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

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

**Number** | **Description**                                                                                |
| 4\.182                        | [Form of Pass Through Trust Certificate, Series 2019\-1A (Aircraft EETC) (incorporated by reference to Exhibit A to Exhibit 4\.3 to American’s Current Report on Form 8\-K filed on August 15, 2019 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312519222562/d774498dex43.htm)                                                                                |
| 4\.183                        | [Form of Pass Through Trust Certificate, Series 2019\-1B (Aircraft EETC) (incorporated by reference to Exhibit A to Exhibit 4\.4 to American’s Current Report on Form 8\-K filed on August 15, 2019 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312519222562/d774498dex44.htm)                                                                                |
| 4\.184                        | [Revolving Credit Agreement (2019\-1AA), dated as of August 15, 2019, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2019\-1AA (Aircraft EETC), as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.18 to American’s Current Report on Form 8\-K filed on August 15, 2019 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312519222562/d774498dex418.htm)                                                                                |
| 4\.185                        | [Revolving Credit Agreement (2019\-1A), dated as of August 15, 2019, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2019\-1A (Aircraft EETC), as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.19 to American’s Current Report on Form 8\-K filed on August 15, 2019 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312519222562/d774498dex419.htm)                                                                                |
| 4\.186                        | [Revolving Credit Agreement (2019\-1B), dated as of August 15, 2019, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2019\-1B (Aircraft EETC), as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.20 to American’s Current Report on Form 8\-K filed on August 15, 2019 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312519222562/d774498dex420.htm)                                                                                |
| 10\.1                         | [Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016, amending the Loan Agreement, dated as of May 23, 2013, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\., as borrower), as the borrower, American Airlines Group Inc\., as parent and guarantor (as successor in interest to US Airways Group, Inc\., as parent and guarantor), the lenders from time to time party thereto, Citibank N\.A\., as administrative agent and collateral agent (as successor in interest to Citicorp North America Inc\., as administrative agent and collateral agent), and certain other parties thereto\. (incorporated by reference to Exhibit 10\.1 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517051216/d286458dex101.htm)                                                                                |
| 10\.2                         | [First Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of November 14, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016, amending the Loan Agreement, dated as of May 23, 2013, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\., as borrower), as the borrower, American Airlines Group Inc\., as parent and guarantor (as successor in interest to US Airways Group, Inc\., as parent and guarantor), the lenders from time to time party thereto, Citibank N\.A\., as administrative agent and collateral agent (as successor in interest to Citicorp North America Inc\., as administrative agent and collateral agent), and certain other parties thereto (incorporated by reference to Exhibit 10\.2 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000009/ex10210k2017.htm) |
| 10\.3                         | [First Amendment and Restatement Agreement, dated as of April 20, 2015, in relation to the Credit and Guaranty Agreement, dated as of October 10, 2014 (as amended), among American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.), American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), the Revolving Lenders (as defined therein) party thereto, the 2015 Term Loan Lenders (as defined therein) party thereto and Citibank N\.A\., as administrative agent and collateral agent (incorporated by reference to Exhibit 10\.4 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515261937/d945812dex104.htm)                                                                                |
| 10\.4                         | [First Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of October 26, 2015, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.), the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.6 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516474605/d78287dex106.htm)                                                                                |
| 10\.5                         | [Second Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of September 22, 2016, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516742263/d247546dex101.htm)                                                                                |
| 10\.6                         | [Third Amendment to the Amended and Restated Credit and Guaranty Agreement, dated as of June 14, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517239325/d416225dex102.htm)                                                                                |
| 10\.7                         | [Fourth Amendment to the Amended and Restated Credit and Guaranty Agreement, dated as of August 21, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.7 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000016/ex10110qq118.htm) \*                                                                                |

177


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

driven by a decrease in ticket yields on relatively flat load factors\. Lower ticket yields (pricing) were impacted, in large part, by our new market growth and by competitor pricing actions felt more acutely in our California markets\.

***Passenger Revenue***—***Regional***

Regional passenger revenue increased by $52 million, or 6%, compared to 2016 due to a 10%increase in capacity, partially offset by a 4%decrease in PRASM compared to 2016\. The increase in capacity is due to an increase in departures from new E175 deliveries, an increase in average aircraft stage length and the annualization of new routes introduced over the past twelve months\. The decrease in Regional PRASM was primarily driven by the significant growth in our regional business and competitive pricing actions\.

***Other***—***Net***

Other—net revenue increased$184 million, or 23%, from 2016, primarily due to increases in frequent flyer program revenue\. Frequent flyer program revenue increased $53 million or 12%, due to an increase in miles sold to our affinity card partner in the the current year\. On a Combined Comparative basis, Other—net revenue increased$34 million, or 4%\.

Under the new revenue recognition standard, our 2017 recast revenues will decrease by approximately $41 million\. We expect competitive pressures on unit revenues to continue into 2018\. However, given our projected capacity growth, we expect total revenue will increase in 2018 as we expect to grow our capacity approximately 7\.5%\.

***OPERATING EXPENSES***

Total operating expenses increased$2\.1 billion, or 46%, compared to 2016\. On a Combined Comparative basis, total operating expenses increased$749 million, or 13% primarily as a result of higher wages and benefits and higher fuel costs, among other increases\. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

|                                     |                                      |                                      |                                          |                                      |                |                |
| ----------------------------------- | ------------------------------------ | ------------------------------------ | ---------------------------------------- | ------------------------------------ | -------------- | -------------- |
|                                     | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,**     | **Twelve Months Ended December 31,** | **Change**     | **Change**     |
| ***(in millions)***                 | **2017**                             | **2016 as Reported**                 | **2016 Pre\-acquisition Virgin America** | **2016 Combined**                    | **$ Combined** | **% Combined** |
| Fuel expense                        | **$1,447**                           | $831                                 | $293                                     | $1,124                               | $323           | 28\.7 %        |
| Non\-fuel expenses                  | **5,108**                            | 3,634                                | 1,028                                    | 4,662                                | 446            | 9\.6 %         |
| Special items—merger\-related costs | **118**                              | 117                                  | 21                                       | 138                                  | (20)           | (14\.5)%       |
| Total Operating Expenses            | **$6,673**                           | $4,582                               | $1,342                                   | $5,924                               | $749           | 12\.6 %        |

Significant operating expense variances from 2016 are more fully described below\.

