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

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

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(e)^ | Includes approximately  27%  investments in U\.S\. domestic government securities,  43%  in emerging market government securities and  30%  in international government securities\. There are no significant foreign currency risks within this classification\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(f)^ | Includes limited partnerships that invest primarily in U\.S\. ( 94% ) and European ( 6% ) buyout opportunities of a range of privately held companies\. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated\. It is estimated that the underlying assets of these funds will be gradually liquidated over the next  one  to  ten years \. Additionally, the pension plan’s master trust has future funding commitments of approximately  $903 million  over the next  ten years \. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(g)^ | Investment includes  42%  in a collective interest trust investing primarily in short\-term securities,  40%  in an emerging market 103\-12 Investment Trust with investments in emerging country equity securities,  10%  in Canadian segregated balanced value, income growth and diversified pooled funds and  8%  in a common/collective trust investing in securities of smaller companies located outside the U\.S\., including developing markets\. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(h)^ | Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy\. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements\. |

Changes in fair value measurements of Level 3 investments during the year ended December 31, 2018, were as follows (in millions):

|                                                     |                                 |                                                  |
| --------------------------------------------------- | ------------------------------- | ------------------------------------------------ |
|                                                     | **Private Market Partnerships** | **Insurance Group**

**Annuity Contracts** |
| Beginning balance at December 31, 2017              | $14                             | $2                                               |
| Actual loss on plan assets:                         |                                 |                                                  |
| Relating to assets still held at the reporting date | (2)                             | —                                                |
| Purchases                                           | 1                               | —                                                |
| Sales                                               | (6)                             | —                                                |
| Ending balance at December 31, 2018                 | $7                              | $2                                               |

Changes in fair value measurements of Level 3 investments during the year ended December 31, 2017, were as follows (in millions):

|                                                     |                                            |                                                  |
| --------------------------------------------------- | ------------------------------------------ | ------------------------------------------------ |
|                                                     | **Private Market**

**Partnerships** | **Insurance Group**

**Annuity Contracts** |
| Beginning balance at December 31, 2016              | $21                                        | $2                                               |
| Actual loss on plan assets:                         |                                            |                                                  |
| Relating to assets still held at the reporting date | (4)                                        | —                                                |
| Purchases                                           | 1                                          | —                                                |
| Sales                                               | (1)                                        | —                                                |
| Transfers out                                       | (3)                                        | —                                                |
| Ending balance at December 31, 2017                 | $14                                        | $2                                               |

118


Annual Report of Southwest Airlines Co\. for year 2019

Item 8\.   Financial Statements and Supplementary Data

Southwest Airlines Co\.

Consolidated Balance Sheet

(in millions, except share data)

|                                                                                |                       |                       |
| -------------------------------------------------------------------------------------------------------------------- | --------------------- | --------------------- |
|                                                                                | **December 31, 2019** | **December 31, 2018** |
| **ASSETS**                                                                                |                       |                       |
| Current assets:                                                                                |                       |                       |
| Cash and cash equivalents                                                                                | $2,548                | $1,854                |
| Short\-term investments                                                                                | 1,524                 | 1,835                 |
| Accounts and other receivables                                                                                | 1,086                 | 568                   |
| Inventories of parts and supplies, at cost                                                                           | 529                   | 461                   |
| Prepaid expenses and other current assets                                                                            | 287                   | 310                   |
| Total current assets                                                                                | 5,974                 | 5,028                 |
| Property and equipment, at cost:                                                                                |                       |                       |
| Flight equipment                                                                                | 21,629                | 21,753                |
| Ground property and equipment                                                                                | 5,672                 | 4,960                 |
| Deposits on flight equipment purchase contracts                                                                      | 248                   | 775                   |
| Assets constructed for others                                                                                | 164                   | 1,768                 |
|                                                                                | 27,713                | 29,256                |
| Less allowance for depreciation and amortization                                                                     | 10,688                | 9,731                 |
|                                                                                | 17,025                | 19,525                |
| Goodwill                                                                                | 970                   | 970                   |
| Operating lease right\-of\-use assets                                                                                | 1,349                 | —                     |
| Other assets                                                                                | 577                   | 720                   |
|                                                                                | $25,895               | $26,243               |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                             |                       |                       |
| Current liabilities:                                                                                |                       |                       |
| Accounts payable                                                                                | $1,574                | $1,416                |
| Accrued liabilities                                                                                | 1,749                 | 1,749                 |
| Current operating lease liabilities                                                                                | 353                   | —                     |
| Air traffic liability                                                                                | 4,457                 | 4,134                 |
| Current maturities of long\-term debt                                                                                | 819                   | 606                   |
| Total current liabilities                                                                                | 8,952                 | 7,905                 |
| Long\-term debt less current maturities                                                                              | 1,846                 | 2,771                 |
| Air traffic liability \- noncurrent                                                                                | 1,053                 | 936                   |
| Deferred income taxes                                                                                | 2,364                 | 2,427                 |
| Construction obligation                                                                                | 164                   | 1,701                 |
| Noncurrent operating lease liabilities                                                                               | 978                   | —                     |
| Other noncurrent liabilities                                                                                | 706                   | 650                   |
| Stockholders' equity:                                                                                |                       |                       |
| Common stock, $1\.00 par value: 2,000,000,000 shares authorized;

 807,611,634 shares issued in 2019 and 2018 | 808                   | 808                   |
| Capital in excess of par value                                                                                | 1,581                 | 1,510                 |
| Retained earnings                                                                                | 17,945                | 15,967                |
| Accumulated other comprehensive income (loss)                                                                        | (61

)          | 20                    |
| Treasury stock, at cost: 288,547,318 and 255,008,275 shares

 in 2019 and 2018 respectively                    | (10,441

)      | (8,452

)       |
| Total stockholders' equity                                                                                | 9,832                 | 9,853                 |
|                                                                                | $25,895               | $26,243               |

See accompanying notes\.

