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

The table below presents the reconciliation of total operating expenses (GAAP measure) to total operating costs excluding special items and fuel (non\-GAAP measure)\. Management uses total operating costs excluding special items and fuel to evaluate our current operating performance and for period\-to\-period comparisons\. The price of fuel, over which we have no control, impacts the comparability of period\-to\-period financial performance\. The adjustment to exclude aircraft fuel and special items allows management an additional tool to understand and analyze our non\-fuel costs and core operating performance\.

The major components of our total CASM and our total CASM excluding special items and fuel for the years ended December 31, 2018 and 2017 are as follows (amounts may not recalculate due to rounding):

|                                              |                                           |                                           |                                                       |
| -------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----------------------------------------------------- |
|                                              | **Year Ended December 31,**               | **Year Ended December 31,**               | **Percent**

**Increase**

**(Decrease)** |
|                                              | **2018**                                  | **2017**                                  | **Percent**

**Increase**

**(Decrease)** |
|                                              | **(In cents, except percentage changes)** | **(In cents, except percentage changes)** | **(In cents, except percentage changes)**             |
| Total CASM:                                  |                                           |                                           |                                                       |
| Aircraft fuel and related taxes              | 2\.86                                     | 2\.22                                     | 28\.8                                                 |
| Salaries, wages and benefits                 | 4\.34                                     | 4\.32                                     | 0\.5                                                  |
| Maintenance, materials and repairs           | 0\.73                                     | 0\.71                                     | 2\.6                                                  |
| Other rent and landing fees                  | 0\.67                                     | 0\.65                                     | 3\.1                                                  |
| Aircraft rent                                | 0\.45                                     | 0\.43                                     | 3\.5                                                  |
| Selling expenses                             | 0\.54                                     | 0\.53                                     | 0\.9                                                  |
| Depreciation and amortization                | 0\.65                                     | 0\.62                                     | 5\.9                                                  |
| Special items, net                           | 0\.28                                     | 0\.26                                     | 8\.3                                                  |
| Other                                        | 1\.80                                     | 1\.78                                     | 1\.6                                                  |
| Regional expenses:                           |                                           |                                           |                                                       |
| Aircraft fuel and related taxes              | 0\.65                                     | 0\.50                                     | 30\.7                                                 |
| Other                                        | 1\.88                                     | 1\.87                                     | 0\.4                                                  |
| Total CASM                                   | 14\.85                                    | 13\.88                                    | 6\.9                                                  |
| Special items, net:                          |
                                    |
                                    |
                                                |
| Special items, net                           | (0\.28)                                   | (0\.26)                                   | 8\.3                                                  |
| Regional operating special items, net        | —                                         | (0\.01)                                   | nm  ^(1)^                                             |
| Aircraft fuel and related taxes              |
                                    |
                                    |
                                                |
| Aircraft fuel and related taxes \- mainline  | (2\.86)                                   | (2\.22)                                   | 28\.8                                                 |
| Aircraft fuel and related taxes \- regional  | (0\.65)                                   | (0\.50)                                   | 30\.7                                                 |
| Total CASM, excluding special items and fuel | 11\.06                                    | 10\.90                                    | 1\.4                                                  |

^(1)^ Not meaningful\.

Significant changes in the components of total CASM are as follows:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Aircraft fuel and related taxes per ASM  increase d  28\.8%  primarily due to a  29\.1 %  increase  in the average price per gallon of fuel to  $2\.21  in  2018  from  $1\.71  in  2017 , as well as a  1\.8 % increase in gallons of fuel consumed\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Depreciation and amortization per ASM  increase d  5\.9%  due in part to our fleet renewal program, as we took delivery of eight owned mainline aircraft in  2018 \. The continued rollout of Premium Economy and harmonization of seating configurations across our fleet as well as information technology and software development projects associated with our merger integration also drove higher depreciation and amortization expense\.  |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Regional aircraft fuel and related taxes per ASM  increase d  30\.7%  primarily due to a  28\.3 %  increase  in the average price per gallon of fuel to  $2\.30  in  2018  from  $1\.79  in  2017  as well as a  4\.0 %  increase  in gallons of fuel consumed\. |

53


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

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

and enjoy other mutual benefits, achieving many of the benefits of consolidation\. Open Skies agreements, including the longstanding agreements between the United States and each of the EU, Canada, Japan, Korea, New Zealand, Australia, Colombia and Panama, as well as the more recent agreements between the United States and each of Mexico and Brazil, may also give rise to better integration opportunities among international carriers\. Movement of airlines between current global airline alliances could reduce joint network coverage for members of such alliances while also creating opportunities for JBAs and bilateral alliances that did not exist before such realignment\. Further airline and airline alliance consolidations or reorganizations could occur in the future\. The Company routinely engages in analyses and discussions regarding its own strategic position, including current and potential alliances, asset acquisitions and divestitures and may have future discussions with other airlines regarding strategic activities\. If other airlines participate in such activities, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of the Company and potentially impairing the Company's ability to realize expected benefits from its own strategic relationships\.

Orders for new aircraft typically must be placed years in advance of scheduled deliveries, and changes in the Company's network strategy over time or other factors outside of the Company's control may make aircraft on order less economic for the Company, result in costs related to modification or termination of aircraft orders or cause the Company to enter into orders for new aircraft on less favorable terms\.

The Company's orders for new aircraft are typically made years in advance of actual delivery of such aircraft, and the financial commitment required for purchases of new aircraft is substantial\. At  December 31, 2019 , the Company had firm commitments to purchase  304  new aircraft from The Boeing Company ("Boeing"), Airbus S\.A\.S ("Airbus") and Embraer S\.A\. ("Embraer"), as well as related agreements with engine manufacturers, maintenance providers and others\. As of  December 31, 2019 , the Company's commitments relating to the acquisition of aircraft and related spare engines, aircraft improvements and other related obligations aggregated to a total of  $26\.7 billion \.

