Annual Report of Southwest Airlines Co\. for year 2018

10\-K 1 luv\-12312018x10k\.htm FORM 10\-K

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

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

**FORM 10\-K**

(Mark One)

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

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| ------------------------------------------- |
| For the fiscal year ended December 31, 2018 |

|    |
| -- |
| or |

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

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| ------------------------------------------------------------------- |
| For the transition period from \_\_\_\_\_\_\_\_ to \_\_\_\_\_\_\_\_ |

Commission File No\. 1\-7259

![southwestfinal\.jpg](https://www.example.com/southwestfinal.jpg)

**Southwest Airlines Co\.**

(Exact name of registrant as specified in its charter)

|                                          |                      |
| ---------------------------------------- | -------------------- |
| TEXAS                                    | 74\-1563240          |
| (State or other jurisdiction of          | (IRS Employer        |
| incorporation or organization)           | Identification No\.) |
| P\.O\. Box 36611                         |                      |
| Dallas, Texas                            | 75235\-1611          |
| (Address of principal executive offices) | (Zip Code)           |

Registrant's telephone number, including area code: **(214) 792\-4000**

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

|                                 |                                               |
| ------------------------------- | --------------------------------------------- |
| **Title of Each Class**         | **Name of Each Exchange on Which Registered** |
| Common Stock ($1\.00 par value) | New York Stock Exchange                       |

**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\. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act\. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days\. Yes þ No ¨

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S\-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)\. Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S\-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10\-K or any amendment to this Form 10\-K\. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non\-accelerated filer, smaller reporting company, or an emerging growth company\. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b\-2 of the Exchange Act\.

|                            |                              |
| -------------------------- | ---------------------------- |
| Large accelerated filer  þ | Accelerated filer  ¨         |
| Non\-accelerated filer  ¨  | Smaller reporting company  ¨ |
|                            | Emerging growth company  ¨   |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act\.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b\-2 of the Act)\. Yes ¨ No þ

The aggregate market value of the common stock held by non\-affiliates of the registrant was approximately $29,086,256,077 computed by reference to the closing sale price of the common stock on the New York Stock Exchange on June 30, 2018, the last trading day of the registrant’s most recently completed second fiscal quarter\.

Number of shares of common stock outstanding as of the close of business on February 1, 2019: 552,688,849 shares

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the Definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held May 15, 2019, are incorporated into Part III of this Annual Report on Form 10\-K\.


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

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**EXHIBIT INDEX**

|                  |                |                                                                                |
| ----------------:|:--------------:|:--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------:|
| **Exhibit No\.** | **Registrant** |                                                                                **Exhibit**                                                                                |
|                  |                |                                                                                **Plan of Merger**                                                                                |
|           \*2\.1 |   UAL United   |                                                        [Agreement and Plan of Merger, dated as of May 2, 2010, by and among UAL Corporation, Continental Airlines, Inc\. and JT Merger Sub Inc\. (schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation  S\-K) (filed as Exhibit 2\.1 to UAL’s  Form 8\-K filed May 4, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000095015710000587/ex2-1.htm)                                                        |
|           \*2\.2 |     United     |                                                                                [Agreement and Plan of Merger, dated as of March 28, 2013, by and between Continental Airlines, Inc\. and United Air Lines, Inc\. (filed as Exhibit 2\.1 to UAL’s Form  8\-K filed April 3, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513140583/d514659dex21.htm)                                                                                |
|                  |                |                                                                                **Articles of Incorporation and Bylaws**                                                                                |
|           \*3\.1 |      UAL       |                                                                                [Amended and Restated Certificate of Incorporation of United Continental Holdings, Inc\. (filed as Exhibit 3\.1 to UAL’s  Form 8\-K filed October 1, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312510222185/dex31.htm)                                                                                |
|           \*3\.2 |      UAL       |                                                                                [Amended and Restated Bylaws of United Continental Holdings, Inc\. (filed as Exhibit 3\.1 to UAL’s Form  10\-Q  for the quarter ended March 31, 2016, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312516550432/d116267dex31.htm)                                                                                |
|           \*3\.3 |     United     |                                                                                [Amended and Restated Certificate of Incorporation of United Airlines, Inc\. (filed as Exhibit 3\.1 to UAL’s Form  8\-K filed April 3, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513140583/d514659dex31.htm)                                                                                |
|           \*3\.4 |     United     |                                                                                [Amended and Restated  By\-laws of United Airlines, Inc\. (filed as Exhibit 3\.2 to UAL’s Form  8\-K filed April 3, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513140583/d514659dex32.htm)                                                                                |
|                  |                |                                                                                **Instruments Defining Rights of Security Holders, Including Indentures**                                                                                |
|           \*4\.1 |   UAL United   | [Amended and Restated Indenture, dated as of January 11, 2013, by and among United Continental Holdings, Inc\. as Issuer, United Air Lines, Inc\. as Guarantor, and the Bank of New York Mellon Trust Company, N\.A\. as Trustee, providing for issuance of 6% Notes due 2028, 6% Notes due 2026 and 8% Notes due 2024 (filed as Exhibit 4\.6 to UAL’s Form  10\-K for the year ended December 31, 2012, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513074391/d436512dex46.htm) |
|           \*4\.2 |   UAL United   |                                 [First Supplemental Indenture, dated as of April 1, 2013, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as trustee, to the Amended and Restated Indenture, dated as of January 11, 2013 (filed as Exhibit 4\.1 to UAL’s Form  8\-K filed April 3, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513140583/d514659dex41.htm)                                 |
|           \*4\.3 |   UAL United   |                          [Second Supplemental Indenture, dated as of September 13, 2013, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as trustee, to the Amended and Restated Indenture, dated as of January 11, 2013 (filed as Exhibit 4\.1 to UAL’s Form  8\-K filed September 19, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000095015513000046/e62572234ex4_1.htm)                           |

