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

Income Tax Allocation

We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations (the "Income Tax Allocation")\. The 2017 tax reform reduced the statutory tax rate in the U\.S\. from  35%  to  21%  during the prior year\. GAAP requires that the tax expense related to tax law changes be recognized in current earnings, even when a portion of the related deferred tax asset originated through amounts recognized in AOCI\. As a result,   $688 million  of income tax expense remains in AOCI, primarily related to pension obligations, and will not be recognized in net income until the pension obligations are fully extinguished, which will not occur for approximately   25  years\.

Other

The amount of, and changes to, our uncertain tax positions were not material in any of the years presented\. We are currently under audit by the IRS for the 2018, 2017, 2016 and 2015 tax years\.

NOTE 13 \. EQUITY AND EQUITY COMPENSATION

Equity

We are authorized to issue   2\.0 billion  shares of capital stock, of which up to   1\.5 billion  may be shares of common stock, par value   $0\.0001  per share, and up to   500 million  may be shares of preferred stock\.

Preferred Stock\.  We may issue preferred stock in one or more series\. The Board of Directors is authorized (1) to fix the descriptions, powers (including voting powers), preferences, rights, qualifications, limitations and restrictions with respect to any series of preferred stock and (2) to specify the number of shares of any series of preferred stock\. We have not issued any preferred stock\.

Treasury Stock\.  We generally withhold shares of Delta common stock to cover employees' portion of required tax withholdings when employee equity awards are issued or vest\. These shares are valued at cost, which equals the market price of the common stock on the date of issuance or vesting\. The weighted average cost per share held in treasury was   $24\.14  and   $21\.19  as of  December 31, 2018  and  2017 , respectively\.

Equity Compensation

Our broad\-based equity and cash compensation plan provides for grants of restricted stock, stock options, performance awards, including cash incentive awards and other equity\-based awards (the "Plan")\. Shares of common stock issued under the Plan may be made available from authorized, but unissued, common stock or common stock we acquire\. If any shares of our common stock are covered by an award that expires, is canceled, forfeited or otherwise terminates without delivery of shares (including shares surrendered or withheld for payment of taxes related to an award), such shares will again be available for issuance under the Plan except for (i) any shares tendered in payment of an option, (ii) shares withheld to satisfy any tax withholding obligation with respect to the exercise of an option or stock appreciation right ("SAR") or (iii) shares covered by a stock\-settled SAR or other awards that were not issued upon the settlement of the award\. The Plan authorizes the issuance of up to   163 million  shares of common stock\. As of  December 31, 2018 , there were   27 million  shares available for future grants\.

 We make long\-term incentive awards annually to eligible employees under the Plan\. Generally, awards vest over time, subject to the employee's continued employment\. Equity compensation expense, including awards payable in common stock or cash, is recognized in salaries and related costs over the employee's requisite service period (generally, the vesting period of the award) and totaled   $159 million ,   $169 million  and   $154 million  for the years ended  December 31, 2018 ,  2017  and  2016 , respectively\. We record expense on a straight\-line basis for awards with installment vesting\. As of  December 31, 2018 , unrecognized costs related to unvested shares and stock options totaled   $81 million \. We expect substantially all unvested awards to vest and recognize forfeitures as they occur\.

Restricted Stock \. Restricted stock is common stock that may not be sold or otherwise transferred for a period of time and is subject to forfeiture in certain circumstances\. The fair value of restricted stock awards is based on the closing price of the common stock on the grant date\. As of  December 31, 2018 , there were   2\.4  million unvested restricted stock awards\.

 92


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

Interest expense, net  increase d  $81 million , or  7\.8 %, in  2019  as compared to  2018 , primarily due to higher\-interest bearing related party payables to other AAG subsidiaries and lower capitalized interest \.

In  2019 , other nonoperating income, net principally included  $183 million  of non\-service related pension and other postretirement benefit plan income\. This income was offset in part by  $32 million  of net foreign currency losses principally associated with losses from Latin American currencies\.

In  2018 , other nonoperating income, net principally included  $309 million  of non\-service related pension and other postretirement benefit plan income\. This income was offset in part by a  $104 million  net special charge for mark\-to\-market unrealized losses primarily associated with American’s equity investment in China Southern Airlines and  $54 million  of net foreign currency losses from Latin American currencies\.

The decrease in non\-service related pension and other postretirement benefit plan income in  2019  as compared to  2018  is principally due to a decrease in the expected return on pension plan assets\.

Income Taxes

American is part of the AAG consolidated income tax return\.

In  2019 , American recorded an income tax provision of  $633 million  at an effective rate of approximately  24% , which was substantially non\-cash due to utilization of its NOLs\. Substantially all of American’s income before income taxes is attributable to the United States\. At  December 31, 2019 , American had approximately  $9\.2 billion  of federal NOLs and  $2\.9 billion  of state NOLs, substantially all of which American expects to be available in 2020 to reduce future federal and state taxable income\.

In  2018 , American recorded an income tax provision of  $534 million  at an effective rate of approximately 24%, which was substantially non\-cash\. This provision included an  $18 million  special income tax charge related to an international income tax matter\.

See Note 5 to American’s Consolidated Financial Statements in Part II, Item 8B for additional information on income taxes\.

Liquidity and Capital Resources

Liquidity

As of  December 31, 2019 , AAG had approximately  $7\.0 billion  in total available liquidity and  $158 million  in restricted cash and short\-term investments\. Additional detail regarding our available liquidity is provided in the table below (in millions):

|                                            |                  |                  |                  |                  |
| ------------------------------------------ | ---------------- | ---------------- | ---------------- | ---------------- |
|                                            | **AAG**          | **AAG**          | **American**     | **American**     |
|                                            | **December 31,** | **December 31,** | **December 31,** | **December 31,** |
|                                            | **2019**         | **2018**         | **2019**         | **2018**         |
| Cash                                       | $280             | $275             | $267             | $265             |
| Short\-term investments                    | 3,546            | 4,485            | 3,543            | 4,482            |
| Undrawn revolving credit facilities  ^(1)^ | 3,243            | 2,843            | 3,243            | 2,843            |
| Total available liquidity                  | $7,069           | $7,603           | $7,053           | $7,590           |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | For 2019, this amount includes $400 million in borrowing capacity under a short\-term revolving line of credit we arranged in December 2019 due to uncertainty surrounding the timing of the Boeing 737 MAX aircraft return to service\. We have no present intention to borrow any amounts under this facility, which matures in September 2020 with an optional extension to December 2020\. For additional discussion of this facility see Note 5 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 3 to American’s Consolidated Financial Statements in Part II, Item 8B\. |

59


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

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

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

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

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

*DOJ Investigation Related to the United States Postal Service*\. In April 2015, the Department of Justice (DOJ) informed us of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air\. In October 2015, we received a Civil Investigative Demand from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis\. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes\. We are cooperating fully with the DOJ with regard to its investigation\.

*General*\. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time\. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control\. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material\. See Part I, Item 1A\. Risk Factors –*“We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity”* for additional discussion\.