64


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

10\-K 1 a10k123118\.htm 10\-K 2018 02\.25\.19

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D\.C\. 20549**

|                |                |                |
| -------------- | -------------- | -------------- |
| **FORM 10\-K** | **FORM 10\-K** | **FORM 10\-K** |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------- |
| ☒ | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**For the Fiscal Year Ended** **December 31, 2018**

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------- |
| ☐ | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**For the Transition Period From to**

Commission file number 1\-8400

|                                                                                |                                                                                |                                                                                |
| --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |
| **American Airlines Group Inc\.**
(Exact name of registrant as specified in its charter) | **American Airlines Group Inc\.**
(Exact name of registrant as specified in its charter) | **American Airlines Group Inc\.**
(Exact name of registrant as specified in its charter) |

|                                                                           |                                                      |
| ------------------------------------------------------------------------- | ---------------------------------------------------- |
| **Delaware**                                                              | **75\-1825172**                                      |
| *(State or other jurisdiction of*

*incorporation or organization)* | *(I\.R\.S\. Employer*

*Identification No\.)*  |
| **4333 Amon Carter Blvd\., Fort Worth, Texas 76155**                      | **(817) 963\-1234**                                  |
| *(Address of principal executive offices, including zip code)*            | *Registrant’s telephone number, including area code* |

*(Former name, former address and former fiscal year, if changed since last report)*

**Securities registered pursuant to Section 12(b) of the Act:**

|                                          |                                          |
| ---------------------------------------- | ---------------------------------------- |
|                                          | **Name of Exchange on Which Registered** |
| Common Stock, $0\.01 par value per share | NASDAQ                                   |

**Securities registered pursuant to Section 12(g) of the Act: None**

Commission file number 1\-2691

|                                                                                |                                                                                |                                                                                |
| ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- |
| **American Airlines, Inc\.**
(Exact name of registrant as specified in its charter) | **American Airlines, Inc\.**
(Exact name of registrant as specified in its charter) | **American Airlines, Inc\.**
(Exact name of registrant as specified in its charter) |

|                                                                           |                                                      |
| ------------------------------------------------------------------------- | ---------------------------------------------------- |
| **Delaware**                                                              | **13\-1502798**                                      |
| *(State or other jurisdiction of*

*incorporation or organization)* | *(I\.R\.S\. Employer*

*Identification No\.)*  |
| **4333 Amon Carter Blvd\., Fort Worth, Texas 76155**                      | **(817) 963\-1234**                                  |
| *(Address of principal executive offices, including zip code)*            | *Registrant’s telephone number, including area code* |

**Securities registered pursuant to Section 12(b) of the Act: None**

**Securities registered pursuant to Section 12(g) of the Act: None**

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

Indicate by check mark if the registrant is a well\-known seasoned issuer, as defined in Rule 405 of the Securities Act\.

|                               |     |   |    |   |
| ----------------------------- | --- | - | -- | - |
| American Airlines Group Inc\. | Yes | ☒ | No | ☐ |
| American Airlines, Inc\.      | Yes | ☒ | No | ☐ |


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

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY**

|                                                      |                                |                  |                                    |                    |                                                   |                       |            |
| ---------------------------------------------------- | ------------------------------ | ---------------- | ---------------------------------- | ------------------ | ------------------------------------------------- | --------------------- | ---------- |
| ***(in millions)***                                  | ***Common Stock Outstanding*** | **Common Stock** | **Capital in Excess of Par Value** | **Treasury Stock** | **Accumulated Other Comprehensive Income (Loss)** | **Retained Earnings** | **Total**  |
| **Balances at December 31, 2015**                    | *125\.175*                     | $1               | $73                                | $(250)             | $(303)                                            | $2,890                | $2,411     |
| Cumulative effect of accounting changes ^(a)^        | —                              | —                | —                                  | —                  | —                                                 | (170)                 | (170)      |
| 2016 net income                                      | —                              | —                | —                                  | —                  | —                                                 | 797                   | 797        |
| Other comprehensive income (loss)                    | —                              | —                | —                                  | —                  | (2)                                               | —                     | (2)        |
| Common stock repurchase                              | *(2\.595)*                     | —                | —                                  | (193)              | —                                                 | —                     | (193)      |
| Stock\-based compensation                            | —                              | —                | 19                                 | —                  | —                                                 | —                     | 19         |
| Cash dividend declared                               | *—*                            | —                | —                                  | —                  | —                                                 | (136)                 | (136)      |
| Stock issued for employee stock purchase plan        | *0\.309*                       | —                | 17                                 | —                  | —                                                 | —                     | 17         |
| Stock issued under stock plans                       | *0\.439*                       | —                | 1                                  | —                  | —                                                 | —                     | 1          |
| **Balances at December 31, 2016**                    | *123\.328*                     | 1                | 110                                | (443)              | (305)                                             | 3,381                 | 2,744      |
| 2017 net income                                      | —                              | —                | —                                  | —                  | —                                                 | 960                   | 960        |
| Other comprehensive income (loss)                    | —                              | —                | —                                  | —                  | (75)                                              | —                     | (75)       |
| Common stock repurchase                              | *(0\.981)*                     | —                | —                                  | (75)               | —                                                 | —                     | (75)       |
| Stock\-based compensation                            | —                              | —                | 34                                 | —                  | —                                                 | —                     | 34         |
| Cash dividend declared                               | *—*                            | —                | —                                  | —                  | —                                                 | (148)                 | (148)      |
| Stock issued for employee stock purchase plan        | *0\.407*                       | —                | 24                                 | —                  | —                                                 | —                     | 24         |
| Stock issued under stock plans                       | *0\.307*                       | —                | (4)                                | —                  | —                                                 | —                     | (4)        |
| **Balances at December 31, 2017**                    | *123\.061*                     | 1                | 164                                | (518)              | (380)                                             | 4,193                 | 3,460      |
| Reclassification of tax effects to retained earnings | —                              | —                | —                                  | —                  | (62)                                              | 62                    | —          |
| 2018 net income                                      | —                              | —                | —                                  | —                  | —                                                 | 437                   | 437        |
| Other comprehensive income (loss)                    | —                              | —                | —                                  | —                  | (6)                                               | —                     | (6)        |
| Common stock repurchase                              | *(0\.776)*                     | —                | —                                  | (50)               | —                                                 | —                     | (50)       |
| Stock\-based compensation                            | —                              | —                | 36                                 | —                  | —                                                 | —                     | 36         |
| Cash dividend declared                               | *—*                            | —                | —                                  | —                  | —                                                 | (158)                 | (158)      |
| Stock issued for employee stock purchase plan        | *0\.632*                       | —                | 35                                 | —                  | —                                                 | —                     | 35         |
| Stock issued under stock plans                       | *0\.277*                       | —                | (3)                                | —                  | —                                                 | —                     | (3)        |
| **Balances at December 31, 2018**                    | ***123\.194***                 | **$1**           | **$232**                           | **$(568)**         | **$(448)**                                        | **$4,534**            | **$3,751** |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------- |
| (a) | Represents the opening balance sheet adjustment recorded as a result of the adoption of the new revenue recognition standard\.  |

Certain information has been adjusted to reflect the adoption of new accounting standards\. See accompanying notes to consolidated financial statements\.