***Aircraft Fuel***

Aircraft fuel expense includes both *raw fuel expense* (as defined below) and the effect of mark\-to\-market adjustments to our fuel hedge portfolio included in our consolidated statement of operations as the value of that portfolio increases and decreases\. Aircraft fuel expense can be volatile, even between quarters, because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease\.

*Raw fuel expense* is defined as the price that we generally pay at the airport, or the “into\-plane” price, including taxes and fees\. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U\.S\. *Raw fuel expense* approximates cash paid to suppliers and does not reflect the effect of our fuel hedges\.

 41


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

|                                                                        |              |          |          |          |          |
| ---------------------------------------------------------------------- | ------------ | -------- | -------- | -------- | -------- |
| ***Year Ended December 31 (in millions, except per\-share amounts):*** | **2017**     | **2016** | **2015** | **2014** | **2013** |
| **CONSOLIDATED OPERATING RESULTS**  *(audited)*                        |              |          |          |          |          |
| Operating Revenues                                                     | **$7,933**   | $5,931   | $5,598   | $5,368   | $5,156   |
| Operating Expenses                                                     | **6,673**    | 4,582    | 4,300    | 4,406    | 4,318    |
| Operating Income                                                       | **1,260**    | 1,349    | 1,298    | 962      | 838      |
| Nonoperating income (expense), net of interest capitalized ^(a)^       | **(53)**     | (4)      | 14       | 13       | (22)     |
| Income before income tax                                               | **1,207**    | 1,345    | 1,312    | 975      | 816      |
| Net Income                                                             | **$1,034**   | $814     | $848     | $605     | $508     |
| Average basic shares outstanding                                       | **123\.211** | 123\.557 | 128\.373 | 135\.445 | 139\.910 |
| Average diluted shares outstanding                                     | **123\.854** | 124\.389 | 129\.372 | 136\.801 | 141\.878 |
| Basic earnings per share                                               | **$8\.39**   | $6\.59   | $6\.61   | $4\.47   | $3\.63   |
| Diluted earnings per share                                             | **$8\.35**   | $6\.54   | $6\.56   | $4\.42   | $3\.58   |
| Cash dividends declared per share                                      | **$1\.20**   | $1\.10   | $0\.80   | $0\.50   | 0\.20    |
| **CONSOLIDATED FINANCIAL POSITION**  *(audited)*                       |              |          |          |          |          |
| *At End of Period (in millions):*                                      |              |          |          |          |          |
| Total assets                                                           | **$10,740**  | $9,962   | $6,530   | $6,059   | $5,719   |
| Long\-term debt, including current portion                             | **$2,569**   | $2,964   | $683     | $798     | $865     |
| Shareholders' equity                                                   | **$3,721**   | $2,931   | $2,411   | $2,127   | $2,029   |
| **OPERATING STATISTICS**  *(unaudited)* ^(d)^                          |              |          |          |          |          |
| **Consolidated:** **^(b)^**                                            |              |          |          |          |          |
| Revenue passengers (000)                                               | **44,034**   | 34,289   | 31,883   | 29,287   | 27,414   |
| RPMs (000,000) "traffic"                                               | **52,338**   | 37,209   | 33,578   | 30,718   | 28,833   |
| ASMs (000,000) "capacity"                                              | **62,072**   | 44,135   | 39,914   | 36,078   | 33,672   |
| Load factor                                                            | **84\.3%**   | 84\.3%   | 84\.1%   | 85\.1%   | 85\.6%   |
| Yield                                                                  | **13\.03¢**  | 13\.45¢  | 14\.27¢  | 14\.91¢  | 14\.80¢  |
| PRASM                                                                  | **10\.98¢**  | 11\.34¢  | 12\.01¢  | 12\.69¢  | 12\.67¢  |
| RASM                                                                   | **12\.78¢**  | 13\.44¢  | 14\.03¢  | 14\.88¢  | 14\.74¢  |
| CASMex ^(c)^                                                           | **8\.23¢**   | 8\.23¢   | 8\.30¢   | 8\.36¢   | 8\.47¢   |
| **Mainline:**                                                          |              |          |          |          |          |
| Revenue passengers (000)                                               | **34,539**   | 24,838   | 22,869   | 20,972   | 19,737   |
| RPMs (000,000) "traffic"                                               | **48,238**   | 33,489   | 30,340   | 27,778   | 26,172   |
| ASMs (000,000) "capacity"                                              | **56,945**   | 39,473   | 35,912   | 32,430   | 30,411   |
| Load factor                                                            | **84\.7%**   | 84\.8%   | 84\.5%   | 85\.7%   | 86\.1%   |
| Yield                                                                  | **12\.14¢**  | 12\.24¢  | 12\.98¢  | 13\.58¢  | 13\.33¢  |
| PRASM                                                                  | **10\.29¢**  | 10\.38¢  | 10\.97¢  | 11\.64¢  | 11\.48¢  |
| CASMex ^(c)^                                                           | **7\.47¢**   | 7\.30¢   | 7\.39¢   | 7\.45¢   | 7\.54¢   |
| **Regional**  **^(b)^** **:**                                          |              |          |          |          |          |
| Revenue passengers (000)                                               | **9,495**    | 9,452    | 9,015    | 8,306    | 7,677    |
| RPMs (000,000) "traffic"                                               | **4,101**    | 3,720    | 3,238    | 2,940    | 2,661    |
| ASMs (000,000) "capacity"                                              | **5,127**    | 4,662    | 4,002    | 3,648    | 3,261    |
| Load factor                                                            | **80\.0%**   | 79\.8%   | 80\.9%   | 80\.6%   | 81\.6%   |
| Yield                                                                  | **23\.41¢**  | 24\.42¢  | 26\.37¢  | 27\.40¢  | 29\.20¢  |
| PRASM                                                                  | **18\.72¢**  | 19\.49¢  | 21\.34¢  | 22\.08¢  | 23\.83¢  |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | Capitalized interest was  $17 million ,  $25 million ,  $34 million ,  $20 million  and  $21 million  for  2017 ,  2016 ,  2015 ,  2014  and  2013 \. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------ |
| (b) | Includes flights under Capacity Purchase Agreements operated by SkyWest and PenAir\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------ |
| (c) | See reconciliation to the most directly related Generally Accepted Accounting Principles (GAAP) measure in the "Results of Operations" section\. |