***(f) Guarantees and Indemnifications***

We are party to many routine contracts in which we provide general indemnities in the normal course of business to third parties for various risks\. We are not able to estimate the potential amount of any liability resulting from the indemnities\. These indemnities are discussed in the following paragraphs\.

In our aircraft financing agreements, we generally indemnify the financing parties, trustees acting on their behalf and other relevant parties against liabilities (including certain taxes) resulting from the financing, manufacture, design, ownership, operation and maintenance of the aircraft regardless of whether these liabilities (including certain taxes) relate to the negligence of the indemnified parties\.

Our loan agreements and other LIBOR\-based financing transactions (including certain leveraged aircraft leases) generally obligate us to reimburse the applicable lender for incremental costs due to a change in law that imposes (i) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (ii) any tax, duty or other charge with respect to the loan (except standard income tax) or (iii) capital adequacy requirements\. In addition, our loan agreements and other financing arrangements typically contain a withholding tax provision that requires

123


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

***The inability to maintain labor costs at competitive levels would harm our financial performance\.***

Currently, we believe our labor costs are competitive relative to the other large network carriers\. However, we cannot provide assurance that labor costs going forward will remain competitive because we are in negotiations for some new agreements now and other agreements may become amendable, competitors may significantly reduce their labor costs or we may agree to higher\-cost provisions unilaterally or in connection with our current or future labor negotiations, such as the employee profit sharing program we instituted effective January 1, 2016, the mid\-contract adjustment we provided to our flight attendants and pilots in 2017 and the $1,000 per employee one\-time bonus we announced on January 2, 2018\. As of December 31, 2017, approximately 85% of our employees were represented for collective bargaining purposes by labor unions\. Some of our unions have brought and may continue to bring grievances to binding arbitration, including those related to wages\. Unions may also bring court actions and may seek to compel us to engage in bargaining processes where we believe we have no such obligation\. If successful, there is a risk these judicial or arbitral avenues could create material additional costs that we did not anticipate\.

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

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

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

In order to operate our existing and proposed flight schedule and, where desirable, add service along new or existing routes, we must be able to maintain and/or obtain adequate gates, check\-in counters, operations areas, operations control facilities and administrative support space\. As airports around the world become more congested, we are not always able to ensure that our plans for new service can be implemented in a commercially viable manner, given operating constraints at airports throughout our network, including due to inadequate facilities at desirable airports\. Further, our operating costs at airports at which we operate, including our hubs, may increase significantly because of capital improvements at such airports that we may be required to fund, directly or indirectly\. Additionally, there is presently a significant amount of capital spending underway at major airports in the United States that we serve, and that spending is expected to result in increased costs to airlines and the traveling public that use those facilities as the airports seek to recover these investments through increased rental, landing and other facility costs\. In some circumstances, such costs could be imposed by the relevant airport authority without our approval\.

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

20


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

|                                                    |          |          |          |          |          |                |           |
| -------------------------------------------------- | -------- | -------- | -------- | -------- | -------- | -------------- | --------- |
|                                                    | **2020** | **2021** | **2022** | **2023** | **2024** | **After 2024** | **Total** |
| Long\-term debt (a)                                | $1\.4    | $1\.4    | $1\.8    | $0\.8    | $3\.1    | $6\.2          | $14\.7    |
| Finance lease obligations—principal portion        | 0\.1     | 0\.1     | —        | —        | —        | 0\.1           | 0\.3      |
| Total debt and finance lease obligations           | 1\.5     | 1\.5     | 1\.8     | 0\.8     | 3\.1     | 6\.3           | 15\.0     |
| Interest on debt and finance lease obligations (b) | 0\.6     | 0\.5     | 0\.4     | 0\.4     | 0\.3     | 0\.7           | 2\.9      |
| Operating lease obligations                        | 0\.9     | 0\.8     | 0\.6     | 0\.6     | 0\.6     | 4\.2           | 7\.7      |
| Regional CPAs (c)                                  | 2\.9     | 2\.9     | 2\.4     | 1\.5     | 1\.3     | 4\.7           | 15\.7     |
| Postretirement obligations (d)                     | 0\.1     | 0\.1     | 0\.1     | 0\.1     | 0\.1     | 0\.3           | 0\.8      |
| Pension obligations (e)                            | —        | —        | —        | —        | 0\.4     | 0\.6           | 1\.0      |
| Capital purchase obligations (f)                   | 6\.9     | 4\.3     | 2\.0     | 1\.0     | 1\.2     | 11\.3          | 26\.7     |
| Total contractual obligations                      | $12\.9   | $10\.1   | $7\.3    | $4\.4    | $7\.0    | $28\.1         | $69\.8    |

(a) Long\-term debt presented in the Company's financial statements is net of  $181 million  of debt discount, premiums and debt issuance costs which are being amortized over the debt terms\. Contractual payments do not include the debt discount, premiums and debt issuance costs\.

(b) Includes interest portion of finance lease obligations of $14 million in  2020 , $11 million in  2021 , $8 million in  2022 , $6 million in  2023 , $4 million in  2024  and $5 million thereafter\. Interest payments on variable interest rate debt were calculated using London interbank offered rates ("LIBOR") applicable at December 31, 2019\.

(c) Represents our estimates of future minimum noncancelable commitments under our CPAs and does not include the portion of the underlying obligations for aircraft and facility rent that is disclosed as part of operating lease obligations\. Amounts also exclude a portion of United's finance lease obligation recorded for certain of its CPAs\. See Note 11 to the financial statements included in Part II, Item 8 of this report for the significant assumptions used to estimate the payments\.

(d) Amounts represent postretirement benefit payments through 2029\. Benefit payments approximate plan contributions as plans are substantially unfunded\.

(e) Represents an estimate of the minimum funding requirements as determined by government regulations for United's U\.S\. pension plans\. Amounts are subject to change based on numerous assumptions, including the performance of assets in the plans and bond rates\.

(f) Represents contractual commitments for firm order aircraft, spare engines and other capital purchase commitments\. See Note 13 to the financial statements included in Part II, Item 8 of this report for a discussion of our purchase commitments\.

Off\-Balance Sheet Arrangements\.  An off\-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support, or that engages in leasing, hedging or research and development arrangements\. The Company's primary off\-balance sheet arrangements include guarantees that are discussed below and variable\-rate operating leases\. See Note 11 to the financial statements included in Part II, Item 8 of this report for more information related to variable\-rate operating leases\.

Letters of Credit and Surety Bonds\.  As of December 31, 2019, United had cash collateralized  $73 million  of letters of credit, which generally have evergreen clauses and are expected to be renewed on an annual basis\. As of December 31, 2019, United also had  $414 million  of surety bonds securing various obligations with expiration dates through 2023\.