Subsequent to the Company placing an order for new aircraft, the Company's network strategy may change\. As a result, the Company's preference for a particular aircraft that it has ordered, often years in advance, may be decreased or eliminated\. If the Company were to modify or terminate any of its existing aircraft order commitments, it may be responsible for material liabilities to its counterparties arising from any such modification\. Additionally, the Company may have a need for additional aircraft that are not available under its existing orders\. In such cases, the Company may seek to acquire aircraft from other sources, such as through lease arrangements, which may result in higher costs or less favorable terms, or through the purchase or lease of used aircraft\. The Company may not be able to acquire such aircraft when needed on favorable terms or at all\.

The imposition of new tariffs, or any increase in existing tariffs, on the importation of commercial aircraft that the Company orders may result in higher costs\. For example, in October 2019, the United States imposed tariffs on certain imports from the EU, including a customs duty at an ad valorem rate of 10% on new commercial aircraft, which rate, in February 2020, was increased to 15%\. These tariffs apply to certain new Airbus aircraft that we have on order\. While the scope and rate of these tariffs are subject to change, if and to the extent these tariffs are imposed on us, they could increase the effective cost of, among other things, new Airbus aircraft\.

A majority of the Company's aircraft and certain parts are sourced from single suppliers; therefore, the Company would be materially and adversely affected if it were unable to obtain timely deliveries, additional equipment or support from any of these suppliers\.

The Company currently sources the majority of its aircraft and many related aircraft parts from Boeing\. In addition, our aircraft suppliers are dependent on other suppliers for certain other aircraft parts\. Therefore, if the Company is unable to acquire additional aircraft from Boeing, or if Boeing fails to make timely deliveries of aircraft or to provide adequate support for its products, the Company's operations could be materially and adversely affected\. The Company is also dependent on a limited number of suppliers for aircraft engines and certain other aircraft parts and could, therefore, also be materially and adversely affected in the event of the unavailability of these engines and other parts\.

Union disputes, employee strikes or slowdowns, and other labor\-related disruptions could adversely affect the Company's operations and could result in increased costs that impair its financial performance\.

United is a highly unionized company\. As of  December 31, 2019 , the Company and its subsidiaries had approximately  96,000  active employees, of whom approximately  84%  were represented by various U\.S\. labor organizations\. See Part I, Item 1\. Business—Employees, of this report for additional information on our represented employee groups and collective bargaining agreements\.

There is a risk that unions or individual employees might pursue judicial or arbitral claims arising out of changes implemented as a result of the Company entering into collective bargaining agreements with its represented employee groups\. There is also a possibility that employees or unions could engage in job actions such as slowdowns, work\-to\-rule campaigns, sick\-outs or other

17


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

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------- |
| ^(4)^ | Severance expenses primarily included costs associated with reductions of management and support staff team members\. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(5)^ | Settlement of a private party antitrust lawsuit\. See Part I, Item 3\. Legal Proceedings \- “ *Private Party Antitrust Action Related to Passenger Capacity”*  for further discussion\.  |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(6)^ | Intangible asset impairment includes a non\-cash charge to write\-off our Brazil route authority as a result of the U\.S\.\-Brazil open skies agreement\. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------- |
| ^(7)^ | Bankruptcy obligations that will be settled in shares of our common stock are marked\-to\-market based on our stock price\.  |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(8)^ | Employee bonus expense included costs related to the  $1,000  cash bonus and associated payroll taxes granted to mainline employees as of December 31, 2017 in recognition of H\.R\. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act)\. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(9)^ | Mark\-to\-market adjustments on equity investments relate to net unrealized losses primarily associated with our equity investments in China Southern Airlines and Mesa Air Group, Inc\. |

|        |                                                                                |
| ------ | ------------------------------------------------------------------------------------------------------------------ |
| ^(10)^ | Income tax special items for 2018 included an  $18 million  charge related to an international income tax matter\. |

|        |                                                                                |
| ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(11)^ | Impact of the 2017 Tax Act includes an  $823 million  non\-cash charge to income tax expense to reflect the impact of lower corporate income tax rates on our deferred tax asset and liabilities resulting from the 2017 Tax Act, which reduced the federal corporate income tax rate from 35% to 21%\. |

45


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

The impact of a 0\.50% change in these assumptions is shown in the table below:

|                                                                 |                                                |                                                |                                                                                |                                                                                |
| --------------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- |
| **Change in Assumption**                                        |  **Effect on 2019**

**Pension Expense** |  **Effect on 2019**

**Pension Expense** | **Effect on Accrued**

**Pension Liability at**

**December 31, 2018** | **Effect on Accrued**

**Pension Liability at**

**December 31, 2018** |
| 0\.50% decrease in weighted average discount rate               | $(5                                            | ) million                                      | $1\.2                                                                              |  billion                                                                           |
| 0\.50% increase in weighted average discount rate               | $3                                             |  million                                       | $(1\.1                                                                             | ) billion                                                                          |
| 0\.50% decrease in expected long\-term rate of return on assets | $65                                            |  million                                       | $—                                                                                |
                                                                             |
| 0\.50% increase in expected long\-term rate of return on assets | $(65                                           | ) million                                      | $—                                                                                |
                                                                             |

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

Funding\.  Our funding obligations for qualified defined benefit plans are governed by the Employee Retirement Income Security Act\.  The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules ("Alternative Funding Rules") for defined benefit plans that are frozen\. We elected the Alternative Funding Rules under which the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17\-year period and is calculated using an  8\.85%  discount rate\.

While the Pension Protection Act makes our funding obligations for these plans more predictable, factors outside our control continue to have an impact on the funding requirements\. Estimates of future funding requirements are based on various assumptions and can vary materially from actual funding requirements\. Assumptions include, among other things, the actual and projected market performance of assets, statutory requirements and demographic data for participants\. For additional information, see  Note 10  of the Notes to the Consolidated Financial Statements\.

Investments Valued at Net Asset Value ("NAV") Per Share\.  On an annual basis we assess the potential for adjustments to the fair value of all investments\.  Certain of our investments valued using NAV as a practical expedient have a lag in the availability of data\. This primarily applies to private equity, private equity\-related strategies and real assets\. We solicit valuation updates from the investment fund managers and use their information and corroborating data from public markets to determine any needed fair value adjustments\.