 60


Annual Report of Southwest Airlines Co\. for year 2019

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized\.

|                  |                         |                                                      |
| ---------------- | ----------------------- | ---------------------------------------------------- |
|                  | SOUTHWEST AIRLINES CO\. | SOUTHWEST AIRLINES CO\.                              |
| February 3, 2020 | By                      | /s/ Tammy Romo                                       |
|                  |                         | Tammy Romo                                           |
|                  |                         | *Executive Vice President & Chief Financial Officer* |
|                  |                         | *(On behalf of the Registrant and in*                |
|                  |                         | *her capacity as Principal Financial*                |
|                  |                         | *& Accounting Officer)*                              |

125


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

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

When calculating pension expense for 2019, the Company assumed that its plans' assets would generate a long\-term rate of return of approximately 7\.4%\. The expected long\-term rate of return assumption was developed based on historical experience and input from the trustee managing the plans' assets\.The expected long\-term rate of return on plan assets is based on a target allocation of assets, which is based on a goal of earning the highest rate of return while maintaining risk at acceptable levels\. Our projected long\-term rate of return reflects the active management of our plans' assets\. The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio\. Plan fiduciaries regularly review actual asset allocation and the pension plans' investments are periodically rebalanced to the targeted allocation when considered appropriate\.

The defined benefit pension plans' assets consist of return generating investments and risk mitigating investments which are held through direct ownership or through interests in common collective trusts\. Return generating investments include primarily equity securities, fixed\-income securities and alternative investments (e\.g\. private equity and hedge funds)\. Risk mitigating investments include primarily U\.S\. government and investment grade corporate fixed\-income securities\. The allocation of assets was as follows at December 31, 2018:

|                          |                  |                                           |
| ------------------------ | ---------------- | ----------------------------------------- |
|                          | Percent of Total | Expected Long\-Term

Rate of Return |
| Equity securities        | 36%              | 9\.5%                                     |
| Fixed\-income securities | 37               | 5\.8                                      |
| Alternatives             | 16               | 7\.3                                      |
| Other                    | 11               | 7\.8                                      |

Pension expense increases as the expected rate of return on plan assets decreases\. Lowering the expected long\-term rate of return on plan assets by 50 basis points (from 7\.4% to 6\.9%) would increase estimated 2019 pension expense by approximately $20 million\. Future pension obligations for United's plans were discounted using a weighted average rate of 4\.2% at December 31, 2018\. The Company selected the discount rate for substantially all of its plans by using a hypothetical portfolio of high quality bonds at December 31, 2018 that would provide the necessary cash flows to match the projected benefit payments\. The pension liability and future pension expense both increase as the discount rate is reduced\. Lowering the discount rate by 50 basis points (from 4\.2% to 3\.7%) would increase the pension liability at December 31, 2018 by approximately $585million and increase the estimated 2019 pension expense by approximately $69 million\. Future changes in plan asset returns, plan provisions, assumed discount rates, pension funding law and various other factors related to the participants in our pension plans will impact our future pension expense and liabilities\. We cannot predict with certainty what these factors will be in the future\.

Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions\. Under the applicable accounting standards for defined benefit pension plans, those gains and losses are not required to be recognized currently as pension benefit expense, but instead may be deferred as part of accumulated other comprehensive income and amortized into expense over the average remaining service life of the covered active employees\. All gains and losses in accumulated other comprehensive income are amortized to expense over the remaining years of service of the covered active employees\. At December 31, 2018 and 2017, the Company had unrecognized actuarial losses for pension benefit plans of $1\.4 billion and $1\.6 billion, respectively, recorded in accumulated other comprehensive income\.

***Other Postretirement Benefit Plan Accounting\.*** United's postretirement plan provides certain health care benefits, primarily in the United States, to retirees and eligible dependents, as well as certain life insurance benefits to certain retirees reflected as "Other Benefits\." United also has retiree medical programs that permit retirees who meet certain age and service requirements to continue medical coverage between retirement and Medicare eligibility\. Eligible employees are required to pay a portion of the costs of their retiree medical benefits, which in some cases may be offset by accumulated unused sick time at the time of their retirement\. Plan benefits are subject to co\-payments, deductibles and other limits as described in the plans\.

The Company accounts for other postretirement benefits by recognizing the difference between plan assets and obligations, or the plan's funded status, in its financial statements\. Other postretirement benefit expense is recognized on an accrual basis over employees' approximate service periods and is generally calculated independently of funding decisions or requirements\. United has not been required to pre\-fund its plan obligations, which has resulted in a significant net obligation, as discussed below\. The Company's benefit obligation was $1\.4 billion and $1\.7 billion for the other postretirement benefit plans at December 31, 2018 and 2017, respectively\.

The calculation of other postretirement benefit expense and obligations requires the use of a number of assumptions, including the assumed discount rate for measuring future payment obligations and the health care cost trend rate\. The Company determines the appropriate discount rate for each of the plans based on current rates on high quality corporate bonds that would generate the cash flow necessary to pay plan benefits when due\. The Company's weighted average discount rate to determine its

37


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

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

NOTE 4 \. DERIVATIVES AND RISK MANAGEMENT

Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations\.  In an effort to manage our exposure to these risks, we may enter into derivative contracts and adjust our derivative portfolio as market conditions change\.