Guarantee of BRW Commitment\.  In connection with funding the BRW Term Loan Agreement, the Company entered into an agreement with Kingsland, pursuant to which, in return for Kingsland's pledge of its 144\.8 million common shares of AVH (which are eligible to be converted into the same number of preferred shares, which may be deposited with the depositary for AVH's ADRs, the class of AVH securities that trades on the NYSE, in exchange for 18\.1 million ADRs) and its consent to BRW's pledge of its AVH common shares to United under the BRW Term Loan Agreement and related agreements, United (1) granted to Kingsland the right to put its AVH common shares to United at market price on the fifth anniversary of the BRW Term Loan Agreement or upon certain sales of AVH common shares owned by BRW, including upon a foreclosure, and (2) guaranteed BRW's obligation to pay Kingsland the difference (which amount, if paid by United, will increase the BRW Term Loan by such amount) if the market price of AVH common shares on the fifth anniversary, or upon any such sale, as applicable, is less than $12 per ADR, for an aggregate maximum possible combined put payment and guarantee amount on the fifth anniversary, or upon such sale, as applicable, of $217 million\. In 2018, the Company recorded a liability of $31 million for the fair value of its guarantee to loan additional funds to BRW if required\. Any such additional loans to BRW would be collateralized by BRW's AVH shares and other collateral\.

Guarantee of Debt of Others\.  As of  December 31, 2019 , United is the guarantor of  $132 million  of aircraft mortgage debt issued by one of United's regional carriers\. The aircraft mortgage debt is subject to increased cost provisions and the Company would potentially be responsible for those costs under the guarantees\. The increased cost provisions in the  $132 million  of aircraft mortgage debt are similar to those in certain of the Company's debt agreements\. See discussion under Increased Cost Provisions,  below, for additional information on increased cost provisions related to the Company's debt\.

33


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

***Impact of Regulatory Requirements on Our Business***

Regulatory requirements, including but not limited to those discussed above, affect operations and increase operating costs for the airline industry, including our airline subsidiaries, and future regulatory developments may continue to do the same in the future\. See Part I, Item 1A\. Risk Factors – “*Evolving data security and privacy requirements could increase our costs, and any significant data security incident could disrupt our operations, harm our reputation, expose us to legal risks and otherwise materially adversely affect our business, results of operations and financial condition,” “If we are unable to obtain and maintain adequate facilities and infrastructure throughout our system and, at some airports, adequate slots, we may be unable to operate our existing flight schedule and to expand or change our route network in the future, which may have a material adverse impact on our operations,” “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,” “The airline industry is heavily taxed,*” *“We are subject to many forms of environmental and noise regulation and may incur substantial costs as a result”* and *“We are subject to risks associated with climate change, including increased regulation to reduce emissions of greenhouse gases”* for additional information\.

**Available Information**

***Use of Websites to Disclose Information***

Our website is located at *www\.aa\.com*\. We have made and expect in the future to make public disclosures to investors and the general public of information regarding AAG and its subsidiaries by means of the investor relations section of our website as well as through the use of our social media sites, including Facebook and Twitter\. In order to receive notification regarding new postings to our website, investors are encouraged to enroll on our website to receive automatic email alerts (see *https://americanairlines\.gcs\-web\.com/email\-alerts*), “follow” American (@AmericanAir) on Twitter and “like” American on its Facebook page (*www\.facebook\.com/AmericanAirlines*)\. None of the information or contents of our website or social media postings is incorporated into this Annual Report on Form 10\-K\.

***Availability of SEC Reports***

A copy of this Annual Report on Form 10\-K, Quarterly Reports on Form 10\-Q, Current Reports on Form 8\-K and amendments to those reports are available free of charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC\. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at *www\.sec\.gov*\. The public may also read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F\. Street, NE, Washington, DC 20549\. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1\-800\-SEC\-0330\.

14


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

CONSOLIDATED BALANCE SHEETS  (continued)

|                                                                                |                                                                                |                                                                                |          |  |  |  |          |
|:--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |:--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |:--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------:|:- |:- |:- | --------:|
| As of December 31  *(in millions except share amounts)*                                                                                | As of December 31  *(in millions except share amounts)*                                                                                | As of December 31  *(in millions except share amounts)*                                                                                |     2019 |  |  |  |     2018 |
| LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                | LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                | LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                |          |  |  |  |          |
| Current Liabilities                                                                                | Current Liabilities                                                                                | Current Liabilities                                                                                |          |  |  |  |          |
| Accounts payable                                                                                | Accounts payable                                                                                | Accounts payable                                                                                |    $ 146 |  |  |  |    $ 132 |
| Accrued wages, vacation and payroll taxes                                                                                | Accrued wages, vacation and payroll taxes                                                                                | Accrued wages, vacation and payroll taxes                                                                                |      470 |  |  |  |      415 |
| Air traffic liability                                                                                | Air traffic liability                                                                                | Air traffic liability                                                                                |      900 |  |  |  |      788 |
| Other accrued liabilities                                                                                | Other accrued liabilities                                                                                | Other accrued liabilities                                                                                |      431 |  |  |  |      416 |
| Deferred revenue                                                                                | Deferred revenue                                                                                | Deferred revenue                                                                                |      750 |  |  |  |      705 |
| Current portion of operating lease liabilities                                                                                | Current portion of operating lease liabilities                                                                                | Current portion of operating lease liabilities                                                                                |      269 |  |  |  |        — |
| Current portion of long\-term debt                                                                                | Current portion of long\-term debt                                                                                | Current portion of long\-term debt                                                                                |      235 |  |  |  |      486 |
| Total Current Liabilities                                                                                | Total Current Liabilities                                                                                | Total Current Liabilities                                                                                |    3,201 |  |  |  |    2,942 |
| Long\-Term Debt, Net of Current Portion                                                                                | Long\-Term Debt, Net of Current Portion                                                                                | Long\-Term Debt, Net of Current Portion                                                                                |    1,264 |  |  |  |    1,617 |
| Other Liabilities and Credits                                                                                | Other Liabilities and Credits                                                                                | Other Liabilities and Credits                                                                                |          |  |  |  |          |
| Long\-term operating lease liabilities, net of current portion                                                                                | Long\-term operating lease liabilities, net of current portion                                                                                | Long\-term operating lease liabilities, net of current portion                                                                                |    1,439 |  |  |  |        — |
| Deferred income taxes                                                                                | Deferred income taxes                                                                                | Deferred income taxes                                                                                |      715 |  |  |  |      512 |
| Deferred revenue                                                                                | Deferred revenue                                                                                | Deferred revenue                                                                                |    1,240 |  |  |  |    1,169 |
| Obligation for pension and postretirement medical benefits                                                                                | Obligation for pension and postretirement medical benefits                                                                                | Obligation for pension and postretirement medical benefits                                                                                |      571 |  |  |  |      503 |
| Other liabilities                                                                                | Other liabilities                                                                                | Other liabilities                                                                                |      232 |  |  |  |      418 |
| Total Other Liabilities and Credits                                                                                | Total Other Liabilities and Credits                                                                                | Total Other Liabilities and Credits                                                                                |    4,197 |  |  |  |    2,602 |
| Commitments and Contingencies (Note 9)                                                                                | Commitments and Contingencies (Note 9)                                                                                | Commitments and Contingencies (Note 9)                                                                                |          |  |  |  |          |
| Shareholders' Equity                                                                                | Shareholders' Equity                                                                                | Shareholders' Equity                                                                                |          |  |  |  |          |
| Preferred stock, $0\.01 par value, Authorized: 5,000,000 shares, none issued or outstanding                                                                                | Preferred stock, $0\.01 par value, Authorized: 5,000,000 shares, none issued or outstanding                                                                                | Preferred stock, $0\.01 par value, Authorized: 5,000,000 shares, none issued or outstanding                                                                                |        — |  |  |  |        — |
| Common stock, $0\.01 par value, Authorized: 400,000,000 shares, Issued: 2019 \- 131,812,173 shares; 2018 \- 130,813,476 shares, Outstanding: 2019 \- 123,000,307 shares; 2018 \- 123,194,430 shares | Common stock, $0\.01 par value, Authorized: 400,000,000 shares, Issued: 2019 \- 131,812,173 shares; 2018 \- 130,813,476 shares, Outstanding: 2019 \- 123,000,307 shares; 2018 \- 123,194,430 shares | Common stock, $0\.01 par value, Authorized: 400,000,000 shares, Issued: 2019 \- 131,812,173 shares; 2018 \- 130,813,476 shares, Outstanding: 2019 \- 123,000,307 shares; 2018 \- 123,194,430 shares |        1 |  |  |  |        1 |
| Capital in excess of par value                                                                                | Capital in excess of par value                                                                                | Capital in excess of par value                                                                                |      305 |  |  |  |      232 |
| Treasury stock (common), at cost: 2019 \- 8,811,866 shares; 2018 \- 7,619,046 shares                                                                                | Treasury stock (common), at cost: 2019 \- 8,811,866 shares; 2018 \- 7,619,046 shares                                                                                | Treasury stock (common), at cost: 2019 \- 8,811,866 shares; 2018 \- 7,619,046 shares                                                                                |    (643) |  |  |  |    (568) |
| Accumulated other comprehensive loss                                                                                | Accumulated other comprehensive loss                                                                                | Accumulated other comprehensive loss                                                                                |    (465) |  |  |  |    (448) |
| Retained earnings                                                                                | Retained earnings                                                                                | Retained earnings                                                                                |    5,133 |  |  |  |    4,534 |
|                                                                                |                                                                                |                                                                                |    4,331 |  |  |  |    3,751 |
| Total Liabilities and Shareholders' Equity                                                                                | Total Liabilities and Shareholders' Equity                                                                                | Total Liabilities and Shareholders' Equity                                                                                | $ 12,993 |  |  |  | $ 10,912 |