|     |                                                                    |
| --- | ------------------------------------------------------------------ |
| (d) | See "Glossary of Terms" for definitions of the abbreviated terms\. |

 32


Annual Report of Southwest Airlines Co\. for year 2019

The Company entered into the following share repurchases during  2019 , which were each recorded as a treasury share purchase for purposes of calculating earnings per share\. See Part II, Item 5 for further information on the Company's share repurchase authorizations\.

|                                                                        |                     |     |               |
| ---------------------------------------------------------------------- | ------------------- | --- | ------------- |
| **Share repurchases (in millions)**                                    | **Shares received** |     | **Cash paid** |
| First Quarter 2019 Accelerated Share Repurchase Program

  | 9\.38               |     | $500          |
| Second Quarter 2019 Accelerated Share Repurchase Program

 | 7\.82               |     | 400           |
| Third Quarter 2019 Accelerated Share Repurchase Program

  | 9\.49               |     | 500           |
| Fourth Quarter 2019 Accelerated Share Repurchase Program               | 9\.11               | (a) | 550           |
| Open Market Share Repurchases                                          | 0\.95               |     | 50            |
| Total                                                                  | 36\.75              |     | $2,000        |

(a) Final settlement of the Fourth Quarter 2019 ASR Program is scheduled to occur in February 2020\. The specific number of shares that the Company ultimately will repurchase under the Fourth Quarter 2019 ASR Program will be determined based generally on a discount to the volume\-weighted average price per share of the Company's common stock during a calculation period to be completed no later than February 13, 2020\.

On February 14, 2019, Fitch upgraded the Company's investment grade credit ratings to "A\-" from "BBB\+\." The upgrade of the Company's investment grade rating was based on the Company's low fundamental level of credit risk as demonstrated by its track record of generating positive free cash flow, its solid financial flexibility, strong balance sheet, and commitment to conservative financial policies\. The Company maintained its investment grade credit ratings of "A3" with Moody's and "BBB\+" with Standard & Poor's\.

The Company routinely carries a working capital deficit, in which its current liabilities exceed its current assets\. This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused funds available to Customers, and loyalty deferred revenue, which are performance obligations for future Customer flights, do not require future settlement in cash, and are mostly nonrefundable\. See Note  5  to the Consolidated Financial Statements for further information\. The Company believes that its current liquidity position, including unrestricted cash and short\-term investments of  $4\.1 billion  as of  December 31, 2019 , anticipated future internally generated funds from operations, and its fully available, unsecured revolving credit facility of $1\.0 billion that expires in  August 2022 , will enable it to meet its future known obligations in the ordinary course of business\. However, if a liquidity need were to arise, the Company believes it has access to financing arrangements because of its investment grade credit ratings, large value of unencumbered assets, and modest leverage, which should enable it to meet its ongoing capital, operating, and other liquidity requirements\. The Company will continue to consider various borrowing or leasing options to maximize liquidity and supplement cash requirements, as necessary\.

The Company has a large net deferred tax liability on its Consolidated Balance Sheet\. The deferral of income taxes has resulted in a significant benefit to the Company and its liquidity position\. Since the Company purchases the majority of the aircraft it acquires, it has been able to utilize accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, in  2019  and in previous years, which has enabled the Company to defer the cash tax payments associated with these depreciable assets to future years\. Based on the Company’s scheduled future aircraft deliveries from Boeing and existing tax laws in effect, the Company will continue to defer a portion of cash income taxes to future years\. The Company has paid in the past, and will continue to pay in the future, significant cash taxes to the various taxing jurisdictions where it operates\. The Company expects to be able to continue to meet such obligations utilizing cash and investments on hand, as well as cash generated from its ongoing operations\.

Off\-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments

The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, payment of debt, and lease arrangements\. For aircraft commitments with Boeing, the Company is required to make cash deposits toward the purchase of aircraft in advance\. These deposits are classified as Deposits on flight equipment

52


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

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

As of December 31, 2017, American’s minimum fixed obligations under its capacity purchase agreements with third\-party regional carriers are as follows (approximately, in millions):

|                                                                                |          |          |          |          |          |                         |           |
| ------------------------------------------------------------------------------------------------------- | -------- | -------- | -------- | -------- | -------- | ----------------------- | --------- |
|                                                                                | **2018** | **2019** | **2020** | **2021** | **2022** | **2023 and Thereafter** | **Total** |
| Minimum fixed obligations under capacity purchase agreements with third\-party regional carriers  ^(1)^ | $1,457   | $1,311   | $1,063   | $866     | $699     | $2,073                  | $7,469    |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Represents minimum payments under capacity purchase agreements with third\-party regional carriers\. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and American’s actual payments could differ materially\. These obligations also include the portion of American’s future obligations representing the lease of aircraft for accounting purposes in the amount of approximately  $377 million  in  2018 ,  $355 million  in  2019 ,  $320 million  in  2020 ,  $282 million  in  2021 ,  $239 million  in  2022  and  $699 million  in  2023 and thereafter \. |

***(d) Off\-Balance Sheet Arrangements***

*Aircraft*

American currently operates 387 owned aircraft and 113 leased aircraft which were financed with EETCs issued by pass\-through trusts\. These trusts are off\-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment\. Rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allow American to raise the financing for a number of aircraft at one time and, if applicable, place such funds in escrow pending a future purchase, delivery or refinancing of the relevant aircraft\. The trusts were also structured to provide for certain credit enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to American\.