Recent Accounting Standards

Standards Effective in Future Years

Comprehensive Income \. In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No\. 2018\-02, "Income Statement—Reporting Comprehensive Income (Topic 220)\." This standard provides an option to reclassify stranded tax effects within  accumulated other comprehensive income/(loss) ("AOCI")  to retained earnings due to the U\.S\. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017\. The adoption of the standard may impact tax amounts stranded in AOCI related to our pension plans\. This standard is effective for interim and annual reporting periods beginning after December 15, 2018\.

Recently Adopted Standards

Leases\.  In 2016, the FASB issued ASU No\. 2016\-02, "Leases (Topic 842)\." This ASU and subsequently issued amendments require leases with durations greater than 12 months to be recognized on the balance sheet\.  The standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted\.

 46


Annual Report of Southwest Airlines Co\. for year 2018

**PART I**

|               |                 |
| ------------- | --------------- |
|  **Item 1\.** | ***Business***  |

**Company Overview**

Southwest Airlines Co\. (the "Company" or "Southwest") operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near\-international markets\. Southwest commenced service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities: Dallas, Houston, and San Antonio\. At December 31, 2018, Southwest operated a total of 750 Boeing 737 aircraft and served 99 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and ten near\-international countries: Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos\.

The Company is continuing its efforts towards its planned inaugural service to Hawaii in 2019, subject to requisite governmental approvals, including approval from the Federal Aviation Administration (the "FAA") for Extended Operations ("ETOPS"), a regulatory requirement to operate between the U\.S\. mainland and the Hawaiian Islands\. The Company has announced its intent to serve Honolulu International Airport, Lihue Airport, Kona International Airport at Keahole, and Kahului Airport from four initial California cities: Oakland, San Diego, San Jose, and Sacramento\. In June 2018, the Company ceased service at Bishop International Airport in Flint, Michigan\. The Company has further announced its decision to cease service at Benito Juárez Mexico City International Airport, with the last day of service scheduled on March 30, 2019\.

Based on the most recent data available from the U\.S\. Department of Transportation (the "DOT"), as of June 30, 2018, Southwest was the largest domestic air carrier in the United States, as measured by the number of domestic originating passengers boarded\.

**Industry**

The airline industry has historically been an extremely volatile industry subject to numerous challenges\. Among other things, it has been cyclical, energy intensive, labor intensive, capital intensive, technology intensive, highly regulated, heavily taxed, and extremely competitive\. The airline industry has also been particularly susceptible to detrimental events such as economic recessions, acts of terrorism, poor weather, and natural disasters\.

The U\.S\. airline industry continued to benefit from modest economic growth during 2018, despite a very competitive domestic fare environment\. The airline industry also experienced a less stable fuel environment in 2018, as compared with recent years, with year\-over\-year fuel prices significantly higher throughout most of 2018, before easing in fourth quarter 2018\. In recent years, the U\.S\. airline industry, including Southwest, has increased available seat miles (also referred to as "capacity," an available seat mile is one seat, empty or full, flown one mile and is a measure of space available to carry passengers in a given period), and has also increased the number of seats per trip through slimline seat retrofits and the use of new and larger aircraft\. Despite recent fuel price volatility, strategic capacity increases are expected to continue in 2019\.

In 2018, the airline industry continued to be impacted by the significant growth of "Ultra\-Low Cost Carriers" ("ULCCs")\. ULCCs provide "unbundled" service offerings, which enable them to appeal to price\-sensitive travelers through promotion to consumers of an extremely low relative base fare for a seat, while separately charging for related services and products\. In response, certain major U\.S\. airlines have introduced and have continued to expand new cabin segmentation fare products, such as a "basic economy" product\. The basic economy product provides for a lowerbase fare to compete with a ULCC base fare, but may include significant additional restrictions on amenities such as seat assignments (including restrictions on group and family seating), order of boarding, checked baggage and use of overhead bin space, flight changes and refunds, and eligibility for upgrades\. Also in response to competitive ULCC pricing, some carriers removed their fare floors for certain routes, leading to a lower fare offering across the industry\. Further, to better derive revenue from customers, some carriers offer a "premium economy" fare that targets consumers willing to pay extra for additional amenities such as more favorable seating options in segmented aircraft\.

**Company Operations**

3


Annual Report of Southwest Airlines Co\. for year 2017

**Equity Compensation Plan Information**

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

**to be Issued Upon**

**Exercise of**

**Outstanding**

**Options,**

**Warrants, and**

**Rights**

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

**Exercise Price of**

**Outstanding Options,**

**Warrants, and**

**Rights**

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

**Future Issuance Under**

**Equity Compensation**

**Plans (Excluding**

**Securities Reflected**

**in Column (a))**

**(c)** |     |
| Equity Compensation Plans Approved by Security Holders     | 1,406,539                                                                                | (1) | $9\.43                                                                                | (2) | 30,454,580                                                                                | (3) |
| Equity Compensation Plans not Approved by Security Holders | 2,100                                                                                |     | $9\.43                                                                                |     | —                                                                                |     |
| Total                                                      | 1,408,639                                                                                |     | $9\.43                                                                                | (2) | 30,454,580                                                                                |     |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (1) | Includes  112,285  shares of common stock issuable upon exercise of outstanding stock options and  1,294,254  restricted share units settleable in shares of the Company’s common stock\. |

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

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (3)  | Of these shares, (i)  8,830,202  shares remained available for issuance under the Company’s tax\-qualified employee stock purchase plan; and (ii)  21,624,378  shares remained available for issuance under the Company’s 2007 Equity Incentive Plan in connection with the exercise of stock options and stock appreciation rights, the settlement of awards of restricted stock, restricted stock units, and phantom shares, and the grant of unrestricted shares of common stock; however, no more than  1,211,599  shares remain available for grant in connection with awards of unrestricted shares of common stock, stock\-settled phantom shares, and awards to non\-Employee members of the Board\. These shares are in addition to the shares reserved for issuance pursuant to outstanding awards included in column (a)\. |

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

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

The information required by this Item 13 will be set forth under the heading “Certain Relationships and Related Transactions, and Director Independence” in the Proxy Statement for the Company’s 2018 Annual Meeting of Shareholders and is incorporated herein by reference\.

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

The information required by this Item 14 will be set forth under the heading “Relationship with Independent Auditors” in the Proxy Statement for the Company’s 2018 Annual Meeting of Shareholders and is incorporated herein by reference\.