See accompanying notes to consolidated financial statements\.

51


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

**INSURANCE**

We carry insurance of types customary in the airline industry and in amounts deemed adequate to protect our interests and property and to comply both with federal regulations and certain credit and lease agreements\. The insurance policies principally provide coverage for Airline Hull, Spares and Comprehensive Legal Liability, War and Allied Perils, and Workers’ Compensation\. In addition, we currently carry a Cyber Insurance policy in the event of security breaches from malicious parties\.

We believe that our emphasis on safety and our state\-of\-the\-art flight deck safety technology help to control the cost of our insurance\.

**WHERE YOU CAN FIND MORE INFORMATION**

Our filings with the Securities and Exchange Commission, including our annual report on Form 10\-K, quarterly reports on Form 10\-Q, current reports on Form 8\-K and amendments to those reports are available on our website at *www\.alaskaair\.com,* free of charge, as soon as reasonably practicable after the electronic filing of these reports with the Securities and Exchange Commission\. The information contained on our website is not a part of this annual report on Form 10\-K\.

**GLOSSARY OF TERMS**

**Aircraft Utilization** \- block hours per day; this represents the average number of hours per day our aircraft are in transit

**Aircraft Stage Length** \- represents the average miles flown per aircraft departure

**ASMs** \- available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

**CASM** \- operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

**CASMex** \- operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non\-fuel operating costs since fuel is largely out of our control

**Debt\-to\-capitalization ratio** \- represents adjusted debt (long\-term debt plus the present value of future operating lease payments) divided by total equity plus adjusted debt

**Diluted Earnings per Share** \- represents earnings per share (EPS) using fully diluted shares outstanding

**Diluted Shares** \- represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

**Economic Fuel** \- best estimate of the cash cost of fuel, net of the impact of our fuel\-hedging program

**Free Cash Flow \-** total operating cash flow generated less cash paid for capital expenditures

**Load Factor** \- RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

**Mainline** \- represents flying Boeing 737 and Airbus 320 family jets and all associated revenues and costs

**PRASM** \- passenger revenue per ASM; commonly called “passenger unit revenue”

**Productivity** \- number of revenue passengers per full\-time equivalent employee

**RASM** \- operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™ and other ancillary revenue; represents the average total revenue for flying one seat one mile

**Regional** \- represents capacity purchased by Alaska from Horizon, SkyWest and PenAir\. In this segment, Regional records actual on\-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs)\. Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska and on behalf of Horizon\.

