RSU award activity for all plans for the years ended  December 31, 2019 ,  2018  and  2017  is as follows:

|                                  |                      |                                            |
| -------------------------------- | -------------------- | ------------------------------------------ |
|                                  | **Number of Shares** | **Weighted Average Grant Date Fair Value** |
|                                  | **(In thousands)**   |                                            |
| Outstanding at December 31, 2016 | 5,187                | $41\.48                                    |
| Granted                          | 2,309                | 48\.58                                     |
| Vested and released              | (2,708

)      | 39\.63                                     |
| Forfeited                        | (464

)        | 44\.48                                     |
| Outstanding at December 31, 2017 | 4,324                | $46\.94                                    |
| Granted                          | 2,194                | 47\.65                                     |
| Vested and released              | (1,999

)      | 44\.99                                     |
| Forfeited                        | (199

)        | 45\.72                                     |
| Outstanding at December 31, 2018 | 4,320                | $44\.29                                    |
| Granted                          | 3,206                | 34\.00                                     |
| Vested and released              | (2,002

)      | 44\.90                                     |
| Forfeited                        | (337

)        | 42\.55                                     |
| Outstanding at December 31, 2019 | 5,187                | $37\.01                                    |

112


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

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

options was determined based upon a simplified assumption that the option will be exercised evenly from vesting to expiration due to the Company's lack of relevant historical data related to stock options\.

As of December 31, 2018, there were approximately 0\.4 million outstanding stock option awards, 0\.2 million of which were exercisable, with weighted\-average exercise prices of $55\.62 and $47\.07, respectively, intrinsic values of $12 million and $6 million, respectively, and weighted\-average remaining contractual lives (in years) of 5\.8 and 3\.8, respectively\.

**NOTE 6 \- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**

The tables below present the components of the Company's AOCI, net of tax (in millions):

|                                                                  |                                                                                |     |                                |                           |                    |        |                   |
| ---------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --- | ------------------------------ | ------------------------- | ------------------ | ------ | ----------------- |
|                                                                  | **Pension and**

**Other**

**Postretirement**

**Liabilities** |     | **Fuel Derivatives Contracts** | **Investments and Other** | **Deferred Taxes** |        |

**Total** |
| Balance at December 31, 2015                                     | $(363)                                                                               |     | $(215)                         | $3                        | $(256)             |        | $(831)            |
| Other comprehensive income (loss) before reclassifications       | (517)                                                                                | (a) | (4)                            | —                         | 187                |        | (334)             |
| Amounts reclassified from accumulated other comprehensive income | 26                                                                                |     | 217                            | (2)                       | 95                 |        | 336               |
| Balance at December 31, 2016                                     | (854)                                                                                |     | (2)                            | 1                         | 26                 |        | (829)             |
| Other comprehensive income (loss) before reclassifications       | (306)                                                                                | (a) | —                              | (7)                       | 74                 |        | (239)             |
| Amounts reclassified from accumulated other comprehensive income | 58                                                                                |     | 2                              | —                         | (21)               |        | 39                |
| Reclassification of stranded tax effects                         | —                                                                                |     | —                              | —                         | (118)              | (b)    | (118)             |
| Balance at December 31, 2017                                     | (1,102)                                                                              |     | —                              | (6)                       | (39)               |        | (1,147)           |
| Other comprehensive income (loss) before reclassifications       | 377                                                                                | (a) | —                              | (5)                       | (83)               |        | 289               |
| Amounts reclassified from accumulated other comprehensive income | 62                                                                                |     | —                              | —                         | (13)               |        | 49                |
| Amounts reclassified to retained earnings                        | —                                                                                |     | —                              | 7                         | (1)                |        | 6                 |
| Balance at December 31, 2018                                     | $(663)                                                                               |     | $—                             | $(4)                      | $(136)             |
 | $(803)            |