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

With respect to leveraged leases, American evaluated whether the leases had characteristics of a variable interest entity\. American concluded the leasing entities met the criteria for variable interest entities\. American generally is not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed\-price purchase option or similar feature that obligates American to absorb decreases in value or entitles American to participate in increases in the value of the aircraft\. American does not provide residual value guarantees to the bondholders or equity participants in the trusts\. Some leases have a fair market value or a fixed price purchase option that allows American to purchase the aircraft at or near the end of the lease term\. However, the option price approximates an estimate of the aircraft’s fair value at the option date\. Under this feature, American does not participate in any increases in the value of the aircraft\. American concluded it is not the primary beneficiary under these arrangements\. Therefore, American accounts for the majority of its EETC leveraged lease financings as operating leases\. American’s total future obligations to the trusts of each of the relevant EETCs under these leveraged lease financings are $572 million as of December 31, 2017, which are included in the future minimum lease payments table above\.

162


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

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

inactivity\. The Company’s estimate of the expected expiration of miles requires significant management judgment\. Current and future changes to expiration assumptions or to the expiration policy, or to program rules and program redemption opportunities, may result in material changes to the deferred revenue balance as well as recognized revenues from the programs\.

The following table summarizes information related to the Company’s Frequent flyer deferred revenue liability:

|                                                                                |         |
|:----------------------------------------------------------------------------------------------------------- | -------:|
| Frequent flyer deferred revenue at December 31, 2017 (in millions)                                          | $4,741  |
| Percentage of miles earned expected to expire                                                               |     18% |
| Impact of 1% change in outstanding miles or weighted average ticket value on deferred revenue (in millions) |    $53  |

***Long\-Lived Assets\.*** The net book value of operating property and equipment for the Company was $26 billion and $23 billion at December 31, 2017 and 2016, respectively\. The assets’ recorded value is impacted by a number of accounting policy elections, including the estimation of useful lives and residual values and, when necessary, the recognition of asset impairment charges\.

The Company records assets acquired, including aircraft, at acquisition cost\. Depreciable life is determined through economic analysis, such as reviewing existing fleet plans, obtaining appraisals and comparing estimated lives to other airlines that operate similar fleets\. The Company has generally estimated the lives of those aircraft to be between 25 and 30 years\. Residual values are estimated based on historical experience with regard to the sale of both aircraft and spare parts and are established in conjunction with the estimated useful lives of the related fleets\. Residual values are based on when the aircraft are acquired and typically reflect asset values that have not reached the end of their physical life\. Both depreciable lives and residual values are revised periodically as facts and circumstances arise to recognize changes in the Company’s fleet plan and other relevant information\. A one\-year increase in the average depreciable life of the Company’s flight equipment would reduce annual depreciation expense on flight equipment by approximately $76 million\.

The Company evaluates the carrying value of long\-lived assets and intangible assets subject to amortization whenever events or changes in circumstances indicate that an impairment may exist\. For purposes of this testing, the Company has generally identified the aircraft fleet type as the lowest level of identifiable cash flows for purposes of testing aircraft for impairment\. An impairment charge is recognized when the asset’s carrying value exceeds its net undiscounted future cash flows and its fair market value\. The amount of the charge is the difference between the asset’s carrying value and fair market value\.

See Note 14 to the financial statements included in Part II, Item 8 of this report for additional information\.

***Indefinite\-lived intangible assets\.*** The Company has indefinite\-lived intangible assets, including goodwill\. Goodwill and indefinite\-lived intangible assets are not amortized but are reviewed for impairment on an annual basis as of October 1, or on an interim basis whenever a triggering event occurs\. An impairment occurs when the fair value of an intangible asset is less than its carrying value\. In 2017, the Hong Kong routes had a fair value cushion that was less than 10% of its carrying value\. The value of the routes was negatively impacted by the slowdown of the Hong Kong market coupled with industry oversupply\. As a result, this intangible asset is susceptible to impairment risk from adverse changes in this particular market\. While management has implemented strategies to address the shifts in supply and demand dynamics, further adverse changes could reduce the underlying cash flows used to estimate fair value and could trigger impairment charges of the Hong Kong routes\.

See Note 2 to the financial statements included in Part II, Item 8 of this report for additional information\.

***Defined Benefit Plan Accounting\.*** We sponsor defined benefit pension plans for eligible employees and retirees\. The most critical assumptions impacting our defined benefit pension plan obligations and expenses are the weighted average discount rate and the expected long\-term rate of return on the plan assets\.