 19


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

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

United Airlines Holdings, Inc\. and Subsidiary Companies

United Airlines, Inc\. and Subsidiary Companies

Annual Report on Form 10\-K

For the Year Ended  December 31, 2019

|              |                                                                                |                                                                     |
| ------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- |
|              |                                                                                | **Page**                                                            |
| **PART I**   | **PART I**                                                                                | **PART I**                                                          |
| Item 1\.     | [Business](https://www.example.com#s886BA93CFB125BDBB73333E4FB42D0DD)                                                                                |
[3](https://www.example.com#s886BA93CFB125BDBB73333E4FB42D0DD)  |
| Item 1A\.    | [Risk Factors](https://www.example.com#sAF0CCB60D20A5F3AA0A03548E66DD8DF)                                                                                |
[10](https://www.example.com#sAF0CCB60D20A5F3AA0A03548E66DD8DF) |
| Item 1B\.    | [Unresolved Staff Comments](https://www.example.com#sE9ECE51D7C66546B80259583067DE9FC)                                                                                |
[22](https://www.example.com#sE9ECE51D7C66546B80259583067DE9FC) |
| Item 2\.     | [Properties](https://www.example.com#s8BC33E255E3950AE8F14A5823D10A04F)                                                                                |
[23](https://www.example.com#s8BC33E255E3950AE8F14A5823D10A04F) |
| Item 3\.     | [Legal Proceedings](https://www.example.com#sE42243AF8333521F949D759203A01142)                                                                                |
[24](https://www.example.com#sE42243AF8333521F949D759203A01142) |
| Item 4\.     | [Mine Safety Disclosures](https://www.example.com#s407E0EEEFCD6581A9C3A37EFC227BBD6)                                                                                |
[25](https://www.example.com#s407E0EEEFCD6581A9C3A37EFC227BBD6) |
| **PART II**  | **PART II**                                                                                | **PART II**                                                         |
| Item 5\.     | [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](https://www.example.com#s0D22DB6704FF5F2D9219C586148EE6F6) |
[25](https://www.example.com#s0D22DB6704FF5F2D9219C586148EE6F6) |
| Item 6\.     | [Selected Financial Data](https://www.example.com#s94EC015AD3AF53A89A3A950E6D5BA836)                                                                                |
[26](https://www.example.com#s94EC015AD3AF53A89A3A950E6D5BA836) |
| Item 7\.     | [Management's Discussion and Analysis of Financial Condition and Results of Operations](https://www.example.com#s18F9FD71350C5819904532C56B8CB746)                        |
[28](https://www.example.com#s18F9FD71350C5819904532C56B8CB746) |
| Item 7A\.    | [Quantitative and Qualitative Disclosures About Market Risk](https://www.example.com#s9D7E0893074C5C4B8F247F0DF92B258B)                                                   |
[38](https://www.example.com#s9D7E0893074C5C4B8F247F0DF92B258B) |
| Item 8\.     | [Financial Statements and Supplementary Data](https://www.example.com#s710C1CCDDDC35A489943CA170E3395A0)                                                                  |
[39](https://www.example.com#s710C1CCDDDC35A489943CA170E3395A0) |
|              | [Combined Notes to Consolidated Financial Statements](https://www.example.com#s146A0E5234F25AAA8011B51507A9B66E)                                                          |
[55](https://www.example.com#s146A0E5234F25AAA8011B51507A9B66E) |
| Item 9\.     | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](https://www.example.com#s846BF6E23ACD57DDA91DF85DB11E359D)                         |
[90](https://www.example.com#s846BF6E23ACD57DDA91DF85DB11E359D) |
| Item 9A\.    | [Controls and Procedures](https://www.example.com#s52A25F4325EB55F99ABEB87C88921213)                                                                                |
[90](https://www.example.com#s52A25F4325EB55F99ABEB87C88921213) |
| Item 9B\.    | [Other Information](https://www.example.com#sE29947610AF6534B84C8BD3F254C88AC)                                                                                |
[93](https://www.example.com#sE29947610AF6534B84C8BD3F254C88AC) |
| **PART III** | **PART III**                                                                                | **PART III**                                                        |
| Item 10\.    | [Directors, Executive Officers and Corporate Governance](https://www.example.com#s8C7D4BBAE66E50E9867B5C0383ACB532)                                                       |
[93](https://www.example.com#s8C7D4BBAE66E50E9867B5C0383ACB532) |
| Item 11\.    | [Executive Compensation](https://www.example.com#s99BC42F7849A59449E9314124E62C64A)                                                                                |
[93](https://www.example.com#s99BC42F7849A59449E9314124E62C64A) |
| Item 12\.    | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](https://www.example.com#s4E4A77B20F0A543E88957D2CDE96500E)               |
[93](https://www.example.com#s4E4A77B20F0A543E88957D2CDE96500E) |
| Item 13\.    | [Certain Relationships and Related Transactions, and Director Independence](https://www.example.com#s934DBD1E3EE95DB79E3D5858E8EAF2CB)                                    |
[93](https://www.example.com#s934DBD1E3EE95DB79E3D5858E8EAF2CB) |
| Item 14\.    | [Principal Accountant Fees and Services](https://www.example.com#s8B699BE2F332594199715C611974641D)                                                                       |
[94](https://www.example.com#s8B699BE2F332594199715C611974641D) |
| **PART IV**  | **PART IV**                                                                                | **PART IV**                                                         |
| Item 15\.    | [Exhibits and Financial Statement Schedules](https://www.example.com#s4586CE06FE875C00BA7101FB8D49E687)                                                                   |
[95](https://www.example.com#s4586CE06FE875C00BA7101FB8D49E687) |
| Item 16\.    | [Form 10\-K Summary](https://www.example.com#sAC99318DC3FD5BB3AFBF200330B83B3D)                                                                                |
[95](https://www.example.com#sAC99318DC3FD5BB3AFBF200330B83B3D) |


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

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

Specifically, American is required to meet certain collateral coverage tests on an annual basis for its Credit Facilities, as described below:

|                                                         |                                                                                |                                                                                |                                                                       |                                                                                |
| ------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|                                                         | **2013 Credit Facilities**                                                                                | **2014 Credit Facilities**                                                                                | **April 2016 Credit**

**Facilities**                           | **December 2016**

**Credit Facilities**                                                                                |
| Frequency of Appraisals of

 Appraised Collateral | Annual                                                                                | Annual                                                                                | Annual                                                                | Annual                                                                                |
| LTV Requirement                                         | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV)                                                                                | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV)                                                                                | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV) | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV)                                                                                |
| LTV as of Last Measurement

 Date                 | 36\.2%                                                                                | 17\.7%                                                                                | 36\.2%                                                                | 53\.6%                                                                                |
| Collateral Description                                  | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate all services between the U\.S\. and South America | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U\.S\. and European Union (including London Heathrow) | Generally, certain spare parts                                        | Generally, certain Ronald Reagan Washington National Airport (DCA) slots, certain La Guardia Airport (LGA) slots, certain simulators and certain leasehold rights |

At  December 31, 2019 , American was in compliance with the applicable collateral coverage tests as of the most recent measurement dates\.

4\. Leases

American leases certain aircraft and engines, including aircraft under capacity purchase agreements\. As of  December 31, 2019 , American had   636  leased aircraft, with remaining terms ranging from less than   one year  to   12 years \.

At each airport where American conducts flight operations, American has agreements, generally with a governmental unit or authority, for the use of passenger, operations and baggage handling space as well as runways and taxiways\. These agreements, particularly in the U\.S\., often contain provisions for periodic adjustments to rates and charges applicable under such agreements\. These rates and charges also vary with American’s level of operations and the operations of the airport\. Because of the variable nature of these rates, these leases are not recorded on American’s balance sheet as a ROU asset or a lease liability\. Additionally, at American’s hub locations and in certain other cities it serves, American leases administrative offices, catering, cargo, training, maintenance and other facilities\.

The components of lease expense were as follows (in millions):

|                               |                             |                             |
| ----------------------------- | --------------------------- | --------------------------- |
|                               | **Year Ended December 31,** | **Year Ended December 31,** |
|                               | **2019**                    | **2018**                    |
| Operating lease cost          | $2,012                      | $1,889                      |
| Finance lease cost:           |                             |                             |
| Amortization of assets        | 79                          | 78                          |
| Interest on lease liabilities | 43                          | 48                          |
| Variable lease cost           | 2,542                       | 2,353                       |
| Total net lease cost          | $4,676                      | $4,368                      |

Included in the table above is   $236 million  and   $226 million  of operating lease cost under American’s capacity purchase agreement with Republic for the years ended  December 31, 2019  and  2018 , respectively\. American holds a   25%  equity interest in Republic Holdings, the parent company of Republic\.