|                                                                             |                                             |                                             |                                             |                                                                       |
| --------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------- | ------------------------------------------- | --------------------------------------------------------------------- |
| **Details about AOCI Components**                                           | **Amount Reclassified from AOCI to Income** | **Amount Reclassified from AOCI to Income** | **Amount Reclassified from AOCI to Income** | **Affected Line Item in the Statement Where Net Income is Presented** |
|                                                                             | **Year Ended December 31,**                 | **Year Ended December 31,**                 | **Year Ended December 31,**                 |                                                                       |
|                                                                             | **2018**                                    | **2017**                                    | **2016**                                    |                                                                       |
| Fuel derivative contracts                                                   |                                             |                                             |                                             |                                                                       |
| Fuel contracts\-reclassifications of losses into earnings                   | $—                                          | $2                                          | $217                                        | Aircraft fuel                                                         |
| Pension and Postretirement liabilities and other                            |                                             |                                             |                                             |                                                                       |
| Amortization of unrecognized (gains) losses and prior service cost (c)      | 62                                          | 58                                          | 26                                          | Miscellaneous, net                                                    |
| Investments and other                                                       |                                             |                                             |                                             |                                                                       |
| Available\-for\-sale securities \- reclassifications of gains into earnings | —                                           | —                                           | (2)                                         | Miscellaneous, net                                                    |

(a) Prior service credits decreased by $3 million, $0 million and increased by $30 million and actuarial losses decreased by approximately $380 million, and increased $306 million and $560 million for 2018, 2017 and 2016, respectively\.

(b) This amount represents the reclassification from AOCI to RE of the stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the "Tax Act")\.

(c) This AOCI component is included in the computation of net periodic pension and other postretirement costs (see Note 8 of this report for additional information)\.

**NOTE 7 \- INCOME TAXES**

The income tax provision (benefit) differed from amounts computed at the statutory federal income tax rate and consisted of the following significant components, as follows (in millions):

67


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

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

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

***If we encounter problems with any of our third\-party regional operators or third\-party service providers, our operations could be adversely affected by a resulting decline in revenue or negative public perception about our services\.***

A significant portion of our regional operations are conducted by third\-party operators on our behalf, primarily under capacity purchase agreements\. Due to our reliance on third parties to provide these essential services, we are subject to the risks of disruptions to their operations, which may result from many of the same risk factors disclosed in this report, such as the impact of adverse economic conditions, the inability of third parties to hire or retain necessary personnel, including in particular pilots, and other risk factors, such as an out\-of\-court or bankruptcy restructuring of any of our regional operators\. Many of these third\-party regional operators provide significant regional capacity that we would be unable to replace in a short period of time should that operator fail to perform its obligations to us\. Volatility in fuel prices, disruptions to capital markets and adverse economic conditions in general have subjected certain of these third\-party regional operators to significant financial pressures, which have in the past and may in the future lead to bankruptcies among these operators\. We may also experience disruption to our regional operations if we terminate the capacity purchase agreement with one or more of our current operators and transition the services to another provider\. Any significant disruption to our regional operations would have a material adverse effect on our business, results of operations and financial condition\.

In addition, our reliance upon others to provide essential services on behalf of our operations may result in our relative inability to control the efficiency and timeliness of contract services\. We have entered into agreements with contractors to provide various facilities and services required for our operations, including distribution and sale of airline seat inventory, provision of information technology and services, regional operations, aircraft maintenance, ground services and facilities, reservations and baggage handling\. Similar agreements may be entered into in any new markets we decide to serve\. These agreements are generally subject to termination after notice by the third\-party service provider\. We are also at risk should one of these service providers cease operations, and there is no guarantee that we could replace these providers on a timely basis with comparably priced providers, or at all\. Any material problems with the efficiency and timeliness of contract services, resulting from financial hardships or otherwise, could have a material adverse effect on our business, results of operations and financial condition\.

***The commercial relationships that we have with airlines, including any related equity investment, may not produce the returns or results we expect\.***

An important part of our strategy to expand our network has been to expand our commercial relationships with other airlines, such as global alliance, joint business and code share relationships, and, in one recent instance, make a significant equity investment in another airline in connection with initiating such a commercial relationship\. We may explore similar non\-controlling investments in, and joint ventures and strategic alliances with, other carriers as part of our global business strategy\. We face competition in forming these commercial relationships since there are a limited number of potential arrangements and other airlines are looking to enter into similar relationships\. Any such existing or future investment could involve significant challenges and risks, including that we may not realize a satisfactory return on our investment or that they may not generate the expected revenue synergies\. These events could have a material adverse effect on our business, results of operations and financial condition\.