Fuel Price Risk

Changes in fuel prices materially impact our results of operations\.  We have recently managed our fuel price risk through a hedging program intended to reduce the financial impact from changes in the price of fuel as fuel prices are subject to potential volatility\.  In addition, we may enter into derivatives with third parties to hedge financial risk related to Monroe’s refining margins\.

In response to this volatility, during 2015 and 2016 we entered into transactions to defer settlement of a portion of our hedge portfolio and lock in the amount of hedge settlements for a portion of 2016 and 2017\. These deferral transactions, excluding markets movements from the date of inception, provided approximately   $300 million  in cash receipts in 2015 and 2016 and required approximately   $300 million  in cash payments in 2016 and 2017\. We also early settled   $455 million  of our airline segment's 2016 positions during 2016\. Cash flows associated with the deferral transactions are reported as cash flows from financing activities within our Consolidated Statements of Cash Flows\.

During the years ended December 31,  2017 ,  2016  and 2015, we recorded fuel hedge losses of   $81 million ,   $366 million  and   $741 million , respectively\.

Interest Rate Risk

Our exposure to market risk from adverse changes in interest rates is primarily associated with our long\-term debt obligations\. Market risk associated with our fixed and variable rate long\-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates\.

In an effort to manage our exposure to the risk associated with our variable rate long\-term debt, we periodically enter into interest rate swaps\. We designate interest rate contracts used to convert the interest rate exposure on a portion of our debt portfolio from a floating rate to a fixed rate as cash flow hedges, while those contracts converting our interest rate exposure from a fixed rate to a floating rate are designated as fair value hedges\.

We also have exposure to market risk from adverse changes in interest rates associated with our cash and cash equivalents and benefit plan obligations\. Market risk associated with our cash and cash equivalents relates to the potential decline in interest income from a decrease in interest rates\. Pension, postretirement, postemployment and worker's compensation obligation risk relates to the potential increase in our future obligations and expenses from a decrease in interest rates used to discount these obligations\.

Foreign Currency Exchange Rate Risk

We are subject to foreign currency exchange rate risk because we have revenue and expense denominated in foreign currencies with our primary exposures being the Japanese yen and Canadian dollar\. To manage exchange rate risk, we execute both our international revenue and expense transactions in the same foreign currency to the extent practicable\.  From time to time, we may also enter into foreign currency option and forward contracts\.  These foreign currency exchange contracts are designated as cash flow hedges\.

 66


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

**EXHIBIT INDEX**

Certain of the following exhibits have been filed with the Securities and Exchange Commission and are incorporated by reference from the documents below\. Certain others are filed with this Form 10\-K\. The exhibits are numbered in accordance with Item 601 of Regulation S\-K\.