135


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

KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints W\. Douglas Parker and Derek J\. Kerr and each or any of them, his or her true and lawful attorneys and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the Registrants’ Annual Report on Form 10\-K for the fiscal year ended December 31, 2017, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents, and each or any of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys and agents, and each of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof\.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of American Airlines Group Inc\. and in the capacities and on the dates noted:

|                         |                                                      |
| ----------------------- | ---------------------------------------------------- |
| Date: February 21, 2018 | /s/ W\. Douglas Parker                               |
|                         | W\. Douglas Parker                                   |
|                         | Chairman and Chief Executive Officer                 |
|                         | (Principal Executive Officer)                        |
| Date: February 21, 2018 | /s/ Derek J\. Kerr                                   |
|                         | Derek J\. Kerr                                       |
|                         | Executive Vice President and Chief Financial Officer |
|                         | (Principal Financial and Accounting Officer)         |
| Date: February 21, 2018 | /s/ James F\. Albaugh                                |
|                         | James F\. Albaugh, Director                          |
| Date: February 21, 2018 | /s/ Jeffrey D\. Benjamin                             |
|                         | Jeffrey D\. Benjamin, Director                       |
| Date: February 21, 2018 | /s/ John T\. Cahill                                  |
|                         | John T\. Cahill, Director                            |
| Date: February 21, 2018 | /s/ Michael J\. Embler                               |
|                         | Michael J\. Embler, Director                         |
| Date: February 21, 2018 | /s/ Matthew J\. Hart                                 |
|                         | Matthew J\. Hart, Director                           |
| Date: February 21, 2018 | /s/ Alberto Ibargüen                                 |
|                         | Alberto Ibargüen, Director                           |
| Date: February 21, 2018 | /s/ Richard C\. Kraemer                              |
|                         | Richard C\. Kraemer, Director                        |

199


Annual Report of Southwest Airlines Co\. for year 2019

Pursuant to the terms of the term loan agreement, the Company entered into an interest rate swap agreement to convert the variable rate on the term loan to a fixed   5\.223 percent  until maturity\.

On  October 3, 2007 , grantor trusts established by the Company issued   $500 million  Pass Through Certificates consisting of   $412 million   6\.15 percent  Series A certificates and   $88 million   6\.65 percent  Series B certificates\. A separate trust was established for each class of certificates\. The trusts used the proceeds from the sale of certificates to acquire equipment notes in the same amounts, which were issued by the Company on a full recourse basis\. Payments on the equipment notes held in each trust are passed through to the holders of certificates of such trust\. The equipment notes were issued for each of   16  Boeing 737\-700 aircraft owned by the Company and are secured by a mortgage on each aircraft\. Beginning  February 1, 2008,  principal and interest payments on the equipment notes held for both series of certificates became due semi\-annually until the balance of the certificates mature on  August 1, 2022 \. Prior to their issuance, the Company also entered into swap agreements to hedge the variability in interest rates on the Pass Through Certificates\. The swap agreements were accounted for as cash flow hedges, and resulted in a payment by the Company of   $20 million  upon issuance of the Pass Through Certificates\. The effective portion of the hedge is being amortized to interest expense concurrent with the amortization of the debt and is reflected in the above table as a reduction in the debt balance\. The ineffectiveness of the hedge transaction was immaterial\.

On  February 28, 1997 , the Company issued   $100 million  of senior unsecured   7\.375 percent  debentures due  March 1, 2027 \. Interest is payable semi\-annually on  March 1 and September 1 \. The debentures may be redeemed, at the option of the Company, in whole at any time or in part from time to time, at a redemption price equal to the greater of the principal amount of the debentures plus accrued interest at the date of redemption or the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the date of redemption at the comparable  treasury rate plus   20  basis points, plus accrued interest at the date of redemption\.

The Company is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business\. Although the letters of credit are an off\-balance sheet item, the majority of the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet\. Outstanding letters of credit totaled   $148 million  at  December 31, 2019 \.

The Company has access to a   $1\.0 billion  unsecured revolving credit facility expiring in  August 2022 \. The revolving credit agreement has an accordion feature that would allow the Company, subject to, among other things, the procurement of incremental commitments, to increase the size of the facility to   $1\.5 billion \. Interest on the facility is based on the Company's credit ratings at the time of borrowing\. At the Company's current ratings, the interest cost would be LIBOR plus a spread of   100\.0  basis points\. The facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre\-tax income to fixed obligations, as defined\. As of  December 31, 2019 , the Company was in compliance with this covenant and there were   no  amounts outstanding under the revolving credit facility\.

The net book value of the assets pledged as collateral for the Company’s secured borrowings, primarily aircraft, was   $990 million  at  December 31, 2019 \. In addition, the Company has pledged a total of up to   12  of its Boeing 737\-700 and   37  of its Boeing 737\-800 aircraft at a net book value of   $1\.2 billion , in the case that it has obligations related to its fuel derivative instruments with counterparties that exceed certain thresholds\. See  Note 10  for further information on these collateral arrangements\.

As of  December 31, 2019 , aggregate annual principal maturities of debt and finance leases (not including amounts associated with interest rate swap agreements, interest on finance leases, and amortization of purchase accounting adjustments) for the five\-year period ending December 31, 2024, and thereafter, were   $819 million  in 2020,   $170 million  in 2021,   $475 million  in 2022,   $103 million  in 2023,   $103 million  in 2024, and   $990 million  thereafter\.

7 \. LEASES

The Company enters into leases for aircraft, property, and other types of equipment in the normal course of business\. The accounting for these leases follows the requirements of the New Lease Standard, which the Company adopted as of January 1, 2019\. See Note  2  for further information\.

86


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

*Ensure Long\-Term Financial Strength*

We are focused on capturing efficiencies created by our merger, delivering on our earnings potential and creating value for our stockholders\. During 2017, we:

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Returned $1\.7 billion to our stockholders ,  including quarterly dividend payments of $198 million and the repurchase of $1\.6 billion of common stock, or 33\.9 million shares\. Since our capital return program commenced in mid\-2014, we have returned $11\.4 billion to stockholders, including $835 million in quarterly dividend payments and $10\.6 billion in share repurchases, or 262\.3 million shares\. In January 2018, we announced that our Board of Directors declared a $0\.10 per share dividend for stockholders of record on February 6, 2018, and payable on February 20, 2018\. |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------- |
| • | Completed several transactions that provided efficient financing\. See discussion within “Liquidity” below for more information\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------- |
| • | Announced revenue and cost initiatives to improve the customer experience, drive revenue improvements and deliver cost efficiencies\. |

*Think Forward, Lead Forward*

We are committed to re\-establishing ourselves as an industry leader by creating an action\-oriented culture that moves quickly to bring products to market, embraces technological change and quickly seizes upon new opportunities for our network and our product\. During 2017, we:

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------- |
| • | Acquired 2\.7% of the outstanding shares of China Southern Airlines, the largest airline in China \. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------- |
| • | Executed a new Trans\-Atlantic joint business agreement that extends the term of our prior Trans\-Atlantic joint business agreement \. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Announced a commitment for more than $1\.6 billion for improvements of LAX Terminals 4 and 5, setting the stage for us to receive additional gate space and strengthen our Pacific gateway\. |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------- |
| • | Built a five\-gate expansion at ORD Terminal 3, which is expected to open in April 2018\. |