21


Annual Report of Southwest Airlines Co\. for year 2019

which are observable\. Based on the Company’s portfolio of option contracts as of  December 31, 2019 , a 10 percent change in implied volatility, holding all other factors constant, would have resulted in a change in the fair value of this portfolio of less than  $12 million \.

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

As discussed in  Note 10  to the Consolidated Financial Statements, any changes in fair value of cash flow derivatives designated as hedges are offset within AOCI until the period in which the expected future cash flow impacts earnings\. Any changes in the fair value of fuel derivatives that do not qualify for hedge accounting are reflected in earnings within Other (gains) losses, net, in the period of the change\. Because the Company has extensive historical experience in valuing the derivative instruments it holds, and such experience is continually evaluated against its counterparties each period when such instruments expire and are settled for cash, the Company believes it is unlikely that an independent third party would value the Company’s derivative contracts at a significantly different amount than what is reflected in the Company’s financial statements\. In addition, the Company also has bilateral credit provisions in some of its counterparty agreements, which provide for parties (or the Company) to provide cash collateral when the fair value of fuel derivatives with a single party exceeds certain threshold levels\. Since this cash collateral is based on the estimated fair value of the Company’s outstanding fuel derivative contracts, this provides further validation to the Company’s estimate of fair values\.

Loyalty Accounting

The Company utilizes estimates in the recognition of revenues and liabilities associated with its loyalty program\. These estimates primarily include the liability associated with Rapid Rewards loyalty member ("Member") account balances that are expected to be redeemed for travel or other products at a future date\. Loyalty account balances include points earned through flights taken, points sold to Customers, or points earned through business partners participating in the loyalty program\.

Under the Southwest Rapid Rewards loyalty program, Members earn points for every dollar spent on Southwest base fares\. The amount of points earned under the program is based on the fare and fare class purchased, with higher fare products (e\.g\., Business Select) earning more points than lower fare products (e\.g\., Wanna Get Away)\. Each fare class is associated with a points earning multiplier, and points for flights are calculated by multiplying the fare for the flight by the fare class multiplier\. Likewise, the amount of points required to be redeemed for a flight can differ based on the fare purchased\. Under the program, (i) Members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates; and (ii) points do not expire\. In addition, Members are able to redeem their points for items other than travel on Southwest Airlines, such as international flights on other airlines, cruises, hotel stays, rental cars, gift cards, event tickets, and more\. In addition to earning points for revenue flights and qualifying purchases with Rapid Rewards Partners, Members also have the ability to purchase, gift, and transfer points, as well as the ability to donate points to selected charities\.

The Company utilizes the deferred revenue method of accounting for points earned through flights taken in its loyalty program\. The Company also sells points and related services to business partners participating in the loyalty program\. Liabilities are recorded for the relative standalone selling price of the Rapid Rewards points which are awarded each period\. The liabilities recorded represent the total number of points expected to be redeemed by Members, regardless of whether the Members may have enough to qualify for a full travel award\. At  December 31, 2019 , the loyalty liabilities

58


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

SAFETY, COMPLIANCE AND OPERATIONAL EXCELLENCE

Our reputation and financial results could be harmed in the event of an airline accident or incident\.

An accident or incident involving one of our aircraft or an aircraft operated by one of our codeshare partners or CPA carriers could involve loss of life and result in a loss of confidence in our Company by the flying public and/or aviation authorities\. We could experience significant claims from injured passengers, bystanders and surviving relatives, as well as costs for the repair or replacement of a damaged aircraft and temporary or permanent loss from service\. We maintain liability insurance in amounts and of the type generally consistent with industry practice, as do our codeshare partners and CPA carriers\. However, the amount of such coverage may not be adequate to fully cover all claims, and we may be forced to bear substantial economic losses from such an event\. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results\. Moreover, any aircraft accident or incident, even if it is fully insured and does not involve one of our aircraft, could cause a public perception that our airlines or the aircraft we or our partners fly are less safe or reliable than other transportation alternatives\. This would harm our business\.