United’s pension plans’ under\-funded status was $1\.9 billion at December 31, 2017\. Funding requirements for tax\-qualified defined benefit pension plans are determined by government regulations\. In 2018, we anticipate

42


Annual Report of Southwest Airlines Co\. for year 2019

The Company is also subject to a financial covenant included in its revolving credit facility, and is subject to credit rating triggers related to its credit card transaction processing agreements, the pricing related to any funds drawn under its revolving credit facility, and some of its hedging counterparty agreements\. Certain covenants include the maintenance of minimum credit ratings and/or triggers that are based on changes in these ratings\. The Company’s revolving credit facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre\-tax income to fixed obligations, as defined\. As of  December 31, 2019 , the Company was in compliance with this covenant and there were  no  amounts outstanding under the revolving credit facility\. However, if conditions change and the Company fails to meet the minimum standards set forth in the revolving credit facility, there could be a reduction in the availability of cash under the facility, or an increase in the costs to keep the facility intact as written\. The Company’s hedging counterparty agreements contain ratings triggers in which cash collateral could be required to be posted with the counterparty if the Company’s credit rating were to fall below investment grade by two of the three major rating agencies, and if the Company were in a net liability position with the counterparty\. See  Note 10  to the Consolidated Financial Statements for further information\.

The Company currently has agreements with organizations that process credit card transactions arising from purchases of air travel tickets by its Customers utilizing American Express, Discover, and MasterCard/VISA\. Credit card processors have financial risk associated with tickets purchased for travel because the processor generally forwards the cash related to the purchase to the Company soon after the purchase is completed, but the air travel generally occurs after that time; therefore, the processor will have liability if the Company does not ultimately provide the air travel\. Under these processing agreements, and based on specified conditions, increasing amounts of cash reserves could be required to be posted with the counterparty\. There was no cash reserved for this purpose as of December 31, 2019\.

A majority of the Company’s sales transactions are processed by Chase Paymentech\. Should chargebacks processed by Chase Paymentech reach a certain level, proceeds from advance ticket sales could be held back and used to establish a reserve account to cover such chargebacks and any other disputed charges that might occur\. Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels below investment grade\. Cash reserve requirements are based on the Company’s public debt rating and a corresponding percentage of the Company’s Air traffic liability\.

As of  December 31, 2019 , the Company was in compliance with all credit card processing agreements\. The inability to enter into credit card processing agreements would have a material adverse effect on the business of the Company\. The Company believes that it will be able to continue to renew its existing credit card processing agreements or will be able to enter into new credit card processing agreements with other processors in the future\.

63


Annual Report of Southwest Airlines Co\. for year 2017

**PART IV**

**Item 15\.** ***Exhibits and Financial Statement Schedules***

(a) 1\. *Financial Statements:*

The financial statements included in Item 8\. Financial Statements and Supplementary Data above are filed as part of this annual report\.

2\. *Financial Statement Schedules:*

There are no financial statement schedules filed as part of this annual report, since the required information is included in the Consolidated Financial Statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present\.

3\. Exhibits:

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 3\.1  | [Restated Certificate of Formation of the Company, effective May 18, 2012 (incorporated by reference to Exhibit 3\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2012 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238012000089/ex3_1.htm)                                                                                |
| 3\.2  | [Second Amended and Restated Bylaws of the Company, effective November 17, 2016 (incorporated by reference to Exhibit 3\.1 to the Company’s Current Report on Form 8\-K filed November 21, 2016 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312516773178/d282581dex31.htm)                                                                                |
| 4\.1  | [Specimen certificate representing common stock of the Company (incorporated by reference to Exhibit 4\.2 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 1994 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/0000930661-95-000050.txt)                                                                                |
| 4\.2  | [Indenture dated as of February 14, 2005, between the Company and The Bank of New York Trust Company, N\.A\., Trustee (incorporated by reference to Exhibit 4\.2 to the Company’s Current Report on Form 8\-K filed February 14, 2005 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000129993305000651/exhibit3.htm)                                                                                |
| 4\.3  | [Indenture dated as of September 17, 2004, between the Company and Wells Fargo Bank, N\.A\., Trustee (incorporated by reference to Exhibit 4\.1 to the Company’s Registration Statement on Form S\-3 filed October 30, 2002 (File No\. 333\-100861))\.](http://www.sec.gov/Archives/edgar/data/92380/000095013402013127/d00530exv4w1.txt)                                                                                |
| 4\.4  | [Indenture dated as of February 25, 1997, between the Company and U\.S\. Trust Company of Texas, N\.A\. (incorporated by reference to Exhibit 4\.12 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 1996 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/0000950134-97-002019.txt)                                                                                |
|       | The Company is not filing any other instruments evidencing any indebtedness because the total amount of securities authorized under any single such instrument does not exceed 10 percent of its total consolidated assets\. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request\.                                                                                |
| 10\.1 | Purchase Agreement No\. 1810, dated January 19, 1994, between The Boeing Company and the Company (incorporated by reference to Exhibit 10\.4 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 1993 (File No\. 1\-7259)); [Supplemental Agreement No\. 1 (incorporated by reference to Exhibit 10\.3 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 1996 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/0000092380-97-000010.txt) ; [Supplemental Agreements Nos\. 2, 3, and 4 (incorporated by reference to Exhibit 10\.2 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 1997 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/0000950134-98-002150.txt) ; [Supplemental Agreements Nos\. 5, 6, and 7 (incorporated by reference to Exhibit 10\.1 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 1998 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/0000950134-99-002046.txt) ; [Supplemental Agreements Nos\. 8, 9, and 10 (incorporated by reference to Exhibit 10\.1 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 1999 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000095013400002530/0000950134-00-002530.txt) ;

 |

117


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

Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as property, plant and equipment, goodwill, intangible assets and certain other assets and liabilities\. The Company determines the fair value of these items using Level 3 inputs, as described in Note 4\.

Income Taxes

The Company uses the asset and liability approach for accounting for and reporting income taxes\. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and for operating loss and tax credit carryforwards\. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled\. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date\. A valuation allowance would be established, if necessary, for the amount of any tax benefits that, based on available evidence, are not expected to be realized\. As of December 31, 2019, there is a partial valuation allowance against net deferred tax assets\. The Company accounts for unrecognized tax benefits in accordance with the applicable accounting standards\.