116


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

*Defend and grow our customer base*

Competition in our markets is fierce and we know we must defend our customer base as we grow our network presence, by providing our guests with an increased choice of schedule times and fares, and allowing us to effectively compete for new guests\. We will continue to introduce guests to our award\-winning service, Mileage Plan™ program, and Visa signature credit card as we grow our network\. We work hard to ensure our guests have a great experience on our airlines and provide an exceptional product at a low fare\.

*Win with low costs and low fares*

We believe that our low\-fare model gives us a competitive advantage by providing value to, and building trust with our guests\. We also know that, in order to provide low fares in our growing network, while returning value to our shareholders, it is imperative for us to maintain a competitive cost structure\. In 2017, our unit costs, excluding fuel and special items, remained flat year over year on a consolidated basis\. We understand the importance of low costs to the business model and the success of the company and we have a long track record of reducing unit costs\. Although our unit costs are expected to rise in 2018 primarily due to pilot wages and maintenance costs, we continue to focus on productivity, cost management, low overhead and leveraging capacity growth\. We also manage increasing fuel costs by flying larger, more fuel\-efficient aircraft, which have increased our fuel efficiency as measured by available seat miles flown per gallon by 3\.5% over the last five years\. As we continue to integrate Virgin America into our operations, we are committed to achieving our stated cost and revenue synergy goals\. It is critical that we achieve these goals in order to continue our cost reduction efforts\.

During fiscal 2017, we added 44 new markets to the combined network\. For 2018, we plan to grow our system\-wide capacity approximately 7\.5% as compared to 2017\. Approximately 70% of growth in 2018 is attributable to existing routes and locations, with the rest attributable to our plans to fly 13 daily departures from Paine Field\-Snohomish County Airport in Everett, Washington to eight West Coast markets starting in fall 2018\.

**AIR GROUP**

Alaska Air Group is a Delaware corporation incorporated in 1985 and the holding company of Alaska, Virgin America, Horizon, McGee Air Services, a wholly\-owned subsidiary of Alaska, and other business units\. Alaska, Virgin America and Horizon operate as airlines however, the business plans, competition and economic risks differ substantially for Horizon in comparison to Alaska and Virgin America\. McGee Air Services operates as an aviation services provider, focused on providing ground and ramp handling services to airlines\. Alaska Airlines is an Alaska corporation that was organized in 1932 and incorporated in 1937\. Virgin America is a Delaware corporation that was incorporated in 2004 and acquired by Air Group on December 14, 2016\. Horizon is a Washington corporation that began service and was incorporated in 1981\. It was acquired by Air Group in 1986\. McGee Air Services is a Delaware corporation that was incorporated in 2016\. Alaska and Virgin America operate fleets of narrowbody passenger jets\. Together, the operations of Alaska and Virgin America are referred to as "mainline" operations\. Alaska also contracts with Horizon, SkyWest Airlines, Inc\. (SkyWest) and Peninsula Airways, Inc\. (PenAir) for regional capacity such that Alaska receives all passenger revenue from those flights\. Horizon began operating E175 regional jet aircraft in 2017 in addition to its fleet of turboprop aircraft and sells all of its capacity to Alaska pursuant to a capacity purchase agreement (CPA)\. The majority of our revenues are generated by transporting passengers\. The percentage of revenues by category is as follows:

|                            |          |                    |          |          |          |
| -------------------------- | -------- | ------------------ | -------- | -------- | -------- |
|                            | **2017** | **2016** **^(a)^** | **2015** | **2014** | **2013** |
| Mainline passenger revenue | 74%      | 69%                | 70%      | 70%      | 70%      |
| Regional passenger revenue | 12%      | 15%                | 15%      | 15%      | 16%      |
| Other revenue              | 13%      | 14%                | 13%      | 13%      | 12%      |
| Freight and Mail revenue   | 1%       | 2%                 | 2%       | 2%       | 2%       |
| Total                      | 100%     | 100%               | 100%     | 100%     | 100%     |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------- |
| (a) | Includes information for Virgin America for the period December 14, 2016 through December 31, 2016\. |

We attempt to deploy aircraft into the network in ways that best optimize our revenues and profitability and reduce our seasonality\.

 6


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

**SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (unaudited)**

|                                   |                   |                   |                    |                    |                   |                   |                    |                    |
| --------------------------------- | ----------------- | ----------------- | ------------------ | ------------------ | ----------------- | ----------------- | ------------------ | ------------------ |
|                                   | **First Quarter** | **First Quarter** | **Second Quarter** | **Second Quarter** | **Third Quarter** | **Third Quarter** | **Fourth Quarter** | **Fourth Quarter** |
| *(in millions, except per share)* | **2017**          | **2016**          | **2017**           | **2016**           | **2017**          | **2016**          | **2017**           | **2016**           |
| Operating revenues                | **$1,749**        | $1,347            | **$2,102**         | $1,494             | **$2,120**        | $1,566            | **$1,962**         | $1,524             |
| Operating income                  | **166**           | 290               | **493**            | 418                | **439**           | 400               | **162**            | 241                |
| Net income                        | **99**            | 184               | **296**            | 260                | **266**           | 256               | **373**            | 114                |
| Basic earnings per share ^(a)^    | **0\.80**         | 1\.47             | **2\.40**          | 2\.11              | **2\.15**         | 2\.08             | **3\.03**          | 0\.92              |
| Diluted earnings per share ^(a)^  | **0\.79**         | 1\.46             | **2\.38**          | 2\.10              | **2\.14**         | 2\.07             | **3\.02**          | 0\.92              |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------- |
| ^(a)^ | For earnings per share, the sum of the quarters may not equal the total for the full year due to rounding\. |

 60


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

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

Additionally, the Company did not satisfy the minimum taxable income requirement to benefit from the 50% GILTI deduction provided by the Tax Act\.