Our operations are often affected by factors beyond our control, including delays, cancellations and other conditions, which could harm our business, financial condition and results of operations\.

As is the case for all airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control\.

Factors that might impact our operations include:

• congestion, construction, and/or space constraints at airports, specifically in our hub locations of Seattle, Los Angeles, and San Francisco;

• air traffic control problems;

• adverse weather conditions;

• lack of operational approval (e\.g\. new routes, aircraft deliveries, etc\.);

• increased security measures or breaches in security;

• contagious illness and fear of contagion;

• changes in international treaties concerning air rights;

• international or domestic conflicts or terrorist activity; and

• other changes in business conditions\.

Due to our concentration of flights in the Pacific Northwest and Alaska, we believe a large portion of our operation is more susceptible to adverse weather conditions than other carriers\. A general reduction in airline passenger traffic as a result of any of the above\-mentioned factors could harm our business, financial condition and results of operations\.

Changes in government regulation imposing additional requirements and restrictions on our operations could increase our operating costs and result in service delays and disruptions\.

Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that require substantial compliance costs\. In the last several years, Congress has passed laws, and the U\.S\. DOT, the TSA and the FAA have issued regulations that have required significant expenditures relating to maintenance of aircraft, operation of airlines and broadening of consumer protections\.

Similarly, there are a number of legislative and regulatory initiatives and reforms at the federal, state and local levels\. These initiatives include increasingly stringent laws to protect the environment, minimum wage requirements, mandatory paid sick or family leave, and health care mandates\. These laws could affect our relationship with our workforce and the vendors that serve our airlines and cause our expenses to increase without an ability to pass through these costs\. New initiatives with employer\-funded costs, specifically those impacting Washington State, could disproportionately increase our cost structure as compared

20


Annual Report of Southwest Airlines Co\. for year 2018

The impacts of applying the New Revenue Standard to the Company’s Consolidated Statement of Cash Flows for the years ended December 31, 2017 and 2016, are as follows (amounts may not recalculate due to rounding):

|                                           |                                  |                                  |                                  |
| ----------------------------------------- | -------------------------------- | -------------------------------- | -------------------------------- |
|                                           | **Year ended December 31, 2017** | **Year ended December 31, 2017** | **Year ended December 31, 2017** |
| **(in millions)**                         | **As Reported**                  | **New Revenue Standard**         | **As Recast**                    |
| Net income                                | $3,488                           | $(131)                           | $3,357                           |
| Deferred income taxes                     | (1,212)                          | 145                              | (1,066)                          |
| Changes in certain assets and liabilities | 227                              | (14)                             | 212                              |
| Net cash provided by operating activities | 3,929                            | —                                | 3,929                            |

|                                           |                                  |                                  |                                  |
| ----------------------------------------- | -------------------------------- | -------------------------------- | -------------------------------- |
|                                           | **Year ended December 31, 2016** | **Year ended December 31, 2016** | **Year ended December 31, 2016** |
| **(in millions)**                         | **As Reported**                  | **New Revenue Standard**         | **As Recast**                    |
| Net income                                | $2,244                           | $(60)                            | $2,183                           |
| Deferred income taxes                     | 455                              | (36)                             | 419                              |
| Changes in certain assets and liabilities | 182                              | 96                               | 279                              |
| Net cash provided by operating activities | 4,293                            | —                                | 4,293                            |

**3****\. NET INCOME PER SHARE**

The following table sets forth the computation of basic and diluted net income per share (in millions except per share amounts):

|                                                                               |                             |                             |                             |
| ----------------------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                               | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** |
|                                                                               | **2018**                    | **2017**                    | **2016**                    |
|                                                                               |                             | **As Recast**               | **As Recast**               |
| **NUMERATOR:**                                                                |                             |                             |                             |
| Net income                                                                    | $2,465                      | $3,357                      | $2,183                      |
| Incremental income effect of

 interest on 5\.25% convertible notes    | —                           | —                           | 2                           |
| Net income after assumed conversion                                           | $2,465                      | $3,357                      | $2,185                      |
| **DENOMINATOR:**                                                              |                             |                             |                             |
| Weighted\-average shares outstanding, basic                                   | 573                         | 601                         | 627                         |
| Dilutive effect of Employee stock options and