109


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

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

Certain details of American’s 2013, 2014, April 2016 and December 2016 Credit Facilities (collectively referred to as the Credit Facilities) are shown in the table below as of December 31, 2017:

|                                                                               |                            |                                  |                            |                                  |                                  |                                        |                                       |
| ----------------------------------------------------------------------------- | -------------------------- | -------------------------------- | -------------------------- | -------------------------------- | -------------------------------- | -------------------------------------- | ------------------------------------- |
|                                                                               | **2013 Credit Facilities** | **2013 Credit Facilities**       | **2014 Credit Facilities** | **2014 Credit Facilities**       | **April 2016 Credit Facilities** | **April 2016 Credit Facilities**       | **December 2016 Credit Facilities**   |
|                                                                               | **2013 Term
Loan**    | **2013 Revolving
Facility** | **2014 Term
Loan**    | **2014 Revolving
Facility** | **April 2016
Term Loan**    | **April 2016
Revolving Facility** | **December
2016
Term Loan** |
| Aggregate principal issued or credit facility availability
(in millions) | $1,900                     | $1,200                           | $750                       | $1,000                           | $1,000                           | $300                                   | $1,250                                |
| Principal outstanding or drawn (in millions)                                  | $1,825                     | $—                               | $728                       | $—                               | $990                             | $—                                     | $1,238                                |
| Maturity date                                                                 | June 2020                  | October 2022                     | October 2021               | October 2022                     | April 2023                       | October 2022                           | December 2023                         |
| LIBOR margin                                                                  | 2\.00%                     | 2\.25%                           | 2\.00%                     | 2\.25%                           | 2\.00%                           | 2\.25%                                 | 2\.00%                                |

The Term Loans are repayable in annual installments in an amount equal to 1\.00% of the aggregate principal amount issued, with any unpaid balance due on the respective maturity dates\. Voluntary prepayments may be made by American at any time\.

The 2013, 2014 and April 2016 Revolving Facilities provide that American may from time to time borrow, repay and reborrow loans thereunder\. The 2013 and 2014 Revolving Facilities have the ability to issue letters of credit thereunder in an aggregate amount outstanding at any time up to $150 million and $300 million, respectively\. The 2013, 2014 and April 2016 Revolving Facilities are each subject to an undrawn annual fee of 0\.75%\. As of December 31, 2017, there were no borrowings or letters of credit outstanding under the 2013, 2014 or April 2016 Revolving Facilities\. The December 2016 Credit Facilities provide for a revolving credit facility that may be established in the future\.

Subject to certain limitations and exceptions, the Credit Facilities are secured by collateral, including certain spare parts, certain slots, certain route authorities, certain simulators and certain leasehold rights\. American has the ability to make future modifications to the collateral pledged, subject to certain restrictions\. American’s obligations under the Credit Facilities are guaranteed by AAG\. American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans as further described below in *“Collateral\-Related Covenants\.”*

The Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness\. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become due and payable immediately\. In addition, if a “change of control” occurs, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the Credit Facilities and terminate the 2013, 2014 and April 2016 Revolving Facilities and any revolving credit facilities established under the December 2016 Credit Facilities\. The Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the Credit Facilities) of not less than $2\.0 billion, and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions\.

***(b) EETCs***

*2016\-3 EETCs*

During the first quarter of 2017, all remaining net proceeds of the Series 2016\-3 Class AA and Class A EETCs (the 2016\-3 EETCs), in the amount of $109 million, were used to purchase equipment notes issued by American in connection with the financing of two of the 25 aircraft financed under the 2016\-3 EETCs (such 25 aircraft, the 2016\-3 Aircraft)\.

In October 2017, American created one additional pass\-through trust which issued approximately $193 million aggregate principal amount of Series 2016\-3 Class B EETCs (the 2016\-3 Class B EETCs) in connection with the financing of the 2016\-3 Aircraft\. The proceeds received from the sale of the 2016\-3 Class B EETCs were used on the

142


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

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

**UNITED AIRLINES, INC\.**

**STATEMENTS OF CONSOLIDATED STOCKHOLDER'S EQUITY**

**(In millions)**

|                                              |                                                       |                                                        |                                                                                |                                          |           |
| -------------------------------------------- | ----------------------------------------------------- | ------------------------------------------------------ | ---------------------------------------------------------------------------------- | ---------------------------------------- | --------- |
|                                              | **Additional**