Temporary differences and carryforwards that give rise to deferred tax assets and liabilities at  December 31, 2019  and  2018  were as follows (in millions):

|                                                                   |                          |                          |                          |                          |
| ----------------------------------------------------------------- | ------------------------ | ------------------------ | ------------------------ | ------------------------ |
|                                                                   | **UAL**                  | **UAL**                  | **United**               | **United**               |
|                                                                   | **2019**                 | **2018**                 | **2019**                 | **2018**                 |
| Deferred income tax asset (liability):                            |                          |                          |                          |                          |
| Federal and state net operating loss ("NOL") carryforwards        | $695                     | $398                     | $668                     | $371                     |
| Deferred revenue                                                  | 1,287                    | 1,232                    | 1,287                    | 1,232                    |
| Employee benefits, including pension, postretirement and medical  | 715                      | 885                      | 715                      | 885                      |
| Operating lease liabilities                                       | 1,256                    | 1,338                    | 1,256                    | 1,338                    |
| Other                                                             | 165                      | 229                      | 165                      | 229                      |
| Less: Valuation allowance                                         | (58

)             | (59

)             | (58

)             | (59

)             |
| Total deferred tax assets                                         | $4,060                   | $4,023                   | $4,033                   | $3,996                   |
| Depreciation                                                      | $

(4,011

) | $

(2,929

) | $

(4,011

) | $

(2,929

) |
| Operating lease right\-of\-use asset                              | (1,061

)          | (1,173

)          | (1,061

)          | (1,173

)          |
| Intangibles                                                       | (724

)            | (749

)            | (724

)            | (749

)            |
| Total deferred tax liabilities                                    | $

(5,796

) | $

(4,851

) | $

(5,796

) | $

(4,851

) |
| Net deferred tax liability                                        | $

(1,736

) | $

(828

)   | $

(1,763

) | $

(855

)   |

United and its domestic consolidated subsidiaries file a consolidated federal income tax return with UAL\. Under an intercompany tax allocation policy, United and its subsidiaries compute, record and pay UAL for their own tax liability as if they were separate companies filing separate returns\. In determining their own tax liabilities, United and each of its subsidiaries take into account all tax credits or benefits generated and utilized as separate companies and they are each compensated for the aforementioned tax benefits only if they would be able to use those benefits on a separate company basis\.

The Company's federal and state NOL carryforwards relate to prior years' NOLs, which may be used to reduce tax liabilities in future years\. These tax benefits are mostly attributable to federal pre\-tax NOL carryforwards of   $3\.0 billion  for UAL\. If not utilized these federal pre\-tax NOLs will expire as follows (in billions):   $0\.7 billion  in 2030,   $0\.5 billion  in 2033, and   $0\.5 billion  in 2034\. The remaining   $1\.3 billion  of NOLs has no expiration date\. In addition, for UAL the majority of tax benefits of the state NOLs of   $100 million  expire over a  five  to  twenty  year period\. We have recorded a   $45 million  valuation allowance against these state NOLs\.

The Company's unrecognized tax benefits related to uncertain tax positions were   $53 million ,   $39 million  and   $21 million  at December 31,  2019 ,  2018  and  2017 , respectively\. Included in the ending balance at  December 31, 2019  is   $53 million  that would affect the Company's effective tax rate if recognized\. The changes in unrecognized tax benefits relating to settlements with taxing authorities, unrecognized tax benefits as a result of tax positions taken during a prior period and unrecognized tax benefits relating from a lapse of the statute of limitations were immaterial during  2019 ,  2018  and  2017 \. The Company does not expect significant increases or decreases in their unrecognized tax benefits within the next  12 months \. There are no material amounts included in the balance at  December 31, 2019  for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility\.

The Company's federal income tax returns for tax years after 2002 remain subject to examination by the Internal Revenue Service (the "IRS") and state taxing jurisdictions\. We are currently under audit by the IRS for the 2016 and 2017 tax years\.

67


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

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

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

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

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

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

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

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

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

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

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

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

The fair value of American’s retiree medical and other postretirement benefits plans assets at December 31, 2018 by asset category, were as follows (in millions):

|                          |                                                                                |                                                                              |                                                                                |                                                     |
| ------------------------ | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- |
|                          | **Fair Value Measurements as of December 31, 2018**                                                 | **Fair Value Measurements as of December 31, 2018**                          | **Fair Value Measurements as of December 31, 2018**                            | **Fair Value Measurements as of December 31, 2018** |
| **Asset Category**       | **Quoted Prices in**

**Active Markets for**

**Identical Assets**

**(Level 1)** | **Significant**

**Observable**

**Inputs**

**(Level 2)** | **Significant**

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Money market fund        | $4                                                                                | $—                                                                           | $—                                                                             | $4                                                  |
| Mutual funds – AAL Class | —                                                                                | 221                                                                          | —                                                                              | 221                                                 |
| Total                    | $4                                                                                | $221                                                                         | $—                                                                             | $225                                                |

164


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

*Operating Expenses*

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

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

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

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

**Increase**

**(Decrease)** |
|                                    | **2017**                                     | **2016**                                     | **Increase**

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

**Increase**

**(Decrease)** |
|                                    | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Aircraft fuel and related taxes    | $6,128                                       | $5,071                                       | $1,057                                       | 20\.8                                                 |
| Salaries, wages and benefits       | 11,942                                       | 10,958                                       | 984                                          | 9\.0                                                  |
| Maintenance, materials and repairs | 1,959                                        | 1,834                                        | 125                                          | 6\.8                                                  |
| Other rent and landing fees        | 1,806                                        | 1,772                                        | 34                                           | 1\.9                                                  |
| Aircraft rent                      | 1,197                                        | 1,203                                        | (6)                                          | (0\.4)                                                |
| Selling expenses                   | 1,477                                        | 1,323                                        | 154                                          | 11\.6                                                 |
| Depreciation and amortization      | 1,702                                        | 1,525                                        | 177                                          | 11\.6                                                 |
| Special items, net                 | 712                                          | 709                                          | 3                                            | 0\.5                                                  |
| Other                              | 4,910                                        | 4,641                                        | 269                                          | 5\.8                                                  |
| Regional expenses:                 |                                              |                                              |                                              |                                                       |
| Aircraft fuel and related taxes    | 1,382                                        | 1,109                                        | 273                                          | 24\.6                                                 |
| Other                              | 5,190                                        | 4,900                                        | 290                                          | 5\.9                                                  |
| Total operating expenses           | $38,405                                      | $35,045                                      | $3,360                                       | 9\.6                                                  |

Total operating expenses increased $3\.4 billion, or 9\.6%, in 2017 from 2016\. The increase in operating expenses was primarily driven by an increase in fuel costs and higher wage rates\.