 restricted stock units | 1                           | 2                           | 1                           |
| Dilutive effect of 5\.25% convertible notes                                   | —                           | —                           | 5                           |
| Adjusted weighted\-average shares outstanding, diluted                        | 574                         | 603                         | 633                         |
| **NET INCOME PER SHARE:**                                                     |                             |                             |                             |
| Basic                                                                         | $4\.30                      | $5\.58                      | $3\.48                      |
| Diluted                                                                       | $4\.29                      | $5\.57                      | $3\.45                      |

**4****\. COMMITMENTS AND CONTINGENCIES**

***Commitments***

83


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

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

**Number** | **Description**                                                                                |
| 4\.140                        | [Note Purchase Agreement, dated as of August 14, 2017, among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust, National Association, as Escrow Agent, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4\.9 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex49.htm)                                                                          |
| 4\.141                        | [Form of Participation Agreement (Participation Agreement among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein) (incorporated by reference to Exhibit B to Exhibit 4\.9 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex49.htm)                                       |
| 4\.142                        | [Form of Indenture and Security Agreement (Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (incorporated by reference to Exhibit C to Exhibit 4\.9 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex49.htm)                                                                                |
| 4\.143                        | [Form of Pass Through Trust Certificate, Series 2017\-2AA (incorporated by reference to Exhibit A to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex42.htm)                                                                                |
| 4\.144                        | [Form of Pass Through Trust Certificate, Series 2017\-2A (incorporated by reference to Exhibit A to Exhibit 4\.3 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex43.htm)                                                                                |
| 4\.145                        | [Revolving Credit Agreement (2017\-2AA), dated as of August 14, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-2AA, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.14 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex414.htm)                                                                                |
| 4\.146                        | [Revolving Credit Agreement (2017\-2A), dated as of August 14, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-2A, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.15 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex415.htm)                                                                                |
| 4\.147                        | [Trust Supplement No\. 2016\-3B, dated as of October 4, 2017, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on October 5, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517304687/d466899dex42.htm)                                                                                |
| 4\.148                        | [Amended and Restated Note Purchase Agreement, dated as of October 4, 2017, amending the Note Purchase Agreement, dated as of October 3, 2016, among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, and Wilmington Trust Company, as Subordination Agent (incorporated by reference to Exhibit 4\.4 to American’s Current Report on Form 8\-K filed on October 5, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517304687/d466899dex44.htm)                                                                                |
| 4\.149                        | [Form of First Amendment to Participation Agreement (First Amendment to Participation Agreement among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein) (incorporated by reference to Exhibit A to Exhibit 4\.4 to American’s Current Report on Form 8\-K filed on October 5, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517304687/d466899dex44.htm) |
| 4\.150                        | [Form of First Amendment to Indenture and Security Agreement (First Amendment to Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (incorporated by reference to Exhibit E to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on October 6, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517305920/d463889dex46.htm#toc463889_35)                                                                                |
| 4\.151                        | [Form of First Amendment to Indenture and Security Agreement (First Amendment to Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (incorporated by reference to Exhibit B to Exhibit 4\.4 to American’s Current Report on Form 8\-K filed on October 5, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517304687/d466899dex44.htm)                                                                                |
| 4\.152                        | [Form of Pass Through Trust Certificate, Series 2016\-3B (incorporated by reference to Exhibit A to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on October 5, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517304687/d466899dex42.htm)                                                                                |
| 4\.153                        | [Revolving Credit Agreement (2016\-3B), dated as of October 4, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2016\-3B, as Borrower, and KfW IPEX\-Bank GmbH, as Liquidity Provider 3B (incorporated by reference to Exhibit 4\.8 to American’s Current Report on Form 8\-K filed on October 5, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517304687/d466899dex48.htm)                                                                                |
| 4\.154                        | [Trust Supplement No\. 2017\-2B, dated as of October 5, 2017, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on October 6, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517305920/d463889dex42.htm)                                                                                |

174