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

**Number** | **Exhibit**

**Description**                                                                                | **Form** | **Date of**

**First Filing** | **Exhibit**

**Number** | **File**

**Number** |
| 3\.1                          | [Amended and Restated Certificate of Incorporation of Registrant](http://www.sec.gov/Archives/edgar/data/766421/000076642117000049/alk10-q22017ex31.htm)                                                                       | 10\-Q    | August 3, 2017                      | 3\.1                          |                            |
| 10\.1\#                       | [Aircraft General Terms Agreement, dated June 15, 2005, between the Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000095012405004737/v11316exv10w1.txt)                             | 10\-Q    | August 5, 2005                      | 10\.1                         |                            |
| 10\.2\#                       | [Purchase Agreement No\. 2497, dated June 15, 2005, between the Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000095012405004737/v11316exv10w2.txt)                                 | 10\-Q    | August 5, 2005                      | 10\.2                         |                            |
| 10\.3\#                       | [Supplemental Agreement No\. 23 to Purchase Agreement No\. 2497 between The Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642111000065/exhibit101.htm)                        | 10\-Q/A  | August 2, 2011                      | 10\.1                         |                            |
| 10\.4\#                       | [Supplemental Agreement No\. 29 to Purchase Agreement No\. 2497 between The Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642113000010/alk10-k123112ex107.htm)                | 10\-K    | February 14, 2013                   | 10\.1                         |                            |
| 10\.5\#                       | [Purchase Agreement No\. 3866 between The Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642113000010/alk10-k123112ex108.htm)                                                  | 10\-K    | February 14, 2013                   | 10\.2                         |                            |
| 10\.6\#                       | [Supplemental Agreement No\. 39 to Purchase Agreement No\. 2497 between The Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642115000024/boeingsupplemental.htm)                | 10\-Q    | May 7, 2015                         | 10\.1                         |                            |
| 10\.7\#                       | [Purchase Agreement, dated April 11, 2016, between Embraer S\.A\. and Horizon Air Industries, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642116000077/exhibit101embraerpurchasea.htm)                          | 10\-Q    | May 9, 2016                         | 10\.1                         |                            |
| 10\.8^                        | [A320 Aircraft Purchase Agreement, dated as of December 29, 2010, between Airbus S\.A\.S\. and Virgin America Inc\.](http://www.sec.gov/Archives/edgar/data/1614436/000119312514365735/d761206dex1015.htm)                     | S\-1/A^  | October 7, 2014                     | 10\.15                        |                            |
| 10\.9\*                       | [Alaska Air Group, Inc\. 2008 Performance Incentive Plan, Form of Nonqualified Stock Option Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex103.htm)                                    | 10\-Q    | August 4, 2011                      | 10\.3                         |                            |
| 10\.10\*                      | [Alaska Air Group, Inc\. 2008 Performance Incentive Plan, Form of Performance Stock Unit Award Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex104.htm)                                 | 10\-Q    | August 4, 2011                      | 10\.4                         |                            |
| 10\.11\*                      | [Alaska Air Group, Inc\. 2008 Performance Incentive Plan, Form of Stock Unit Award Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex105.htm)                                             | 10\-Q    | August 4, 2011                      | 10\.5                         |                            |
| 10\.12\*                      | [Alaska Air Group, Inc\. 2008 Performance Incentive Plan, Amended for Stock\-Split](http://www.sec.gov/Archives/edgar/data/766421/000076642116000065/alk10-k123115ex1010.htm)                                                  | 10\-K    | February 11, 2016                   | 10\.10                        |                            |
| 10\.13\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan](http://www.sec.gov/Archives/edgar/data/766421/000076642116000081/ex101.htm)                                                                                | 8\-K     | May 18, 2016                        | 10\.1                         |                            |
| 10\.14\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan, Form of Nonqualified Stock Option Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642116000096/ex101formofnonqualifiedsto.htm)                        | 10\-Q    | August 2, 2016                      | 10\.1                         |                            |
| 10\.15\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan, Form of Incentive Stock Option Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642116000096/ex102formofincentivestocko.htm)                           | 10\-Q    | August 2, 2016                      | 10\.2                         |                            |
| 10\.16\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan, Form of Performance Stock Unit Award Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642116000096/ex103forofperformancestock.htm)                     | 10\-Q    | August 2, 2016                      | 10\.3                         |                            |
| 10\.17\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan, Form of Stock Unit Award Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642116000096/ex104formofstockunitawarda.htm)                                 | 10\-Q    | August 2, 2016                      | 10\.4                         |                            |
| 10\.18\*                      | [Alaska Air Group, Inc\. 2010 Employee Stock Purchase Plan, as Amended for the Offering Period Commencing March 1, 2017](http://www.sec.gov/Archives/edgar/data/766421/000076642117000016/alk10-k123116ex1018.htm)             | 10\-K    | February 28, 2017                   | 10\.18                        |                            |
| 10\.19\*                      | [Alaska Air Group, Inc\. Stock Deferral Plan for Non\-Employee Directors](http://www.sec.gov/Archives/edgar/data/766421/000076642116000065/alk10-k123115ex1012.htm)                                                            | 10\-K    | February 11, 2016                   | 10\.12                        |                            |
| 10\.20\*                      | [Alaska Air Group, Inc\. Nonqualified Deferred Compensation Plan, as amended](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex101.htm)                                                             | 10\-Q    | August 4, 2011                      | 10\.1                         |                            |
| 10\.21\*                      | [1995 Elected Officers Supplementary Retirement Plan, as amended](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex102.htm)                                                                         | 10\-Q    | August 4, 2011                      | 10\.2                         |                            |
| 10\.22\*                      | [Form of Alaska Air Group, Inc\. Change of Control Agreement for named executive officers, as amended and restated October 16, 2014](http://www.sec.gov/Archives/edgar/data/766421/000076642116000065/alk10-k123115ex1015.htm) | 10\-K    | February 11, 2016                   | 10\.15                        |                            |
| 10\.23\*                      | [Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended February 14, 2017](http://www.sec.gov/Archives/edgar/data/766421/000076642117000029/alk10-q12017ex101.htm)                | 10\-Q    | May 5, 2017                         | 10\.1                         |                            |
| 10\.24\*                      | [Alaska Air Group Performance Based Pay Plan, Amended and Restated January 18, 2017](http://www.sec.gov/Archives/edgar/data/766421/000076642117000029/alk10-q12017ex102.htm)                                                   | 10\-Q    | May 5, 2017                         | 10\.2                         |                            |
| 10\.25\*†                     | [Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended January 17, 2018](https://www.example.com/oprplanamended011718.htm)                                                       |          |                                     |                               |                            |
| 10\.26\*†                     | [Alaska Air Group Performance Based Pay Plan, Amended and Restated January 17, 2018](https://www.example.com/pbpamendedandrestated011.htm)                                                                                |          |                                     |                               |                            |
| 10\.27\*†                     | [Executive Employment Agreement between Horizon Air Industries, Inc\. and Gary L\. Beck](https://www.example.com/beckagmtfnl011218.htm)                                                                                |          |                                     |                               |                            |
| 21†                           | [Subsidiaries of Registrant](https://www.example.com/alk10-k123117ex21.htm)                                                                                |          |                                     |                               |                            |

 101


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

***Off\-Balance Sheet Arrangements***

An off\-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us\.

We have no off\-balance sheet arrangements of the types described in the first three categories above that we believe may have a material current or future effect on financial condition, liquidity or results of operations\. Certain guarantees that we do not expect to have a material current or future effect on our financial condition, liquidity or results of operations are disclosed in Note 11 to AAG’s Consolidated Financial Statements included in Part II, Item 8A and Note 9 to American’s Consolidated Financial Statements in Part II, Item 8B\.

*Pass\-Through Trusts*

We have financed certain aircraft and engines with EETCs, issued by pass\-through trusts\. These trusts are off\-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment\. Rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allow American to raise the financing for a number of aircraft at one time and, if applicable, place such funds in escrow pending a future purchase, delivery or refinancing of the relevant aircraft\. The trusts have also been structured to provide for certain credit enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to American\.

Each trust covers a set number of aircraft scheduled to be delivered or refinanced upon the issuance of the EETC or within a specific period of time thereafter\. At the time of each covered aircraft financing, the relevant trust used the proceeds of the issuance of the EETC (which may have been available at the time of issuance thereof or held in escrow until financing of the applicable aircraft following its delivery) to purchase equipment notes relating to the financed aircraft\. The equipment notes are issued, at American’s election, in connection with a mortgage financing of the aircraft or, in certain cases, by a separate owner trust in connection with a leveraged lease financing of the aircraft\. In the case of a leveraged lease financing, the owner trust then leases the aircraft to American\. In both cases, the equipment notes are secured by a security interest in the aircraft\. The pass\-through trust certificates are not direct obligations of, nor are they guaranteed by, AAG or American\. However, in the case of mortgage financings, the equipment notes issued to the trusts are direct obligations of American and, in certain instances, have been guaranteed by AAG\. As of December 31, 2017, $11\.9 billion associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet\.

With respect to leveraged leases, American evaluated whether the leases had characteristics of a variable interest entity\. American concluded the leasing entities met the criteria for variable interest entities\. American generally is not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed\-price purchase option or similar feature that obligates American to absorb decreases 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 obligations to the trusts of each of the relevant EETCs under these leveraged lease financings are $572 million as of December 31, 2017\.

*Letters of Credit and Other*

We provide financial assurance, such as letters of credit, surety bonds or restricted cash and investments, to primarily support projected workers’ compensation obligations and airport commitments\. As of December 31, 2017, we had $448 million of letters of credit and surety bonds securing various obligations, of which $88 million is collateralized with our restricted cash\. The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2022\.