The Company has substantial federal and state net operating losses (NOLs) for income tax purposes as a result of the acquisition of Virgin America\. The Company's ability to utilize Virgin America's NOLs is limited by previous “ownership changes,” as defined in Section 382 of the Internal Revenue Code and similar state provisions, and could be further limited if there is another ownership change\. In general terms, an ownership change can occur whenever there is a collective shift in the ownership of a company by more than 50% by one or more “5% stockholders” within a three\-year period\. The occurrence of such a change generally limits the amount of NOL carryforwards a company could utilize in a given year to the aggregate fair market value of the company's common stock immediately prior to the ownership change, multiplied by the long\-term tax\-exempt interest rate in effect for the month of the ownership change\. The acquisition constituted an ownership change and the potential for further limitations following the acquisition\. See Note 7 to the consolidated financial statements for more discussion of the calculation\.

Stock\-Based Compensation

Accounting standards require companies to recognize as expense the fair value of stock options and other equity\-based compensation issued to employees as of the grant date\. These standards apply to all stock awards that the Company grants to employees as well as the Company’s Employee Stock Purchase Plan (ESPP), which features a look\-back provision and allows employees to purchase stock at a 15% discount\. All stock\-based compensation expense is recorded in wages and benefits in the consolidated statements of operations\.

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of in\-the\-money stock options and restricted stock units, using the treasury\-stock method\. In 2019, 2018, and 2017, anti\-dilutive stock options excluded from the calculation of EPS were not material\.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016\-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for leases currently classified as operating leases\. In July 2018, the FASB issued ASU 2018\-11, "Targeted Improvements \- Leases (Topic 842)" which amended Topic 842 to provide companies an alternative transition method which would not require adjusting comparative period financial information\. The Company elected this transition method upon adoption on January 1, 2019\. As a result, the Company recorded a cumulative\-effect adjustment to the opening balance of retained earnings upon transition\. This adjustment is discussed further in Note 6\.

NOTE 2\. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue\. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on\-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program\. Mileage Plan other revenue includes brand and marketing revenue from our co\-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions\. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions\.

59


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

If we or our subsidiaries are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements or if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages, subject to the requirements of the Railway Labor Act or the NLRA, as the case may be\. Strikes or labor disputes with our unionized employees may adversely affect our ability to conduct business\. Likewise, if third\-party regional carriers with whom we have contract carrier agreements are unable to reach agreement with their unionized work groups in current or future negotiations regarding the terms of their collective bargaining agreements, those carriers may be subject to work interruptions or stoppages, subject to the requirements of the Railway Labor Act, which could have a negative impact on our operations\.

Our results can fluctuate due to the effects of weather, natural disasters and seasonality\.

Our results of operations are impacted by severe weather, natural disasters and seasonality\. Severe weather conditions and natural disasters (or other environmental events) can significantly disrupt service and create air traffic control problems\. These events decrease revenue and can also increase costs\. In addition, increases in the frequency, severity or duration of thunderstorms, hurricanes, typhoons or other severe weather events, including from changes in the global climate, could result in increases in delays and cancellations, turbulence\-related injuries and fuel consumption to avoid such weather, any of which could result in loss of revenue and higher costs\. In addition, demand for air travel is typically higher in the June and September quarters, particularly in our international markets, because there is more vacation travel during these periods than during the remainder of the year\. The seasonal shifting of demand causes our financial results to vary on a seasonal basis\. Because of fluctuations in our results from weather, natural disasters and seasonality, operating results for a historical period are not necessarily indicative of operating results for a future period and operating results for an interim period are not necessarily indicative of operating results for an entire year\.

An extended disruption in services provided by third parties, including third\-party regional  carriers, could have a material adverse effect on our results of operations\.

We utilize the services of third parties in a number of areas in support of our operations that are integral to our business, including third\-party carriers in the Delta Connection program and ground operations at some airports\. While we have agreements with these providers that define expected service performance, we do not have direct control over their operations\. In particular, some third\-party regional carriers are facing a shortage of qualified pilots due to government mandated increases in flight experience required for pilots working for airlines\. If this shortage becomes more widespread, third\-party regional carriers may not be able to comply with their obligations to us\. To the extent that a significant disruption in services occurs because third party providers are unable to perform their obligations over an extended period of time, our revenue may be reduced or our expenses may be increased, resulting in a material adverse effect on our results of operations\.

The failure or inability of insurance to cover a significant liability related to an environmental or other incident associated with the operation of the Monroe refinery could have a material adverse effect on our consolidated financial results\.

Monroe's refining operations are subject to various hazards unique to refinery operations, including explosions, fires, toxic emissions and natural catastrophes\. Monroe could incur substantial losses, including cleanup costs, fines and other sanctions and third\-party claims, and its operations could be interrupted, as a result of such an incident\. Monroe's insurance coverage does not cover all potential losses, costs or liabilities, and Monroe could suffer losses for uninsurable or uninsured risks or in amounts greater than its insurance coverage\. In addition, Monroe's ability to obtain and maintain adequate insurance may be affected by conditions in the insurance market over which it has no control\. If Monroe were to incur a significant liability for which it is not fully insured or for which insurance companies do not or are unable to provide coverage, this could have a material adverse effect on our consolidated financial results of operations or consolidated financial position\.

The operation of the refinery by Monroe is subject to significant environmental regulation\. Failure to comply with environmental regulations or the enactment of additional regulation could have a negative impact on our consolidated financial results\.

Monroe's operations are subject to extensive environmental, health and safety laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures and greenhouse gas emissions\. Monroe could incur fines and other sanctions, cleanup costs and third\-party claims as a result of violations of or liabilities under environmental, health and safety requirements, which if significant, could have a material adverse effect on our financial results\. In addition, the enactment of new environmental laws and regulations, including any laws or regulations relating to greenhouse gas emissions, could significantly increase the level of expenditures required for Monroe or restrict its operations\.