Significant changes in the components of American’s total operating expenses are as follows:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Aircraft fuel and related taxes  increase d  20\.8 % primarily due to a  21\.4 %  increase  in the average price per gallon of fuel to  $1\.71  in  2017  from  $1\.41  in  2016 , offset in part by a  0\.5 %  decrease  in gallons of fuel consumed\. The  decrease  in fuel consumption was primarily driven by the operation of more fuel efficient aircraft during  2017  in connection with American’s fleet renewal program\. |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Salaries, wages and benefits  increase d  9\.0 % primarily due to mid\-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective in the third quarter of 2016\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Maintenance, materials and repairs  increase d  6\.8 % as compared to  2016  primarily due to a contract change that accelerated the timing of certain maintenance expenses incurred\. Certain flight equipment was transitioned to a new flight hour based contract (referred to as power by the hour) where expense is incurred and recognized based on actual hours flown\. Previously, this flight equipment was covered by a time and materials based contract where expense is incurred and recognized as maintenance is performed\. |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Selling expenses  increase d  11\.6 % primarily due to higher commissions driven by the overall increase in revenues as well as an increase in flown premium tickets, which are subject to higher commissions\. |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Depreciation and amortization  increase d  11\.6 % primarily due to American’s fleet renewal program, as American took delivery of 57 owned mainline aircraft in 2017\. |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Regional aircraft fuel and related taxes  increase d  24\.6 % primarily due to a  21\.2 %  increase  in the average price per gallon of fuel to  $1\.79  in  2017  from  $1\.48  in  2016  as well as a  2\.8 %  increase  in gallons of fuel consumed\.  |

63


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

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

|        |                                                                                |
| ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(10)^ | Impact of the 2017 Tax Act includes a   $924 million  non\-cash charge to income tax expense to reflect the impact of lower corporate income tax rates on the Company’s deferred tax asset and liabilities resulting from the 2017 Tax Act, which reduced the federal corporate income tax rate from 35% to 21%\. |

3\. Debt

Long\-term debt included on American’s consolidated balance sheets consisted of (in millions):

|                                                                                |                  |                  |
| ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ---------------- |
|                                                                                | **December 31,** | **December 31,** |
|                                                                                | **2019**         | **2018**         |
| *Secured*                                                                                |                  |                  |
| 2013 Credit Facilities, variable interest rate of 3\.54%, installments through 2025  ^(a)^                                                                    | $1,807           | $1,825           |
| 2014 Credit Facilities, variable interest rate of 3\.72%, installments through 2021  ^(a)^                                                                    | 1,202            | 1,215            |
| April 2016 Credit Facilities, variable interest rate of 3\.80%, installments through 2023  ^(a)^                                                              | 970              | 980              |
| December 2016 Credit Facilities, variable interest rate of 3\.74%, installments through 2023  ^(a)^                                                           | 1,213            | 1,225            |
| Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3\.00% to 8\.39%, averaging 4\.05%, maturing from 2020 to 2032  ^(b)^        | 11,933           | 11,648           |
| Equipment loans and other notes payable, fixed and variable interest rates ranging from 2\.99% to 7\.31%, averaging 3\.45%, maturing from 2020 to 2031  ^(c)^ | 4,727            | 5,060            |
| Special facility revenue bonds, fixed interest rates of 5\.00%, maturing from 2020 to 2031                                                                    | 725              | 769              |
| Total long\-term debt                                                                                | 22,577           | 22,722           |
| Less: Total unamortized debt discount, premium and issuance costs                                                                                | 205              | 219              |
| Less: Current maturities                                                                                | 2,246            | 2,466            |
| Long\-term debt, net of current maturities                                                                                | $20,126          | $20,037          |

The table below shows the maximum availability under revolving credit facilities, all of which were undrawn, as of  December 31, 2019  (in millions):

|                                      |        |
| ------------------------------------ | ------ |
| 2013 Revolving Facility              | $750   |
| 2014 Revolving Facility              | 1,643  |
| April 2016 Revolving Facility        | 450    |
| Other Short\-term Revolving Facility | 400    |
| Total                                | $3,243 |

Secured financings are collateralized by assets, primarily aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots and certain pre\-delivery payments\.

At  December 31, 2019 , the maturities of long\-term debt are as follows (in millions):

|                     |         |
| ------------------- | ------- |
| 2020                | $2,293  |
| 2021                | 3,508   |
| 2022                | 1,551   |
| 2023                | 4,072   |
| 2024                | 1,521   |
| 2025 and thereafter | 9,632   |
| Total               | $22,577 |

131


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

**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#s4A12AD5A7ED453199168B69D5EF41E40)                                              |
[80](https://americanairlines.gcs-web.com/email-alerts#s4A12AD5A7ED453199168B69D5EF41E40) |
| [Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016](https://americanairlines.gcs-web.com/email-alerts#sF1101FD277715FB8BEB52A7E6B1A2D6D)           |
[81](https://americanairlines.gcs-web.com/email-alerts#sF1101FD277715FB8BEB52A7E6B1A2D6D) |
| [Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016](https://americanairlines.gcs-web.com/email-alerts#sB653FA5C9E14592FA201ABF67E058CFA) |
[82](https://americanairlines.gcs-web.com/email-alerts#sB653FA5C9E14592FA201ABF67E058CFA) |
| [Consolidated Balance Sheets at December 31, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#s3CD2E9B8FED05DDEB9EA969B682B3726)                                            |
[83](https://americanairlines.gcs-web.com/email-alerts#s3CD2E9B8FED05DDEB9EA969B682B3726) |
| [Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016](https://americanairlines.gcs-web.com/email-alerts#s8F24FE00DB6E59E28D5B33E0947CB011)           |
[84](https://americanairlines.gcs-web.com/email-alerts#s8F24FE00DB6E59E28D5B33E0947CB011) |
| [Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016](https://americanairlines.gcs-web.com/email-alerts#sCAEDC359CB025B798F4DDAFD0F0668F6) |
[85](https://americanairlines.gcs-web.com/email-alerts#sCAEDC359CB025B798F4DDAFD0F0668F6) |
| [Notes to Consolidated Financial Statements](https://americanairlines.gcs-web.com/email-alerts#s3C56451EA1E9515DA14F40E67592802A)                                                           |
[86](https://americanairlines.gcs-web.com/email-alerts#s3C56451EA1E9515DA14F40E67592802A) |