**Capital**

**Invested** | **Retained Earnings (Accumulated**

**Deficit)** | **Accumulated**

**Other**

**Comprehensive**

**Income (Loss)** | **Receivable from Related Parties, Net** | **Total** |
| Balance at December 31, 2015                 | $6,138                                                | $3,673                                                 | $(831)                                                                             | $(17)                                    | $8,963    |
| Net income (a)                               | —                                                     | 2,234                                                  | —                                                                                | —                                        | 2,234     |
| Other comprehensive income                   | —                                                     | —                                                      | 2                                                                                | —                                        | 2         |
| Dividend to UAL                              | (2,603)                                               | —                                                      | —                                                                                | —                                        | (2,603)   |
| Stock\-settled share\-based compensation     | 32                                                    | —                                                      | —                                                                                | —                                        | 32        |
| UAL contribution related to stock plans      | 6                                                     | —                                                      | —                                                                                | —                                        | 6         |
| Other (a)                                    | —                                                     | (56)                                                   | —                                                                                | (58)                                     | (114)     |
| Balance at December 31, 2016                 | 3,573                                                 | 5,851                                                  | (829)                                                                              | (75)                                     | 8,520     |
| Net income (a)                               | —                                                     | 2,163                                                  | —                                                                                | —                                        | 2,163     |
| Other comprehensive loss                     | —                                                     | —                                                      | (200)                                                                              | —                                        | (200)     |
| Dividend to UAL                              | (1,844)                                               | —                                                      | —                                                                                | —                                        | (1,844)   |
| Stock\-settled share\-based compensation     | 56                                                    | —                                                      | —                                                                                | —                                        | 56        |
| UAL contribution related to stock plans      | 2                                                     | —                                                      | —                                                                                | —                                        | 2         |
| Excess tax benefits from share\-based awards | —                                                     | 14                                                     | —                                                                                | —                                        | 14        |
| Reclassification of stranded tax effects     | —                                                     | 118                                                    | (118)                                                                              | —                                        | —         |
| Other                                        | —                                                     | —                                                      | —                                                                                | (15)                                     | (15)      |
| Balance at December 31, 2017                 | 1,787                                                 | 8,146                                                  | (1,147)                                                                            | (90)                                     | 8,696     |
| Net income                                   | —                                                     | 2,131                                                  | —                                                                                | —                                        | 2,131     |
| Other comprehensive loss                     | —                                                     | —                                                      | 338                                                                                | —                                        | 338       |
| Dividend to UAL                              | (1,249)                                               | —                                                      | —                                                                                | —                                        | (1,249)   |
| Stock\-settled share\-based compensation     | 60                                                    | —                                                      | —                                                                                | —                                        | 60        |
| Other                                        | —                                                     | (5)                                                    | 6                                                                                | (20)                                     | (19)      |
| Balance at December 31, 2018                 | $598                                                  | $10,272                                                | $(803)                                                                             | $(110)                                   | $9,957    |

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

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

53


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

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

We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date ,  in determining the present value of lease payments\. We give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates\.

Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option\. Leases with a term of 12 months or less are not recorded on the balance sheet\. Our lease agreements do not contain any residual value guarantees\.

Under certain of our capacity purchase agreements with third\-party regional carriers, we do not own the underlying aircraft\. However, since we control the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to be leased for accounting purposes\. For these capacity purchase agreements, we account for the lease and non\-lease components separately\. The lease component consists of the aircraft and the non\-lease components consist of services, such as the crew and maintenance\. We allocate the consideration in the capacity purchase agreements to the lease and non\-lease components using their estimated relative standalone prices\. See Note 12(b) for additional information on our capacity purchase agreements \.

For real estate, we account for the lease and non\-lease components as a single lease component\.

(h) Income Taxes

Income taxes are accounted for under the asset and liability method\. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards\. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes\.

We provide a valuation allowance for our deferred tax assets when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized\. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income\. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets\. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand\.

(i) Goodwill

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

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill\. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill\. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded\. Based upon our annual assessment, there was   no  goodwill impairment in  2019 \. The carrying value of the goodwill on our consolidated balance sheets was   $4\.1 billion  as of  December 31, 2019  and  2018 \.

(j) Other Intangibles, Net

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

Definite\-Lived Intangible Assets

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

79


Annual Report of Southwest Airlines Co\. for year 2017

|   |                                                                       |
| - | --------------------------------------------------------------------- |
| • | the adoption of more restrictive locally\-imposed noise regulations\. |

Because expenses of a flight do not vary significantly with the number of passengers carried, a relatively small change in the number of passengers can have a disproportionate effect on an airline’s operating and financial results\. Therefore, any general reduction in airline passenger traffic as a result of any of the factors listed above could adversely affect the Company's results of operations\. In addition, in instances where the airline industry shrinks, many airport operating costs are essentially unchanged and must be shared by the remaining operating carriers, which can therefore increase the Company's costs\.

***The airline industry is affected by many conditions that are beyond its control, which can impact the Company's business strategies and results of operations\.***

In addition to the unpredictable economic conditions and fuel costs discussed above, the Company, like the airline industry in general, is affected by conditions that are largely unforeseeable and outside of its control, including, among others:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | adverse weather and natural disasters such as the hurricanes and earthquakes in third quarter 2017, which resulted in approximately $100 million in reduced revenues for the Company as a result of approximately 5,000 canceled flights;  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | changes in consumer preferences, perceptions, spending patterns, or demographic trends (including, without limitation, changes in government travel patterns due to government shutdowns or sequestration); |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | actual or potential disruptions in the air traffic control system (including, without limitation, as a result of potential FAA budget cuts due to government shutdowns or sequestration); |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------- |
| • | changes in the competitive environment due to industry consolidation, industry bankruptcies, and other factors; |

|   |                                                              |
| - | ------------------------------------------------------------ |
| • | air traffic congestion and other air traffic control issues; |

|   |                           |
| - | ------------------------- |
| • | outbreaks of disease; and |

|   |                                                                          |
| - | ------------------------------------------------------------------------ |
| • | actual or threatened war, terrorist attacks, and political instability\. |

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

As discussed in more detail above under "Business \- Competition," the airline industry is intensely competitive\. The Company's primary competitors include other major domestic airlines, as well as regional and new entrant airlines, surface transportation, and alternatives to transportation such as videoconferencing and the Internet\. The Company's revenues are sensitive to the actions of other carriers with respect to pricing, routes, frequent flyer 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")\.***

With the expansion of the Company's international flight offerings, the U\.S\. Customs and Border Protection ("CBP") has become an increasingly important federal agency\. CBP personnel and CBP\-mandated procedures 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\.

26


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

Our business is subject to extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages\.

Airlines are subject to extensive domestic and international regulatory requirements\. In the last several years, Congress has passed laws, and the DOT, the FAA, the TSA and the DHS have issued regulations and a number of other directives, that affect the airline industry\. These requirements impose substantial costs on us and restrict the ways we may conduct our business\.