 15


Annual Report of Southwest Airlines Co\. for year 2017

of capital; (iv) an assumed discount rate depending on the asset; (v) a tax rate; and (vi) market prices for comparable assets\. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made\. However, actual results and amounts may be significantly different from the Company’s estimates\.

As part of this evaluation, the Company assesses whether changes in (i) macroeconomic conditions; (ii) industry and market conditions; (iii) cost factors; (iv) overall financial performance; and (v) Company\-specific events, have occurred which would impact the use and/or fair value of these assets since the Company's quantitative analysis in 2013\. In 2017 and 2016, the Company performed a qualitative assessment of goodwill and determined that there was no indication that goodwill was impaired\. The qualitative assessments included analyses and weighting of all relevant factors noted above\. The Company performed a quantitative assessment of all indefinite\-lived intangible assets in 2015 and a qualitative assessment in 2016 and 2017 and determined that there was no impairment in any of these years as a result of the assessments\. The Company did record a $21 million noncash impairment charge related to leased slots at Newark Liberty International Airport (not indefinite\-lived assets) as a result of the FAA announcement in April 2016 that this airport was being changed to a Level 2 schedule\-facilitated airport from its previous designation as Level 3\. Southwest does not believe this FAA decision is indicative of a similar decision being made at its other slot\-controlled airports\.

Future impairment of Goodwill and indefinite\-lived intangible assets may result from changes in assumptions, estimates, or circumstances, some of which are beyond the Company’s control\. Factors which could result in an impairment of Goodwill, holding other assumptions constant, could include, but are not limited to: (i) a significant reduction in passenger demand as a result of domestic or global economic conditions; (ii) significantly higher prices for jet fuel; (iii) lower fares or passenger yields as a result of increased competition or lower demand; (iv) a significant increase in future capital expenditure commitments; and (v) significant disruptions to the Company’s operations as a result of both internal and external events such as terrorist activities, actual or threatened war, labor actions by Employees, or further industry regulation\. Factors which could result in an impairment of owned domestic slots, holding other assumptions constant, could include, but are not limited to: (i) a change in competition in the slotted airport; (ii) a change in governmental regulations in the slotted airport; (iii) significantly higher prices for jet fuel; and (iv) increased competition at a nearby airport\.

**Item 7A\.** ***Quantitative and Qualitative Disclosures About Market Risk***

The Company has interest rate risk in its floating\-rate debt obligations and interest rate swaps, commodity price risk in jet fuel required to operate its aircraft fleet, and market risk in the derivatives used to manage its fuel hedging program and in the form of fixed\-rate debt instruments\. As of December 31, 2017, the Company operated a total of 122 aircraft under operating and capital lease\. However, except for a small number of aircraft that have lease payments that fluctuate based in part on changes in market interest rates, the remainder of the leases are not considered market sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below\. The Company also has 78 aircraft under operating and capital lease that have been subleased to another carrier\. In addition, the Company has 15 remaining Classic aircraft under operating leases which were grounded in September 2017\. Further information about these leases is disclosed in Note 7 to the Consolidated Financial Statements\. The Company does not purchase or hold any derivative financial instruments for trading purposes\. See Note 10 to the Consolidated Financial Statements for information on the Company’s accounting for its hedging program and for further details on the Company’s financial derivative instruments\.

***Hedging***

The Company purchases jet fuel at prevailing market prices, but seeks to manage market risk through execution of a documented hedging strategy\. The Company utilizes financial derivative instruments, on both a short\-term and a long\-term basis, as a form of insurance against the potential for significant increases in fuel prices\. The Company believes there can be significant risk in not hedging against the possibility of such fuel price increases, especially in energy

66


Annual Report of Southwest Airlines Co\. for year 2018

To illustrate the results of the Company's efforts to reduce fuel consumption and improve fuel efficiency, the table below sets forth the Company's available seat miles produced per fuel gallon consumed over the last five years:

|                                               |                             |                             |                             |                             |                             |
| --------------------------------------------- | --------------------------- | --------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                               | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** | **Year ended December 31,** |
|                                               | **2018**                    | **2017**                    | **2016**                    | **2015**                    | **2014**                    |
| Available seat miles per fuel gallon consumed | 76\.3                       | 75\.2                       | 74\.4                       | 73\.9                       | 72\.8                       |

The Company also enters into fuel derivative contracts to manage its risk associated with significant increases in fuel prices\. The Company's fuel hedging activities, as well as the risks associated with high and/or volatile fuel prices, are discussed in more detail below under "Risk Factors," "Management’s Discussion and Analysis of Financial Condition and Results of Operations," and Note 10 to the Consolidated Financial Statements\.

Salaries, wages, and benefits expense constituted approximately 41 percent of the Company's operating expenses during 2018 and was the Company's largest operating cost\. The Company's ability to control labor costs is limited by the terms of its collective\-bargaining agreements, and increased labor costs have negatively impacted the Company's low\-cost competitive position\. The Company's labor costs, and risks associated therewith, are discussed in more detail below under "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations\."

**Fare Structure**

***General***

Southwest offers a relatively simple fare structure that features competitive fares and product benefits, including unrestricted fares, as well as lower fares available on a restricted basis\. Southwest fare products include three major categories: "Wanna Get Away^®^," "Anytime," and "Business Select^®^," with the goal of making it easier for Customers to choose the fare they prefer\. All fare products include the privilege of two free checked bags (weight and size limits apply) and complimentary soft drinks and snacks, as well as free movies\-on\-demand and live and on\-demand television where available on WiFi\-enabled aircraft\. In addition, regardless of the fare product, Southwest does not charge fees for changes to flight reservations although fare differences may apply\.