**2017 Financial Overview**

*The U\.S\. Airline Industry*

The industry remained profitable in 2017\. Despite an improving economy and strong demand environment, year\-over\-year revenue results by carrier were varied\. This was in part due to competitive pricing actions and the effects of competitive capacity growth in certain markets, as well as the three major hurricanes that negatively impacted commercial flights in Texas, Florida, the Caribbean islands and Puerto Rico\. With respect to fuel costs, the price of Brent crude oil per barrel, which jet fuel prices tend to follow, was on average approximately 23%higher in 2017 as compared to 2016\. The average daily spot price for Brent crude oil during 2017 was $54 per barrel as compared to an average daily spot price of $44 per barrel during 2016\. On a daily basis, Brent crude oil prices fluctuated during 2017 between a high of $67 per barrel to a low of $44 per barrel, and closed the year on December 31, 2017 at $67 per barrel\. Brent crude oil prices were higher in 2017 due principally to reductions of global inventories driven by strong demand and continued production restraint\. Jet fuel prices during 2017 were also impacted by hurricane disruptions and increased refinery costs\.

See Part I, Item 1A\. Risk Factors – *“Downturns in economic conditions could adversely affect our business,”**“Our business is very dependent on the price and availability of aircraft fuel\. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity”* and *“Our business has been and will continue to be affected by many changing economic and other conditions beyond our control, including global events that affect travel behavior, and our results of operations could be volatile and fluctuate due to seasonality\.”*

46


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

PART IV

ITEM 15\. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Consolidated Financial Statements

The following consolidated financial statements of American Airlines Group Inc\. and Independent Auditors’ Report are filed as part of this report:

|                                                                                |                                                                                |
| ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |
|                                                                                | **Page**                                                                                |
| [Report of Independent Registered Public Accounting Firm](https://americanairlines.gcs-web.com/email-alerts#sFBAF70E840725CAA8BB53D94506D1677)                                                        |
[70](https://americanairlines.gcs-web.com/email-alerts#sFBAF70E840725CAA8BB53D94506D1677) |
| [Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#sDC79B337356B5D478F1B445F8AFD3EE6)                     |
[72](https://americanairlines.gcs-web.com/email-alerts#sDC79B337356B5D478F1B445F8AFD3EE6) |
| [Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#s20F71A5FBFF55C218B7B832D173E656D)           |
[73](https://americanairlines.gcs-web.com/email-alerts#s20F71A5FBFF55C218B7B832D173E656D) |
| [Consolidated Balance Sheets at December 31, 2019 and 2018](https://americanairlines.gcs-web.com/email-alerts#s114AEF2992435285B352927F35BBB4E6)                                                      |
[74](https://americanairlines.gcs-web.com/email-alerts#s114AEF2992435285B352927F35BBB4E6) |
| [Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#sC108AFF930EA52F5B22FDF51C9DF4D73)                     |
[75](https://americanairlines.gcs-web.com/email-alerts#sC108AFF930EA52F5B22FDF51C9DF4D73) |
| [Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2019, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#s83D77C2381DA5561A975DCB156EFDBFC) |
[76](https://americanairlines.gcs-web.com/email-alerts#s83D77C2381DA5561A975DCB156EFDBFC) |
| [Notes to Consolidated Financial Statements](https://americanairlines.gcs-web.com/email-alerts#s41217F693E2559FBAD1A441297EE0E67)                                                                     |
[77](https://americanairlines.gcs-web.com/email-alerts#s41217F693E2559FBAD1A441297EE0E67) |

The following consolidated financial statements of American Airlines, Inc\. and Independent Auditors’ Report are filed as part of this report:

|                                                                                |                                                                                |
| ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- |
|                                                                                | **Page**                                                                                |
| [Report of Independent Registered Public Accounting Firm](https://americanairlines.gcs-web.com/email-alerts#sF654EA2EA5E05489A53C095E0EB97B61)                                              |
[115](https://americanairlines.gcs-web.com/email-alerts#sF654EA2EA5E05489A53C095E0EB97B61) |
| [Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#s7A65E6895EA25503A7FB7E14AA2D15F1)           |
[117](https://americanairlines.gcs-web.com/email-alerts#s7A65E6895EA25503A7FB7E14AA2D15F1) |
| [Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#sD606CCBC20CC59EC91842F5152DA3E1F) |
[118](https://americanairlines.gcs-web.com/email-alerts#sD606CCBC20CC59EC91842F5152DA3E1F) |
| [Consolidated Balance Sheets at December 31, 2019 and 2018](https://americanairlines.gcs-web.com/email-alerts#sB0CCBAB126A355179E615B580D36134E)                                            |
[119](https://americanairlines.gcs-web.com/email-alerts#sB0CCBAB126A355179E615B580D36134E) |
| [Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#s90C6E9677CF25645A4612D9EB5DC79E4)           |
[120](https://americanairlines.gcs-web.com/email-alerts#s90C6E9677CF25645A4612D9EB5DC79E4) |
| [Consolidated Statements of Stockholder’s Equity for the Years Ended December 31, 2019, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#sEA99E913CAA75BA88C9AF005A229EE75) |
[121](https://americanairlines.gcs-web.com/email-alerts#sEA99E913CAA75BA88C9AF005A229EE75) |
| [Notes to Consolidated Financial Statements](https://americanairlines.gcs-web.com/email-alerts#s945D66BC357E5A17B30C1A461148EE92)                                                           |
[122](https://americanairlines.gcs-web.com/email-alerts#s945D66BC357E5A17B30C1A461148EE92) |

Schedules not included have been omitted because they are not applicable or because the required information is included in the Consolidated Financial Statements or notes thereto\.

163


Annual Report of Southwest Airlines Co\. for year 2018

respectively\. Computer software depreciation expense was $155 million, $168 million, and $111 million for the years ended December 31, 2018, 2017, and 2016, 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 2018, 2017, or 2016\.

***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, Mechanics, Flight Simulator Technicians, and Material Specialists, are in discussions on labor agreements\. Those unionized Employee groups in discussions represent approximately 43 percent of the Company’s full\-time equivalent Employees as of December 31, 2018\.

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 counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels\. Collateral deposits provided to or held from counterparties serve to decrease, but not totally eliminate, the credit risk associated with the Company’s hedging program\. See Note 10 for further information\.

As of December 31, 2018, the Company operated an all\-Boeing fleet, all of which are variations of the Boeing 737\. If the Company were unable to acquire additional aircraft or associated aircraft parts from Boeing, or Boeing were unable or unwilling to make timely deliveries of aircraft or associated parts, or to provide adequate support for its products, the Company’s operations would be materially adversely impacted\. In addition, the Company would be materially adversely impacted in the event of a mechanical or regulatory issue associated with the Boeing 737 aircraft type, whether as a result of downtime for part or all of the Company’s fleet, increased maintenance costs, or because of a negative perception by the flying public\. The Company is also dependent on sole or limited suppliers for aircraft engines and certain other aircraft parts and services and would, therefore, also be materially adversely impacted in the event of the unavailability of, inadequate support for, or a mechanical or regulatory issue associated with, engines and other parts\.