For example, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions\. These requirements can be issued with little or no notice, or can otherwise impact our ability to efficiently or fully utilize our aircraft, and in some instances have resulted in the temporary grounding of aircraft types altogether (including the March 2019 grounding of all Boeing 737 MAX aircraft, including the 24 aircraft in our fleet, which remains in place as of the date of this report), or otherwise caused substantial disruption and resulted in material costs to us and lost revenues\. The FAA also exercises comprehensive regulatory authority over nearly all technical aspects of our operations\. Our failure to comply with such requirements has in the past and may in the future result in fines and other enforcement actions by the FAA or other regulators\. In the future, any new regulatory requirements, particularly requirements that limit our ability to operate or price our products, could have a material adverse effect on us and the industry\.

DOT consumer rules dictate procedures for customer handling during long onboard delays, further regulate airline interactions with passengers, including passengers with disabilities, through the ticketing process, at the airport, and onboard the aircraft, and require disclosures concerning airline fares and ancillary fees such as baggage fees\. Other DOT rules apply to post\-ticket purchase price increases and an expansion of tarmac delay regulations to international airlines\. In 2020, the DOT is expected to implement a number of new regulations that will impact us, including disability rules for accessible lavatories and refunds for checked bag fees in the event of certain delays in delivery\.

The Aviation and Transportation Security Act mandates the federalization of certain airport security procedures and imposes additional security requirements on airports and airlines, most of which are funded by a per\-ticket tax on passengers and a tax on airlines\. Present and potential future security requirements can have the effect of imposing costs and inconvenience on travelers, potentially reducing the demand for air travel\.

The results of our operations, demand for air travel, and the manner in which we conduct business each may be affected by changes in law and future actions taken by governmental agencies, including:

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | changes in law that affect the services that can be offered by airlines in particular markets and at particular airports, or the types of fares offered or fees that can be charged to passengers; |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | the granting and timing of certain governmental approvals (including antitrust or foreign government approvals) needed for codesharing alliances, joint businesses and other arrangements with other airlines; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | restrictions on competitive practices (for example, court orders, or agency regulations or orders, that would curtail an airline’s ability to respond to a competitor); |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------- |
| • | the adoption of new passenger security standards or regulations that impact customer service standards; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | restrictions on airport operations, such as restrictions on the use of slots at airports or the auction or reallocation of slot rights currently held by us; and |

|   |                                                                        |
| - | ---------------------------------------------------------------------- |
| • | the adoption of more restrictive locally\-imposed noise restrictions\. |

Each additional regulation or other form of regulatory oversight increases costs and adds greater complexity to airline operations and, in some cases, may reduce the demand for air travel\. There can be no assurance that the increased costs or greater complexity associated with our compliance with new rules, anticipated rules or other forms of regulatory oversight will not have a material adverse effect on us\.

Any significant reduction in air traffic capacity at and in the airspace serving key airports in the U\.S\. or overseas could have a material adverse effect on our business, results of operations and financial condition\. In addition, the United States National Airspace System (the ATC system) is not successfully modernizing to meet the growing demand for U\.S\. air travel\. Air traffic controllers rely on outdated procedures and technologies that routinely compel airlines to fly inefficient routes or take significant delays on the ground\. The ATC system’s inability to manage existing travel demand has led government agencies to implement short\-term capacity constraints during peak travel periods or adverse weather

22


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

We believe that operating fuel\-efficient aircraft and executing on operational best practices are the best hedges against high fuel prices\. Maintaining a young, fuel\-efficient fleet helps to reduce our fuel consumption rate, but also the amount of greenhouse gases and other pollutants that our aircraft emit\.

COMPETITION

Competition in the airline industry is intense and unpredictable\. Our competitors consist primarily of other airlines and, to a lesser extent, other forms of transportation\. Competition can be direct, in the form of another carrier flying the exact non\-stop route, or indirect, where a carrier serves the same two cities non\-stop from an alternative airport in that city or via an itinerary requiring a connection at another airport\. We compete with other domestic airlines and a limited number of international airlines on nearly all of our scheduled routes\. Our largest competitor is Delta Airlines Inc\. (Delta), who has significantly increased its capacity in Seattle since 2013\. Approximately 76% of our capacity to and from Seattle competes with Delta\. As we have grown in California and have expanded our transcontinental route offerings, United Airlines and Southwest Airlines have also become large competitors and have increased their capacity in markets we serve\. Our California and transcontinental routes have a higher concentration of competitors when compared to our historical route structure, which was predominately concentrated in the Pacific Northwest\. Based on schedules filed with the U\.S\. Department of Transportation, we expect the amount of competitive capacity overlap with all carriers to increase by more than 1% in the first quarter of 2020, weighted based on our network\.

We believe that the following principal competitive factors are important to our guests:

• Safety

Safety is our top priority and is at the core of everything we do\. In early 2020, Alaska was again ranked by AirlineRatings\.com as one of only two U\.S\. airlines in the Top 20 safest airlines in the world\. In 2018, we also received our 17th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon aircraft technicians for their commitment to training\.

• Fares and ancillary services

Ticket and other fee pricing is a significant competitive factor in the airline industry, and the increased availability of fare information on the Internet allows travelers to easily compare fares and identify competitor promotions and discounts\. Pricing is driven by a variety of factors including, but not limited to, market\-specific capacity, market share per route/geographic area, cost structure, fare vs\. ancillary revenue strategies, and demand\.

For example, airlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors\. In addition, traditional network carriers have been able to reduce their operating costs through bankruptcies and mergers, while low\-cost carriers have continued to grow their fleets and expand their networks, potentially enabling them to better control costs per available seat mile (the average cost to fly an aircraft seat one mile), which in turn may enable them to lower their fares\. These factors can reduce our pricing power and that of the airline industry as a whole\.

Domestic airline capacity is dominated by four large carriers, representing over 80% of total seats\. One of our advantages is our low fare with high value position in the industry\. However, given the large concentration of industry capacity, some carriers in our markets may discount their fares substantially to develop or increase market share\. Fares that are substantially below our cost to operate can be harmful if sustained over a long period of time\. We will defend our core markets and, if necessary, redeploy capacity to better match supply with demand\. We believe our strong financial position and low cost advantage enables us to offer competitive fares while still earning returns for our shareholders\.