70


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

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------ |
| • | Selling expenses  decrease d  5\.0 % primarily due to lower credit card and booking fees\. |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Depreciation and amortization  increase d  11\.8 % primarily due to depreciation related to aircraft purchased in connection with American’s fleet renewal program\. In 2016, American took delivery of 55 new mainline aircraft\. |

*Operating Special Items, Net*

|                                                         |                             |                             |
| ------------------------------------------------------- | --------------------------- | --------------------------- |
|                                                         | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                         | **2016**                    | **2015**                    |
|                                                         | **(In millions)**           | **(In millions)**           |
| Merger integration expenses  ^(1)^                      | $514                        | $826                        |
| Fleet restructuring expenses  ^(2)^                     | 177                         | 210                         |
| Mark\-to\-market adjustments for bankruptcy obligations | 25                          | (53)                        |
| Other operating charges (credits), net                  | (7)                         | 68                          |
| Total mainline operating special items, net             | 709                         | 1,051                       |
| Regional operating special items, net                   | 13                          | 18                          |
| Total operating special items, net                      | $722                        | $1,069                      |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Merger integration expenses included costs related to information technology, re\-branding of aircraft, airport facilities and uniforms, alignment of labor union contracts, professional fees, severance, relocation and training, and, in 2015, also included share\-based compensation related to awards granted in connection with the Merger that fully vested in December 2015\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Fleet restructuring expenses, driven in part by the Merger, principally included the acceleration of depreciation, impairments, remaining lease payments and lease return costs for aircraft and related equipment grounded or expected to be grounded earlier than planned\. |

*Regional Operating Expenses*

|                                   |                                              |                                              |                                              |                                              |
| --------------------------------- | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- |
|                                   | **Year Ended
December 31,**             | **Year Ended
December 31,**             | **Increase
(Decrease)**                 | **Percent
Increase
(Decrease)**    |
|                                   | **2016**                                     | **2015**                                     | **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)** |
| Aircraft fuel and related taxes   | $1,109                                       | $1,230                                       | $(121)                                       | (9\.8)                                       |
| Other                             | 4,900                                        | 4,722                                        | 178                                          | 3\.8                                         |
| Total regional operating expenses | $6,009                                       | $5,952                                       | $57                                          | 1\.0                                         |

Regional operating expenses increased $57 million, or 1\.0%, in 2016 as compared to 2015\. The year\-over\-year increase was due in part to a $178 million, or 3\.8%, increase in other regional operating expenses\. The increase in other regional operating expenses was primarily driven by an increase in capacity\. Offsetting this increase was a $121 million, or 9\.8%, decrease in fuel costs\. The decrease in fuel costs was driven primarily by a 14\.5% decline in the average price per gallon of fuel to $1\.48 in 2016 from $1\.73 in 2015, offset in part by a 5\.5% increase in consumption\. See Note 1(q) to American’s Consolidated Financial Statements in Part II, Item 8B for further information on regional expenses\.

64


Annual Report of Southwest Airlines Co\. for year 2018

**Equity Compensation Plan Information**

|                                                            |                                                                                |     |                                                                                |     |                                                                                |     |
| ---------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | -------------------------------------------------------------------------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- |
| **Plan Category**                                          | **Number of Securities**

**to be Issued Upon**

**Exercise of**

**Outstanding**

**Options,**

**Warrants, and**

**Rights**

**(a)** |     | **Weighted\-Average**

**Exercise Price of**

**Outstanding Options,**

**Warrants, and**

**Rights**

**(b)** |     | **Number of Securities Remaining Available for**

**Future Issuance Under**

**Equity Compensation**

**Plans (Excluding**

**Securities Reflected**

**in Column (a))**

**(c)** |     |
| Equity Compensation Plans Approved by Security Holders     | 1,359,313                                                                                | (1) | $6\.75                                                                                | (2) | 29,130,404                                                                                | (3) |
| Equity Compensation Plans not Approved by Security Holders | 2,100                                                                                |     | $9\.43                                                                                |     | —                                                                                |     |
| Total                                                      | 1,361,413                                                                                |     | $6\.75                                                                                | (2) | 29,130,404                                                                                |     |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (1) | Includes  17,383  shares of common stock issuable upon exercise of outstanding stock options and  1,341,930  restricted share units settleable in shares of the Company’s common stock\. |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (2) | The weighted\-average exercise price does not take into account the restricted share units discussed in footnote (1) above because the restricted share units do not have an exercise price upon vesting\. |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (3)  | Of these shares, (i)  8,169,202  shares remained available for issuance under the Company’s tax\-qualified employee stock purchase plan; and (ii)  20,961,202  shares remained available for issuance under the Company’s 2007 Equity Incentive Plan in connection with the exercise of stock options and stock appreciation rights, the settlement of awards of restricted stock, restricted stock units, and phantom shares, and the grant of unrestricted shares of common stock; however, no more than  1,183,299  shares remain available for grant in connection with awards of unrestricted shares of common stock, stock\-settled phantom shares, and awards to non\-Employee members of the Board\. These shares are in addition to the shares reserved for issuance pursuant to outstanding awards included in column (a)\. |

See Note 9 to the Consolidated Financial Statements for information regarding the material features of the above plans\. Each of the above plans provides that the number of shares with respect to which options may be granted, the number of shares of common stock subject to an outstanding option, and the number of restricted share units granted shall be proportionately adjusted in the event of a subdivision or consolidation of shares or the payment of a stock dividend on common stock, and the purchase price per share of outstanding options shall be proportionately revised\.

**Item 13\.** ***Certain Relationships and Related Transactions, and Director Independence***

The information required by this Item 13 will be set forth under the heading “Certain Relationships and Related Transactions, and Director Independence” in the Proxy Statement for the Company’s 2019 Annual Meeting of Shareholders and is incorporated herein by reference\.

**Item 14\.** ***Principal Accounting Fees and Services***

The information required by this Item 14 will be set forth under the heading “Relationship with Independent Auditors” in the Proxy Statement for the Company’s 2019 Annual Meeting of Shareholders and is incorporated herein by reference\.