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#s4829AFE0B57E5A4AA7B530E80D350BF7)                                              |
[129](https://americanairlines.gcs-web.com/email-alerts#s4829AFE0B57E5A4AA7B530E80D350BF7) |
| [Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016](https://americanairlines.gcs-web.com/email-alerts#sB7B00638CB47596CA0E91BA408E3DB9F)           |
[130](https://americanairlines.gcs-web.com/email-alerts#sB7B00638CB47596CA0E91BA408E3DB9F) |
| [Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016](https://americanairlines.gcs-web.com/email-alerts#s8422279F19C55C0797B0C66493078206) |
[131](https://americanairlines.gcs-web.com/email-alerts#s8422279F19C55C0797B0C66493078206) |
| [Consolidated Balance Sheets at December 31, 2018 and 2017](https://americanairlines.gcs-web.com/email-alerts#sFB81686247A45595993539551E71E8C3)                                            |
[132](https://americanairlines.gcs-web.com/email-alerts#sFB81686247A45595993539551E71E8C3) |
| [Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016](https://americanairlines.gcs-web.com/email-alerts#s0D96E83EC53A59BF88C695AFA7AF83E7)           |
[133](https://americanairlines.gcs-web.com/email-alerts#s0D96E83EC53A59BF88C695AFA7AF83E7) |
| [Consolidated Statements of Stockholder’s Equity for the Years Ended December 31, 2018, 2017 and 2016](https://americanairlines.gcs-web.com/email-alerts#sBC3ADD7F0C1555B59175103E61B26B07) |
[134](https://americanairlines.gcs-web.com/email-alerts#sBC3ADD7F0C1555B59175103E61B26B07) |
| [Notes to Consolidated Financial Statements](https://americanairlines.gcs-web.com/email-alerts#s673A519A70CB5C2CA6F1E67C6269ED0A)                                                           |
[135](https://americanairlines.gcs-web.com/email-alerts#s673A519A70CB5C2CA6F1E67C6269ED0A) |

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\.

179


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

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

**18\. Subsequent Event**

*Dividend Declaration*

In January 2019, we announced that our Board of Directors declared a $0\.10 per share cash dividend for stockholders of record on February 6, 2019, and payable on February 20, 2019\. Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors\. We are not obligated to continue a dividend for any fixed period, and the payment of dividends may be suspended or discontinued at any time at our discretion and without prior notice\.

128


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

In addition, to reduce the risk of a potential adverse effect on our ability to use our NOL Carryforwards and certain other tax attributes for federal income tax purposes, our Certificate of Incorporation contains certain restrictions on the acquisition and disposition of our common stock by substantial stockholders (generally holders of more than 4\.75%)\.

See Part I, Item 1A\. Risk Factors – *“AAG’s Certificate of Incorporation and Bylaws include provisions that limit voting and acquisition and disposition of our equity interests\.”* Also see AAG’s Certification of Incorporation and Bylaws, which are filed as Exhibits 3\.1, 3\.2 and 3\.3 hereto, for the full text of the foregoing restrictions\.

42


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

Designated Hedge Gains (Losses)

Gains (losses) related to our designated hedge contracts during the years ended December 31, 2019, 2018 and 2017 are as follows:

|                                           |                                           |                                           |                                                |                                                |                                                |  |  |  |      |      |                                                             |                                                             |                                                             |                                                             |                                                             |                                                             |                                                             |  |  |  |  |  |  |
|:----------------------------------------- |:----------------------------------------- |:----------------------------------------- | ----------------------------------------------:| ----------------------------------------------:| ----------------------------------------------:|:- |:- |:- | ----:| ----:| -----------------------------------------------------------:|:-----------------------------------------------------------:|:-----------------------------------------------------------:|:-----------------------------------------------------------:|:-----------------------------------------------------------:|:-----------------------------------------------------------:|:-----------------------------------------------------------:|:- |:- |:- |:- |:- |:- |
|                                           |                                           |                                           | Gain (Loss) Reclassified from AOCI to Earnings | Gain (Loss) Reclassified from AOCI to Earnings | Gain (Loss) Reclassified from AOCI to Earnings |  |  |  |      |      | Gain (Loss) Recognized in Other Comprehensive Income (Loss) | Gain (Loss) Recognized in Other Comprehensive Income (Loss) | Gain (Loss) Recognized in Other Comprehensive Income (Loss) | Gain (Loss) Recognized in Other Comprehensive Income (Loss) | Gain (Loss) Recognized in Other Comprehensive Income (Loss) | Gain (Loss) Recognized in Other Comprehensive Income (Loss) | Gain (Loss) Recognized in Other Comprehensive Income (Loss) |  |  |  |  |  |  |
| (in millions)                             | (in millions)                             | (in millions)                             |                                           2019 |                                           2018 |                                           2017 |  |  |  | 2019 | 2018 |                                                        2017 |
| Foreign currency exchange contracts ^(1)^ | Foreign currency exchange contracts ^(1)^ | Foreign currency exchange contracts ^(1)^ |                                            $ 1 |                                          $ (3) |                                           $ 10 |  |  |  |  $ — |  $ 1 |                                                      $ (43) |

^(1)^ Earnings on our designated foreign currency exchange contracts are recorded in passenger revenue in the income statement\. These hedge contracts settled during the year ended December 31, 2019\.