• Customer service and reputation

We compete with other airlines in areas of customer service such as on\-time performance and guest amenities \- including first class and other premium seating, quality of on\-board products, aircraft type and comfort\. In 2019, Alaska ranked highest in customer satisfaction among traditional network carriers by J\.D\. Power and Associates for the 12th year in a row, and was also named as the best U\.S\. airline by Condé Nast Traveler\. Additionally, in 2019 we opened our new flagship lounge in the North Satellite of Sea\-Tac Airport and began work on our new lounge at San Francisco International Airport\.

We are also in the process of reconfiguring our Airbus aircraft, which began in 2018\. The new livery and interior reconfiguration will provide guests with one consistent brand experience across the Mainline fleet\. Airbus livery updates

11


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

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Delta Air Lines, Inc\.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Delta Air Lines, Inc\. (the Company) as of  December 31, 2017  and  2016 , and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders' equity for each of the three years in the period ended  December 31, 2017 , and the related notes (collectively referred to as the “consolidated financial statements”)\. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at  December 31, 2017  and  2016 , and the results of its operations and its cash flows for each of the three years in the period ended  December 31, 2017 , in conformity with U\.S\. generally accepted accounting principles\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of  December 31, 2017 , based on criteria established in Internal Control\-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated  February 23, 2018  expressed an unqualified opinion thereon\.

Basis for Opinion

These financial statements are the responsibility of the Company's management\. Our responsibility is to express an opinion on the Company’s financial statements based on our audits\. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U\.S\. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB\.

We conducted our audits in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud\. Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks\. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements\. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements\. We believe that our audits provide a reasonable basis for our opinion\.

|                                                      |                       |
| ---------------------------------------------------- | --------------------- |
|                                                      | /s/ Ernst & Young LLP |
| We have served as the Company's auditor since 2006\. |                       |
| Atlanta, Georgia                                     |                       |
| February 23, 2018                                    |                       |

 49


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

**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\.

|                         |                         |       |                   |
| ----------------------- | ----------------------- | ----- | ----------------- |
| ALASKA AIR GROUP, INC\. | ALASKA AIR GROUP, INC\. |       |                   |
| By:                     | /s/ BRADLEY D\. TILDEN  | Date: | February 14, 2018 |
|                         | **Bradley D\. Tilden**  |       |                   |
|                         | Chief Executive Officer |       |                   |

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on February 14, 2018 on behalf of the registrant and in the capacities indicated\.

 99


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

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

***Benefit Payments***

The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (approximately, in millions):

|                                                   |          |          |          |          |          |                |
| ------------------------------------------------- | -------- | -------- | -------- | -------- | -------- | -------------- |
|                                                   | **2019** | **2020** | **2021** | **2022** | **2023** | **2024\-2028** |
| Pension benefits                                  | $717     | $754     | $793     | $831     | $872     | $4,891         |
| Retiree medical and other postretirement benefits | 84       | 75       | 71       | 66       | 64       | 280            |

***Plan Assets***

The objectives of American’s investment policies are to: maintain sufficient income and liquidity to pay retirement benefits; produce a long\-term rate of return that meets or exceeds the assumed rate of return for plan assets; limit the volatility of asset performance and funded status; and diversify assets among asset classes and investment managers\.

Based on these investment objectives, a long\-term strategic asset allocation has been established\. This strategic allocation seeks to balance the potential benefit of improving funded position with the potential risk that the funded position would decline\. The current strategic target asset allocation is as follows:

|                                 |                   |
| ------------------------------- | ----------------- |
| **Asset Class/Sub\-Class**      | **Allowed Range** |
| Equity                          | 60% \- 85%        |
| Public:                         |                   |
| U\.S\. Large                    | 20% \- 50%        |
| U\.S\. Small/Mid                | 0% \- 10%         |
| International                   | 17% \- 27%        |
| Emerging Markets                | 5% \- 11%         |
| Alternative Investments         | 5% \- 20%         |
| Fixed Income                    | 15% \- 40%        |
| Public:                         |                   |
| U\.S\. Long Duration            | 15% \- 30%        |
| High Yield and Emerging Markets | 0% \- 10%         |
| Private Income                  | 0% \- 10%         |
| Cash Equivalents                | 0% \- 5%          |

Public equity as well as high yield and emerging market fixed income securities are used to provide diversification and are expected to generate higher returns over the long\-term than U\.S\. long duration bonds\. Public stocks are managed using a value investment approach in order to participate in the returns generated by stocks in the long\-term, while reducing year\-over\-year volatility\. U\.S\. long duration bonds are used to partially hedge the assets from declines in interest rates\. Alternative (private) investments are used to provide expected returns in excess of the public markets over the long\-term\. The pension plan’s master trust also participates in securities lending programs to generate additional income by loaning plan assets to borrowers on a fully collateralized basis\. These programs are subject to market risk\.

Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year\. Securities traded in the over\-the\-counter market are valued at the last bid price\. The money market fund is valued at fair value which represents the net asset value of the shares of such fund as of the close of business at the end of the period\. Investments in limited partnerships are carried at estimated net asset value as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships\. Common/collective trusts are valued at net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts\. The pension plan’s master trust also invests in a 103\-12 investment entity (the 103\-12 Investment Trust) which is designed to invest plan assets of more than one unrelated employer\. The 103\-12 Investment Trust is valued at net asset value which is determined by the issuer at the end of each month and is based on the aggregate fair value of trust assets less liabilities, divided by the number of units outstanding\. No changes in valuation techniques or inputs occurred during the year\.

161


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

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

relates to weighted average discount rate assumption changes and, in 2018, changes to American’s medical trend and per capita claim assumptions\.