77


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

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

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

*Indefinite\-Lived Intangible Assets*

Indefinite\-lived intangible assets include certain domestic airport slots at our hubs and international slots and route authorities\. Indefinite\-lived intangible assets are not amortized but instead are assessed for impairment annually on October 1^st^ or more frequently if events or circumstances indicate that the asset may be impaired\. For both periods as of December 31, 2018 and 2017, we had $1\.9 billion of indefinite\-lived intangible assets on our consolidated balance sheets\.

In the second quarter of 2018, we recorded a $26 million impairment charge on a Brazil route authority as a result of the U\.S\.\-Brazil open skies agreement, which is included within special items, net on our consolidated statement of operations\.

Indefinite\-lived intangible assets are assessed for impairment by initially performing a qualitative assessment to determine whether we believe it is more likely than not that an asset has been impaired\. If we believe impairment has occurred, we then evaluate for impairment by comparing the estimated fair value of assets to the carrying value\. An impairment charge is recognized if the asset’s estimated fair value is less than its carrying value\. Based upon our annual assessment, there were no additional indefinite\-lived intangible asset impairments in 2018 other than the Brazil route authority described above\.

***(k) Revenue Recognition***

*Revenue*

Effective January 1, 2018, we adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods\. Refer to “*Recent Accounting Pronouncements”* in Note 1(b) for the effects of the adoption on our consolidated statements of operations for the years ended December 31, 2017 and 2016 and on our consolidated balance sheet as of December 31, 2017\.Under the New Revenue Standard, revenue is recognized upon the transfer of control of promised products or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those products or services\.

The following are the significant categories comprising our reported operating revenues (in millions):

|                                       |          |          |          |
| ------------------------------------- | -------- | -------- | -------- |
|                                       | **2018** | **2017** | **2016** |
| Passenger revenue:                    |          |          |          |
| Passenger travel                      | $37,457  | $36,152  | $34,278  |
| Loyalty revenue \- travel  ^(1)^      | 3,219    | 2,979    | 2,767    |
| Total passenger revenue               | 40,676   | 39,131   | 37,045   |
| Cargo                                 | 1,013    | 890      | 785      |
| Other:                                |          |          |          |
| Loyalty revenue \- marketing services | 2,352    | 2,124    | 1,872    |
| Other revenue                         | 500      | 477      | 440      |
| Total other revenue                   | 2,852    | 2,601    | 2,312    |
| Total operating revenues              | $44,541  | $42,622  | $40,142  |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions earned through travel and mileage credits sold to co\-branded credit card and other partners\. See “ *Loyalty Revenue* ” below for further discussion on these mileage credits\. |

92


Annual Report of Southwest Airlines Co\. for year 2019

3 \. NET INCOME PER SHARE

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

|                                                        |                             |                             |                             |
| ------------------------------------------------------ | --------------------------- | --------------------------- | --------------------------- |
|                                                        | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** |
|                                                        | **2019**                    | **2018**                    | **2017**                    |
| **NUMERATOR:**                                         |                             |                             |                             |
| Net income                                             | $2,300                      | $2,465                      | $3,357                      |
| **DENOMINATOR:**                                       |                             |                             |                             |
| Weighted\-average shares outstanding, basic            | 538                         | 573                         | 601                         |
| Dilutive effect of restricted stock units              | 1                           | 1                           | 2                           |
| Adjusted weighted\-average shares outstanding, diluted | 539                         | 574                         | 603                         |
| **NET INCOME PER SHARE:**                              |                             |                             |                             |
| Basic                                                  | $4\.28                      | $4\.30                      | $5\.58                      |
| Diluted                                                | $4\.27                      | $4\.29                      | $5\.57                      |

78


Annual Report of Southwest Airlines Co\. for year 2019

|                                            |                                                                                |
| ------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|                                            | ***Southwest Rapid Rewards loyalty program spoilage***

                                                                                |
| *Description of the Matter*                | As explained in Notes 1 and 5 to the consolidated financial statements, the Company recognizes revenue associated with award flights taken by Southwest Rapid Rewards loyalty program members upon the redemption of loyalty points\. The Company estimates the portion of loyalty points that will not be redeemed (spoilage) in estimating the revenue to recognize each period\. The Company uses a predictive statistical model that considers the member’s past behavior, as well as several other factors related to the member’s account that management believes are expected to be indicative of the likelihood of future point redemption, to estimate the amount of spoilage\. These factors include, but are not limited to, tenure with the program, points accrued in the program, and points redeemed in the program\.

Auditing the Company’s estimate of spoilage for loyalty points requires significant judgment due to the complexity of the predictive statistical model and the subjectivity related to the assumptions that are used by management to estimate the likelihood of a member’s future point redemption\. Additionally, due to the magnitude of the Company’s liability for loyalty benefits, changes in customer behavior and/or expected future redemption patterns could result in significant variations in the amount of passenger revenue recognized\.

 |
| *How We Addressed the Matter in Our Audit* | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s determination of the spoilage estimate, including the statistical model, significant underlying assumptions selected by management and the data inputs used in the statistical model\.

To test the Company’s use of the predictive statistical model, among other procedures, we involved our internal specialists to assist in our evaluation of the Company’s methodology and the predictive factors described above\. Our internal specialists also performed corroborative calculations of the resulting estimated spoilage rates\. Additionally, we tested the completeness and accuracy of the data used in the predictive statistical model\.

                                                                                |
|                                            | ***Valuation of financial derivative instruments***

                                                                                |
| *Description of the Matter*                | As explained in Notes 1, 10, and 11 to the financial statements, the Company’s fuel derivative instruments consist of over\-the\-counter contracts, which are not traded on a public exchange and require the Company to estimate their fair values\. The fair value of fuel derivative option contracts are determined using option pricing models with inputs about commodity prices, strike prices, risk\-free interest rates, term to expiration, and volatility\. Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3 fair value measures\. The Company analyzes volatility information for reasonableness and compares it to similar information received from external sources\. The fair value of the option contracts considers both the intrinsic value and any remaining time value associated with the derivatives that have not settled\. Auditing the fair value measurement of fuel option contracts is complex and requires significant judgment in order to evaluate the application of the option pricing model and evaluating the unobservable input of implied volatility used in the fair value measurement of the Company’s fuel option contracts\.

                                                                                |
| *How We Addressed the Matter in Our Audit* | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to calculate the fair value of fuel option derivative contracts, including controls that related to the volatility input\.

Among other procedures, we involved internal valuation specialists to assist in the testing of the significant inputs in the option pricing model by comparing the market data inputs, including volatility, to external sources\. With the support of our specialists, we also tested the application of and the computational accuracy of the option pricing model by performing independent corroborative calculations\. Additionally, we compared the Company’s fuel option contract valuations to the counterparty valuations, which were independently obtained as part of our audit procedures\.

                                                                                |

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1971\.

Dallas, Texas

February 3, 2020

111