122


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

NOTE 9\. AIRPORT REDEVELOPMENT

New York\-JFK Airport

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

We managed the project and bore the construction risk, including cost over\-runs\. Prior to 2018, we accounted for this project by recording an asset for project costs (e\.g\., design, permitting, labor and other general construction costs), regardless of funding source, and a construction obligation equal to project costs funded by parties other than us\. Our rental payments reduced the construction obligation and resulted in the recording of interest expense, calculated using the effective interest method\. Upon adoption of the new lease standard during 2018, the project cost asset and construction obligation were derecognized and we recorded a transition adjustment that increased equity by $40 million (net of tax)\. Following derecognition of these assets and liabilities, we recognized a ROU asset and lease liability representing the fixed component of the lease payments\.

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

We are now planning for further expansion of Terminal 4\. Subject to approval of the Board of the Port Authority, IAT and the Port Authority will finalize and enter a lease amendment for the expansion and renovation of the Terminal 4 arrivals and departures hall, the addition of 16 new gates to Concourse A, the renovation of existing concourses and roadway upgrades to improve access for vehicles\.

Los Angeles International Airport ("LAX")

We executed a modified lease agreement during 2016 with the City of Los Angeles ("the City") which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX\. Under the lease agreement, we have relocated certain airlines and other tenants from Terminals 2 and 3 to Terminals 5 and 6 and undertaken various initial projects to enable operations from Terminals 2 and 3 during the project\. We are now designing and constructing the redevelopment of Terminal 3 and enhancement of Terminal 2, which also includes rebuilding the ticketing and arrival halls and security checkpoint, construction of core infrastructure to support the City's planned airport people mover, ramp improvements and construction of a secure connector to the north side of the Tom Bradley International Terminal\. Construction is expected to be completed by 2024\.

Under the lease agreement and subsequent project component approvals by the City's Board of Airport Commissioners, the City has appropriated to date approximately $1\.6 billion to purchase completed project assets\. The lease allows for a maximum reimbursement by the City of $1\.8 billion\. Costs we incur in excess of such maximum will not be reimbursed by the City\.

A substantial majority of the project costs are being funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using an $800 million revolving credit facility provided by a group of lenders\. The credit facility was executed during 2017 and amended in 2019 and we have guaranteed the obligations of the RAIC under the credit facility\. Loans made under the credit facility are being repaid with the proceeds from the City’s purchase of completed project assets\. Using funding provided by cash flows from operations and/or the credit facility, we spent approximately $176 million on this project during 2019\.

Based on our assessment of the project, we concluded that we do not control the underlying assets being constructed, and therefore, we do not have the project asset or related obligation recorded on our balance sheet\.

79


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

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

***Fair Value Information\.*** Accounting standards require us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs\. These inputs are prioritized as follows:

|         |                                                                                |
| ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| Level 1 | Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value                                                                    |
| Level 2 | Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market\-corroborated inputs                                         |
| Level 3 | Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities |

Assets and liabilities measured at fair value are based on the valuation techniques identified in the tables below\. The valuation techniques are as follows:

(a)*Market approach\.* Prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities; and

(b)*Income approach\.* Techniques to convert future amounts to a single current value based on market expectations (including present value techniques, option\-pricing and excess earnings models)\.

The following tables present information about United’s pension and other postretirement plan assets at December 31 (in millions):

|                                           |           |             |             |             |                                         |           |             |             |             |                                         |
|:----------------------------------------- | ---------:| -----------:| -----------:| -----------:| ---------------------------------------:| ---------:| -----------:| -----------:| -----------:| ---------------------------------------:|
|                                           |  **2017** |    **2017** |    **2017** |    **2017** |                                **2017** |  **2016** |    **2016** |    **2016** |    **2016** |                                **2016** |
| Pension Plan Assets:                      | **Total** | **Level 1** | **Level 2** | **Level 3** | **Assets
Measured
at NAV(a)** | **Total** | **Level 1** | **Level 2** | **Level 3** | **Assets
Measured
at NAV(a)** |
| Equity securities funds                   |    $1,406 |        $269 |        $133 |          $— |                                  $1,004 |    $1,173 |        $230 |        $111 |          $— |                                    $832 |
| Fixed\-income securities                  |     1,470 |           — |         834 |          18 |                                     618 |     1,298 |           — |         824 |          11 |                                     463 |
| Alternatives                              |       637 |           — |           — |         139 |                                     498 |       586 |           — |           — |         134 |                                     452 |
| Other investments                         |       419 |          32 |         124 |         172 |                                      91 |       298 |          47 |          68 |          87 |                                      96 |
| Total                                     |    $3,932 |        $301 |      $1,091 |        $329 |                                  $2,211 |    $3,355 |        $277 |      $1,003 |        $232 |                                  $1,843 |
| Other Postretirement Benefit Plan Assets: |           |             |             |             |                                         |           |             |             |             |                                         |
| Deposit administration fund               |       $54 |          $— |          $— |         $54 |                                      $— |       $55 |          $— |          $— |         $55 |                                      $— |

(a) In accordance with the relevant accounting standards, certain investments that are measured at fair value using the net asset value (“NAV”) per share (or its equivalent) have not been classified in the fair value hierarchy\. These investments are commingled funds that invest in fixed\-income instruments including bonds, debt securities, and other similar instruments issued by various U\.S\. and non\-U\.S\. public\- or private\-sector entities\. Redemption periods for these investments range from daily to annually\.

*Equity and Fixed\-Income\.* Equities include investments in both developed market and emerging market equity securities\. Fixed\-income includes primarily U\.S\. and non\-U\.S\. government fixed\-income securities and U\.S\. and non\-U\.S corporate fixed\-income securities\.

*Deposit Administration Fund\.* This investment is a stable value investment product structured to provide investment income\.

*Alternatives\.* Alternative investments consist primarily of investments in hedge funds, real estate and private equity interests\.

*Other investments\.* Other investments consist of cash, insurance contracts and other funds\.

82


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

**NOTE 4\. FAIR VALUE MEASUREMENTS**

***Fair Value of Financial Instruments on a Recurring Basis***

As of December 31, 2017, the total cost basis for marketable securities was $1\.4 billion\. There were no significant differences between the cost basis and fair value of any individual class of marketable securities\.