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | During  2018 , American contributed  $472 million  to its defined benefit pension plans, including supplemental contributions of  $433 million  in addition to a  $39 million  minimum required contribution\. During  2017 , American contributed  $286 million  to its defined benefit pension plans, including supplemental contributions of  $261 million  in addition to a  $25 million  minimum required contribution\. |

***Balance Sheet Position***

|                      |                      |                      |                                                                  |                                                                  |
| -------------------- | -------------------- | -------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- |
|                      | **Pension Benefits** | **Pension Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** |
|                      | **2018**             | **2017**             | **2018**                                                         | **2017**                                                         |
|                      | **(In millions)**    | **(In millions)**    | **(In millions)**                                                | **(In millions)**                                                |
| As of December 31,   |                      |                      |                                                                  |                                                                  |
| Current liability    | $7                   | $10                  | $23                                                              | $88                                                              |
| Noncurrent liability | 6,274                | 6,825                | 589                                                              | 627                                                              |
| Total liabilities    | $6,281               | $6,835               | $612                                                             | $715                                                             |

|                                                               |        |        |        |        |
| ------------------------------------------------------------- | ------ | ------ | ------ | ------ |
| Net actuarial loss (gain)                                     | $5,341 | $5,337 | $(452) | $(388) |
| Prior service cost (benefit)                                  | 131    | 159    | (362)  | (600)  |
| Total accumulated other comprehensive loss (income), pre\-tax | $5,472 | $5,496 | $(814) | $(988) |

***Plans with Accumulated Benefit Obligations Exceeding Fair Value of Plan Assets***

|                                               |                      |                      |                                                                  |                                                                  |
| --------------------------------------------- | -------------------- | -------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- |
|                                               | **Pension Benefits** | **Pension Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** |
|                                               | **2018**             | **2017**             | **2018**                                                         | **2017**                                                         |
|                                               | **(In millions)**    | **(In millions)**    | **(In millions)**                                                | **(In millions)**                                                |
| Projected benefit obligation                  | $16,254              | $18,144              | $—                                                               | $—                                                               |
| Accumulated benefit obligation (ABO)          | 16,246               | 18,135               | —                                                                | —                                                                |
| Accumulated postretirement benefit obligation | —                    | —                    | 837                                                              | 1,010                                                            |
| Fair value of plan assets                     | 9,971                | 11,307               | 225                                                              | 295                                                              |
| ABO less fair value of plan assets            | 6,275                | 6,828                | —                                                                | —                                                                |

***Net Periodic Benefit Cost (Income)***

|                                    |                      |                      |                      |                                                                    |                                                                    |                                                                    |
| ---------------------------------- | -------------------- | -------------------- | -------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ |
|                                    | **Pension Benefits** | **Pension Benefits** | **Pension Benefits** | **Retiree Medical and**

 **Other Postretirement Benefits**  | **Retiree Medical and**

 **Other Postretirement Benefits**  | **Retiree Medical and**

 **Other Postretirement Benefits**  |
|                                    | **2018**             | **2017**             | **2016**             | **2018**                                                           | **2017**                                                           | **2016**                                                           |
|                                    | **(In millions)**    | **(In millions)**    | **(In millions)**    | **(In millions)**                                                  | **(In millions)**                                                  | **(In millions)**                                                  |
| Defined benefit plans:             |                      |                      |                      |                                                                    |                                                                    |                                                                    |
| Service cost                       | $2                   | $2                   | $2                   | $5                                                                 | $4                                                                 | $3                                                                 |
| Interest cost                      | 670                  | 717                  | 746                  | 35                                                                 | 39                                                                 | 47                                                                 |
| Expected return on assets          | (901)                | (786)                | (747)                | (24)                                                               | (21)                                                               | (20)                                                               |
| Settlements                        | —                    | 1                    | —                    | —                                                                  | —                                                                  | —                                                                  |
| Amortization of:                   |                      |                      |                      |                                                                    |                                                                    |                                                                    |
| Prior service cost (benefit)       | 28                   | 28                   | 28                   | (236)                                                              | (237)                                                              | (240)                                                              |
| Unrecognized net loss (gain)       | 140                  | 144                  | 125                  | (21)                                                               | (23)                                                               | (16)                                                               |
| Net periodic benefit cost (income) | $(61)                | $106                 | $154                 | $(241)                                                             | $(238)                                                             | $(226)                                                             |

The components of net periodic benefit income other than the service cost component are included in nonoperating other income, net in American’s consolidated statements of operations\.