Not Designated Hedge Gains (Losses)

Gains (losses) related to our foreign currency exchange and fuel contracts are as follows:

|                                     |                                     |                                     |  |  |  |                                              |                                              |                                              |  |  |  |                                  |                                  |                                  |  |  |  |  |  |  |
|:----------------------------------- |:----------------------------------- |:----------------------------------- |:- |:- |:- |:--------------------------------------------:|:--------------------------------------------:|:--------------------------------------------:|:- |:- |:- | --------------------------------:| --------------------------------:| --------------------------------:|:- |:- |:- |:- |:- |:- |
|                                     |                                     |                                     |  |  |  | Location of Gain (Loss) Recognized in Income | Location of Gain (Loss) Recognized in Income | Location of Gain (Loss) Recognized in Income |  |  |  | Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income |  |  |  |  |  |  |
|                                     |                                     |                                     |  |  |  |                                              |                                              |                                              |  |  |  |          Year Ended December 31, |          Year Ended December 31, |          Year Ended December 31, |  |  |  |  |  |  |
| (in millions)                       | (in millions)                       | (in millions)                       |  |  |  |                                              |                                              |                                              |  |  |  |                             2019 |                             2018 |                             2017 |
| Foreign currency exchange contracts | Foreign currency exchange contracts | Foreign currency exchange contracts |  |  |  |       Gain/(loss) on investments, net        |       Gain/(loss) on investments, net        |       Gain/(loss) on investments, net        |  |  |  |                             $ 10 |                            $ (4) |                              $ — |
| Fuel hedge contracts                | Fuel hedge contracts                | Fuel hedge contracts                |  |  |  |       Aircraft fuel and related taxes        |       Aircraft fuel and related taxes        |       Aircraft fuel and related taxes        |  |  |  |                             (41) |                               52 |                             (81) |
| Total                               | Total                               | Total                               |  |  |  |                                              |                                              |                                              |  |  |  |                           $ (31) |                             $ 48 |                           $ (81) |

Credit Risk

To manage credit risk associated with our fuel price, interest rate and foreign currency hedging programs, we evaluate counterparties based on several criteria including their credit ratings and limit our exposure to any one counterparty\.

Our hedge contracts often contain margin funding requirements\. The margin funding requirements may cause us to post margin to counterparties or may cause counterparties to post margin to us as market prices in the underlying hedged items change\. Due to the fair value position of our hedge contracts, we posted margin of $34 million as of December 31, 2019 and held margin of $9 million as of December 31, 2018\.

Our accounts receivable are generated largely from the sale of passenger airline tickets and cargo transportation services, the majority of which are processed through major credit card companies\. We also have receivables from the sale of miles under our loyalty program to participating airlines and non\-airline businesses such as credit card companies, hotels, car rental agencies and ridesharing companies\. The credit risk associated with our receivables is minimal\.

Self\-Insurance Risk

We self\-insure a portion of our losses from claims related to workers' compensation, environmental issues, property damage, medical insurance for employees and general liability\. Losses are accrued based on an estimate of the aggregate liability for claims incurred, using independent actuarial reviews based on standard industry practices and our historical experience\.

72


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

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

**1\. Basis of Presentation and Summary of Significant Accounting Policies**

***(a) Basis of Presentation***

American Airlines Group Inc\. (we, us, our and similar terms, or AAG), a Delaware corporation, is a holding company whose primary business activity is the operation of a major network air carrier, providing scheduled air transportation for passengers and cargo through its mainline operating subsidiary, American Airlines, Inc\. (American) and its wholly\-owned regional airline subsidiaries, Envoy Aviation Group Inc\. (Envoy), PSA Airlines, Inc\. (PSA) and Piedmont Airlines, Inc\. (Piedmont) that operate under the brand American Eagle\. On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc\. (US Airways Group), a Delaware corporation, which survived as a wholly\-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger)\. Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc\. All significant intercompany transactions have been eliminated\.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements\. Actual results could differ from those estimates\. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long\-lived and intangible assets, the loyalty program, as well as pension and retiree medical and other postretirement benefits\.

***(b) Recent Accounting Pronouncements***

*Standards Adopted in 2018*

Effective January 1, 2018, we adopted the accounting pronouncements described below\.

***ASU 2014\-09: Revenue from Contracts with Customers (Topic 606) (the New Revenue Standard)***

The New Revenue Standard applies to all companies that enter into contracts with customers to transfer goods or services\. We adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods\.

The adoption of the New Revenue Standard impacted our accounting for outstanding mileage credits earned through travel by AAdvantage loyalty program members\. There was no change in accounting for sales of mileage credits to co\-branded credit card or other partners\. Prior to the adoption of the New Revenue Standard, we used the incremental cost method to account for the portion of our loyalty program liability related to mileage credits earned through travel, which were valued based on the estimated incremental cost of carrying one additional passenger\. The New Revenue Standard required us to change our policy to the deferred revenue method and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned is deferred and recognized in passenger revenue upon future mileage redemption\. The value of the earned mileage credits is materially greater under the deferred revenue method than the value attributed to these mileage credits under the incremental cost method\.

The New Revenue Standard also required certain reclassifications, principally the reclassification of certain ancillary revenues previously classified and reported as other revenue to passenger revenue and as applicable to cargo revenue\. Additionally, the New Revenue Standard required a gross presentation on the face of our consolidated statements of operations for certain revenues and expenses that had previously been presented on a net basis\.

See *“Impacts to 2017 Results”* and *“Impacts to 2016 Results”* below for the impact to our consolidated statements of operations data for 2017 and 2016, respectively, and our consolidated balance sheet as of December 31, 2017 related to the adoption of the New Revenue Standard\.

***ASU 2017\-07: Compensation \- Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the New Retirement Standard)***

The New Retirement Standard required all components of our net periodic benefit cost (income), with the exception of service cost, previously reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense)\. The New Retirement Standard was applied retrospectively, which resulted in the recast of each prior reporting period presented\. The adoption of the New Retirement Standard had no impact on pre\-tax income or net income reported\.

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

Income Tax Allocation

We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations ("Income Tax Allocation")\. The 2017 tax reform reduced the statutory tax rate in the U\.S\. from 35% to 21%\. 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, $672 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\.

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 2019, 2018 and 2017 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 $26\.37 and $24\.14 as of December 31, 2019 and 2018, 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, 2019, there were  25 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 $161 million, $159 million and $169 million for the years ended December 31, 2019, 2018 and 2017, respectively\. We record expense on a straight\-line basis for awards with installment vesting\. As of December 31, 2019, unrecognized costs related to unvested shares and stock options totaled $94 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, 2019, there were 2\.6 million unvested restricted stock awards\.

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