Fair values of financial instruments on the consolidated balance sheet (in millions):

|                                         |             |             |           |
| --------------------------------------- | ----------- | ----------- | --------- |
| **December 31, 2017**                   | **Level 1** | **Level 2** | **Total** |
| **Assets**                              |             |             |           |
| **Marketable securities**               |             |             |           |
| U\.S\. government and agency securities | $328        | $—          | $328      |
| Foreign government bonds                | —           | 43          | 43        |
| Asset\-backed securities                | —           | 209         | 209       |
| Mortgage\-backed securities             | —           | 99          | 99        |
| Corporate notes and bonds               | —           | 726         | 726       |
| Municipal securities                    | —           | 22          | 22        |
| **Derivative instruments**              |             |             |           |
| Fuel hedge contracts—call options       | —           | 22          | 22        |
| Interest rate swap agreements           | —           | 9           | 9         |
| **Liabilities**                         |             |             |           |
| **Derivative instruments**              |             |             |           |
| Interest rate swap agreements           | —           | (8)         | (8)       |

|                                         |             |             |           |
| --------------------------------------- | ----------- | ----------- | --------- |
| **December 31, 2016**                   | **Level 1** | **Level 2** | **Total** |
| **Assets**                              |             |             |           |
| **Marketable securities**               |             |             |           |
| U\.S\. government and agency securities | $287        | $—          | $287      |
| Foreign government bonds                | —           | 36          | 36        |
| Asset\-backed securities                | —           | 138         | 138       |
| Mortgage\-backed securities             | —           | 89          | 89        |
| Corporate notes and bonds               | —           | 691         | 691       |
| Municipal securities                    | —           | 11          | 11        |
| **Derivative instruments**              |             |             |           |
| Fuel hedge contracts—call options       | —           | 20          | 20        |
| **Liabilities**                         |             |             |           |
| **Derivative instruments**              |             |             |           |
| Interest rate swap agreements           | —           | (5)         | (5)       |

The Company uses the market and income approach to determine the fair value of marketable securities\. U\.S\. government securities are Level 1 as the fair value is based on quoted prices in active markets\. Foreign government bonds, asset\-backed securities, mortgage\-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information\.

The Company uses the market and income approaches to determine the fair value of derivative instruments\. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets\. In addition, the fair value considers the exposure to

 77


Annual Report of Southwest Airlines Co\. for year 2019

Company's risk of loss\. With respect to any insurance claims, policy coverages and claims are subject to acceptance by the many insurers involved and may require arbitration and/or mediation to effectively settle the claims over prolonged periods of time\.

Competition

Competition within the airline industry is intense and highly unpredictable, and Southwest currently competes with other airlines on virtually all of its scheduled routes\. As a result of moderately improved economic conditions and an increased focus by airlines on costs, the airline industry has become increasingly competitive in recent years with a healthier financial condition and improved profitability\.

Key competitive factors within the airline industry include (i) pricing and cost structure; (ii) routes, loyalty programs, and schedules; and (iii) customer service, operational reliability, and amenities\. Southwest also competes for customers with other forms of transportation, as well as alternatives to travel\. In recent years, the majority of domestic airline service has been provided by Southwest and the other largest major U\.S\. airlines, including American Airlines, Delta Air Lines, and United Airlines\. The DOT defines major U\.S\. airlines as those airlines with annual revenues of at least $1 billion; there are currently 13 passenger airlines offering scheduled service, including Southwest, that meet this standard\.

Pricing and Cost Structure

Pricing is a significant competitive factor in the airline industry, and the availability of fare information on the Internet allows travelers to easily compare fares and identify competitor promotions and discounts\. During 2019, the Company continued to experience a competitive fare environment, which included further industry changes from both a fare level and product offering perspective\. As discussed above under "Business \- Industry," other carrier offerings ranged from a "Basic Economy" fare product, designed to compete with ULCC fares, to a "Premium Economy" product, that targets consumers willing to pay a premium for certain amenities that were previously included in the carriers' base fares (e\.g\., more favorable seating locations in the main cabin)\. Also in response to ULCC pricing, some carriers no longer have fare floors for certain routes, leading to a lower fare offering across the industry\. These changes have put increased pressure on the industry's fare environment and have created a challenging revenue environment\.

Pricing can be driven by a variety of factors\. For example, airlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors and/or grow market share\. Some airlines have been able to reduce fares because they have been able to lower their operating costs\. Further, some of the Company's competitors have launched multi\-year cost savings efforts to meet specific financial and growth targets\. Common efforts include fleet transformation to gain fuel efficiencies, fleet simplification, and increasing the number of seats per trip through seat retrofits and the use of larger aircraft\.

The Company believes its low\-cost operating structure continues to provide it with an advantage over many of its airline competitors by enabling it to continue to charge low fares\. However, ULCCs, which have increased capacity in the Company's markets, have surpassed the Company's cost advantage with larger aircraft, increased seat density, and lower wages\. Further, as discussed below under "Management’s Discussion and Analysis of Financial Condition and Results of Operations," the Company continues to experience significant unit cost pressure as a result of the MAX groundings\. While it has become increasingly difficult for the Company to improve upon its industry cost position, the Company believes it continues to have a competitive advantage through its differentiation of Southwest from many of its competitors by not charging additional fees for items such as first and second checked bags for each ticketed Customer, flight changes, seat selection, snacks, curb\-side check\-in, and telephone reservations\.

Routes, Loyalty Programs, and Schedules

The Company also competes with other airlines based on markets served, loyalty opportunities, and flight schedules\. Some major airlines have more extensive route structures than Southwest, including more extensive international networks\. In addition, many competitors have entered into significant commercial relationships with other airlines, such as global alliances, code\-sharing, and capacity purchase agreements, which increase the airlines' opportunities to expand their route offerings\. An alliance or code\-sharing agreement enables an airline to offer flights that are operated by another airline and also allows the airline’s customers to book travel that includes segments on different airlines through a single reservation or ticket\. As a result, depending on the nature of the specific alliance or code\-sharing arrangement, a participating airline may be able to, among other things, (i) offer its customers access to more destinations

17