159


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

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

**Number** | **Description**                                                                                |
| 4\.11                         | [Series 2013\-2B N907AN Equipment Note No\. 1, dated as of November 27, 2013 (incorporated by reference to Exhibit 4\.11 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex411.htm)                                                                                |
| 4\.12                         | [Schedule I (Pursuant to Instruction 2 to Item 601 of Regulation S\-K, this Schedule I contains a list of documents applicable to the financing of the Aircraft in connection with the offering of the Class B Certificates, which documents are substantially identical to those filed herewith as Exhibits 4\.6, 4\.7, 4\.8, 4\.9, 4\.10 and 4\.11\. Schedule I sets forth the details by which such documents differ from the corresponding Exhibits) (incorporated by reference to Exhibit 99\.2 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex992.htm) |
| 4\.13                         | [Amended and Restated Intercreditor Agreement (2013\-2), dated as of December 20, 2013, among Wilmington Trust Company, as Trustee of American Airlines Pass Through Trust 2013\-2A, American Airlines Pass Through Trust 2013\-2B and American Airlines Pass Through Trust 2013\-2C, Morgan Stanley Bank, N\.A\., as Class A Liquidity Provider and as Class B Liquidity Provider, and Wilmington Trust Company, as Subordination Agent (incorporated by reference to Exhibit 4\.4 to AMR’s Current Report on Form 8\-K filed on December 20, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513480827/d647497dex44.htm)                   |
| 4\.14                         | [Indenture, dated as of May 20, 2019, by and among American Airlines Group Inc\., the Guarantor (as defined therein) and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4\.1 to AAG’s Current Report on Form 8\-K filed on May 21, 2019 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312519152852/d728811dex41.htm)                                                                                |
| 4\.15                         | [Pass Through Trust Agreement, dated as of September 16, 2014, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4\.1 to American’s Current Report on Form 8\-K filed on September 17, 2014 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312514343482/d790263dex41.htm)                                                                                |
| 4\.16                         | [Trust Supplement No\. 2014\-1A, dated as of September 16, 2014, 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 September 17, 2014 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312514343482/d790263dex42.htm)                                                                                |
| 4\.17                         | [Trust Supplement No\. 2014\-1B, dated as of September 16, 2014, 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 September 17, 2014 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312514343482/d790263dex43.htm)                                                                                |
| 4\.18                         | [Intercreditor Agreement (2014\-1), dated as of September 16, 2014, among Wilmington Trust Company, as Trustee of the American Airlines Pass Through Trust 2014\-1A and as Trustee of the American Airlines Pass Through Trust 2014\-1B, Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Class A Liquidity Provider and Class B 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 September 17, 2014 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312514343482/d790263dex44.htm)       |
| 4\.19                         | [Amendment No\. 1 to Intercreditor Agreement (2014\-1), dated as of June 24, 2015, among American Airlines, Inc\., Credit Agricole Corporate and Investment Bank, as Class A and Class B liquidity provider and Wilmington Trust Company, as subordination agent and trustee (incorporated by reference to Exhibit 10\.6 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515261937/d945812dex106.htm)                                                                                |
| 4\.20                         | [Note Purchase Agreement, dated as of September 16, 2014, 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 September 17, 2014 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312514343482/d790263dex49.htm)                                                                                |
| 4\.21                         | [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) (Exhibit B to Note Purchase Agreement) (incorporated by reference to Exhibit 4\.10 to American’s Current Report on Form 8\-K filed on September 17, 2014 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312514343482/d790263dex410.htm)                                    |
| 4\.22                         | [Form of Indenture and Security Agreement (Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (Exhibit C to Note Purchase Agreement) (incorporated by reference to Exhibit 4\.11 to American’s Current Report on Form 8\-K filed on September 17, 2014 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312514343482/d790263dex411.htm)                                                                                |
| 4\.23                         | [Revolving Credit Agreement (2014\-1A), dated as of September 16, 2014, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2014\-1A, as Borrower, and Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Liquidity Provider (incorporated by reference to Exhibit 4\.14 to American’s Current Report on Form 8\-K filed on September 17, 2014 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312514343482/d790263dex414.htm)                                                                                |

165


Annual Report of Southwest Airlines Co\. for year 2019

underlying markets or provided by third parties\. Included in the Company’s cumulative net unrealized  losses  from fuel hedges as of  December 31, 2019 , recorded in AOCI, were approximately   $36 million  in unrealized  losses , net of taxes, which are expected to be realized in earnings during the twelve months subsequent to  December 31, 2019 \.

Interest Rate Swaps

The Company is party to certain interest rate swap agreements that are accounted for as either fair value hedges or cash flow hedges, as defined in the applicable accounting guidance for derivative instruments and hedging\. Several of the Company's interest rate swap agreements qualify for the "shortcut" method of accounting for hedges, which dictates that the hedges are assumed to be perfectly effective, and, thus, there is no ineffectiveness to be recorded in earnings\. For the Company’s interest rate swap agreements that do not qualify for the "shortcut" or "critical terms match" methods of accounting, ineffectiveness is assessed at each reporting period\. If hedge accounting is achieved, all periodic changes in fair value of the interest rate swaps are recorded in AOCI\. The ineffectiveness associated with all of the Company’s interest rate swap agreements for all periods presented was not material\.

The fair values of the interest rate swap agreements, which are adjusted regularly, have been aggregated by counterparty for classification in the Consolidated Balance Sheet\. Agreements totaling a net liability of   $4 million  are fair value hedges, cash flow hedges, and interest rate derivatives not utilizing hedge accounting, and are classified as components of Other assets, Accrued liabilities, and Other noncurrent liabilities\. The corresponding adjustment related to the net liability associated with the Company’s cash flow hedges is to AOCI, fair value hedges is to the carrying value of the long\-term debt, and interest rate derivatives not utilizing hedge accounting is to Interest expense\. See Note  12 \.

The Company has a fixed\-to\-floating interest rate swap agreement in place associated with its   $500 million   2\.65 percent  Notes due  2020  that is accounted for as a fair value hedge\. As a result of the fixed\-to\-floating interest rate swap agreement in place, the average floating rate recognized during  2019  was approximately   3\.01 percent  on the   $500 million  Notes\.

The Company has a floating\-to\-fixed interest rate swap agreement associated with its   $600 million  floating\-rate term loan agreement due  2020  that is accounted for as a cash flow hedge\. The interest rate hedge has fixed the interest rate on the   $600 million  floating\-rate term loan agreement at   5\.223 percent  until maturity\.

There are also two interest rate swap agreements, which convert a portion of AirTran Holdings' floating\-rate debt to a fixed\-rate basis for the remaining life of the debt, thus reducing the impact of interest rate changes on future interest expense and cash flows\. Under these agreements, which expire in  2020 , AirTran Holdings pays fixed rates between   4\.35 percent  and   4\.50 percent  and receives either three\-month or six\-month LIBOR on the notional values\. The notional amount of outstanding debt related to interest rate swaps as of  December 31, 2019 , was   $13 million \. The mark\-to\-market impact associated with these hedges for all periods presented was not material\.

Credit Risk and Collateral

Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date\. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements\. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past\. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty\. At  December 31, 2019 , the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating\. The Company also had agreements with counterparties in which cash deposits, letters of credit, and/or pledged aircraft are required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds\. In certain cases, the Company has the ability to substitute among these different forms of collateral in its discretion\. The following

97


Annual Report of Southwest Airlines Co\. for year 2017

**Report of Independent Registered Public Accounting Firm**

To the Shareholders and the Board of Directors of Southwest Airlines Co\.

**Opinion on Internal Control over Financial Reporting**

We have audited Southwest Airlines Co\.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control\-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), (the COSO criteria)\. In our opinion, Southwest Airlines Co\. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Southwest Airlines Co\. as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”) of the Company and our report dated February 7, 2018 expressed an unqualified opinion thereon\.

**Basis for Opinion**

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Annual Report on Internal Control Over Financial Reporting”\. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit\. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U\.S\. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB\.

We conducted our audit in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects\.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances\. We believe that our audit provides a reasonable basis for our opinion\.

**Definition and Limitations of Internal Control over Financial Reporting**

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles\. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements\.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements\. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become

110


Annual Report of Southwest Airlines Co\. for year 2019

The Company adopted the New Hedging Standard as of January 1, 2018\. See Note 2 for further information on this adoption\.

All cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the Consolidated Statement of Cash Flows, within Changes in certain assets and liabilities\. The Company classifies its cash collateral provided to or held from counterparties in a "net" presentation on the Consolidated Balance Sheet against the fair value of the derivative positions with those counterparties\. See  Note 10  for further information\.

Software Capitalization

The Company capitalizes certain internal and external costs related to the acquisition and development of internal use software during the application development stages of projects\. The Company amortizes these costs using the straight\-line method over the estimated useful life of the software, which is typically  five  to   fifteen years \. Costs incurred during the preliminary project or the post\-implementation/operation stages of the project are expensed as incurred\. Capitalized computer software, included as a component of Ground property and equipment in the accompanying Consolidated Balance Sheet, net of accumulated depreciation, was   $630 million  and   $674 million  at  December 31, 2019 , and  2018 , respectively\. Computer software depreciation expense was   $177 million ,   $155 million , and   $168 million  for the years ended  December 31, 2019 ,  2018 , and  2017 , respectively, and is included as a component of Depreciation and amortization expense in the accompanying Consolidated Statement of Income\. The Company evaluates internal use software for impairment on a quarterly basis; if it is determined the value of an asset was not recoverable or it qualifies for impairment, a charge will be recorded to write down the software to the lower of its carrying value or fair value\. The Company had   no  significant impairments during  2019 ,  2018 , or  2017 \.

Income Taxes

The Company accounts for deferred income taxes utilizing an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effect of temporary differences between the financial statements and the tax basis of assets and liabilities, as measured by current enacted tax rates\. The Company also evaluates the need for a valuation allowance to reduce deferred tax assets to estimated recoverable amounts\.

The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income before income taxes\. Penalties are recorded in Other (gains) losses, net, and interest paid or received is recorded in Interest expense or Interest income, respectively, in the accompanying Consolidated Statement of Income\. There were no material amounts recorded for penalties and interest related to uncertain tax positions for all years presented\. See Note  14  for further information\.

Concentration Risk

Approximately   83 percent  of the Company’s full\-time equivalent Employees are unionized and are covered by collective\-bargaining agreements\. A percentage of the Company's unionized Employees, including its Flight Attendants, Customer Service Agents, Dispatchers, Flight Crew Training Instructors, and Meteorologists, which had contracts that became amendable on or before December 31, 2019, are in discussions on labor agreements\. Those unionized Employee groups in discussions represent approximately   40 percent  of the Company’s full\-time equivalent Employees as of  December 31, 2019 \.

The Company attempts to minimize its concentration risk with regards to its cash, cash equivalents, and its investment portfolio\. This is accomplished by diversifying and limiting amounts among different counterparties, the type of investment, and the amount invested in any individual security or money market fund\.

To manage risk associated with financial derivative instruments held, the Company selects and will periodically review counterparties based on credit ratings, limits its exposure to a single counterparty, and monitors the market position of the program and its relative market position with each counterparty\. The Company also has agreements with

74


Annual Report of Southwest Airlines Co\. for year 2019

|          |                                                                                |
| -------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 21       | [Subsidiaries of the Company\.](https://www.example.com/luv-12312019xex21.htm)                                                                                |
| 23       | [Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm\.](https://www.example.com/luv-12312019xex23.htm)                                    |
| 31\.1    | [Rule 13a\-14(a) Certification of Chief Executive Officer\.](https://www.example.com/luv-12312019xex311.htm)                                                      |
| 31\.2    | [Rule 13a\-14(a) Certification of Chief Financial Officer\.](https://www.example.com/luv-12312019xex312.htm)                                                      |
| 32       | [Section 1350 Certification of Chief Executive Officer and Chief Financial Officer\. ](https://www.example.com/luv-12312019xex32.htm) (3)                         |
| 101\.INS | XBRL Instance Document \- The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document\. |
| 101\.SCH | Inline XBRL Taxonomy Extension Schema Document\.                                                                                |
| 101\.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document\.                                                                                |
| 101\.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document\.                                                                                |
| 101\.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document\.                                                                                |
| 101\.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document\.                                                                                |
| 104      | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)\.                                                                        |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| (1) | Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would likely cause competitive harm to the Company if publicly disclosed\. |

|     |                                                           |
| --- | --------------------------------------------------------- |
| (2) | Management contract or compensatory plan or arrangement\. |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (3) | This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S\-K\. |

A copy of each exhibit may be obtained at a price of 15 cents per page, $10\.00 minimum order, by writing to: Investor Relations, Southwest Airlines Co\., P\.O\. Box 36611, Dallas, Texas 75235\-1611\.

Item 16\.  10\-K Summary

None\.

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