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | "Wanna Get Away" fares are generally the lowest fares and are typically subject to advance purchase requirements\. They are nonrefundable, but, subject to Southwest's No Show Policy, funds may be applied to future travel on Southwest\. Wanna Get Away fares earn six Rapid Rewards ^®^  points, under Southwest's Rapid Rewards loyalty program, for each dollar spent on the base fare\. The Company's loyalty program is discussed below under "Rapid Rewards Loyalty Program\." |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | "Anytime" fares are, subject to Southwest's No Show Policy, refundable if canceled, or funds may be applied towards future travel on Southwest\. If this fare is purchased with nonrefundable funds, then the flight will be nonrefundable if canceled\. Anytime fares earn 10 Rapid Rewards points for each dollar spent on the base fare\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | "Business Select" fares are, subject to Southwest's No Show Policy, refundable if canceled, or funds may be applied towards future travel on Southwest\. If this fare is purchased with nonrefundable funds, then the flight will be nonrefundable if canceled\. Business Select fares also include additional perks such as priority boarding with a boarding position in the first 15 boarding positions within boarding group "A," 12 Rapid Rewards points per dollar spent on the base fare \- the highest loyalty point multiplier of all Southwest fare products, "Fly By ^®^ " priority security and/or ticket counter access in participating airports, and one complimentary premium beverage coupon for the day of travel (Customers must be of legal drinking age to drink alcoholic beverages)\. |

Southwest's No Show Policy applies if a Customer does not change or cancel a flight segment at least ten minutes prior to scheduled departure and the Customer does not travel on the scheduled flight\. In such event, subject to certain exceptions, all segments associated with the reservation will be canceled, and (i) with respect to a "Wanna Get Away" fare, unused funds will be forfeited; and (ii) with respect to an "Anytime" or "Business Select" fare, unused funds will be held as travel credit for future travel by the Customer on Southwest\.

***Ancillary Services***

The Company offers ancillary services such as Southwest's EarlyBird Check\-In^®^, Upgraded Boarding, and transportation of pets and unaccompanied minors, in accordance with Southwest's respective policies\.

6


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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the  15th day of  February, 2019  by the following persons on behalf of the registrant and in the capacities indicated\.

|                            |                                                                                |
| -------------------------- | ----------------------------------------------------------------------------------------- |
| **Signature**              | **Title**                                                                                |
| /s/ Edward H\. Bastian     | Chief Executive Officer and Director

(Principal Executive Officer)                 |
| Edward H\. Bastian         | Chief Executive Officer and Director

(Principal Executive Officer)                 |
| /s/ Paul A\. Jacobson      | Executive Vice President and Chief Financial Officer

(Principal Financial Officer) |
| Paul A\. Jacobson          | Executive Vice President and Chief Financial Officer

(Principal Financial Officer) |
| /s/ Craig M\. Meynard      | Vice President and Chief Accounting Officer (Principal Accounting Officer)                |
| Craig M\. Meynard          | Vice President and Chief Accounting Officer (Principal Accounting Officer)                |
| /s/ Francis S\. Blake      | Chairman of the Board                                                                     |
| Francis S\. Blake          | Chairman of the Board                                                                     |
| /s/ Daniel A\. Carp        | Director                                                                                |
| Daniel A\. Carp            | Director                                                                                |
| /s/ Ashton B\. Carter      | Director                                                                                |
| Ashton B\. Carter          | Director                                                                                |
| /s/ David G\. DeWalt       | Director                                                                                |
| David G\. DeWalt           | Director                                                                                |
| /s/ William H\. Easter III | Director                                                                                |
| William H\. Easter III     | Director                                                                                |
| /s/ Michael P\. Huerta     | Director                                                                                |
| Michael P\. Huerta         | Director                                                                                |
| /s/ Jeanne P\. Jackson     | Director                                                                                |
| Jeanne P\. Jackson         | Director                                                                                |
| /s/ George N\. Mattson     | Director                                                                                |
| George N\. Mattson         | Director                                                                                |
| /s/ Douglas R\. Ralph      | Director                                                                                |
| Douglas R\. Ralph          | Director                                                                                |
| /s/ Sergio A\.L\. Rial     | Director                                                                                |
| Sergio A\.L\. Rial         | Director                                                                                |
| /s/ Kathy N\. Waller       | Director                                                                                |
| Kathy N\. Waller           | Director                                                                                |

 107


Annual Report of Southwest Airlines Co\. for year 2017

Approximately $595 million, approximately $383 million, and approximately $287 million of the Company's operating revenues in 2017, 2016, and 2015, respectively, were attributable to foreign operations\. The remainder of the Company's operating revenues, approximately $20\.6 billion, approximately $20\.0 billion, and approximately $19\.5 billion in 2017, 2016, and 2015, respectively, were attributable to domestic operations\. The Company's assets are not allocated to a geographic area because the Company's tangible assets primarily consist of flight equipment, the majority of which are interchangeable and are deployed systemwide, with no individual aircraft dedicated to any specific route or region\.

**Cost Structure**

A key component of the Company's business strategy is its focus on cost discipline and profitably charging competitively low fares\. Adjusted for stage length, the Company has lower unit costs, on average, than the majority of major domestic carriers\. The Company's strategy includes the use of a single aircraft type, the Boeing 737, the Company's operationally efficient point\-to\-point route structure, and its highly productive Employees\. Southwest's use of a single aircraft type allows for simplified scheduling, maintenance, flight operations, and training activities\. Southwest's point\-to\-point route structure includes service to and from many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore\-Washington International, Burbank, Manchester, Oakland, San Jose, Providence, and Ft\. Lauderdale\-Hollywood\. These conveniently located airports are typically less congested than other airlines' hub airports, which has contributed to Southwest's ability to achieve high asset utilization because aircraft can be scheduled to minimize the amount of time they are on the ground\. This, in turn, has reduced the number of aircraft and gate facilities that would otherwise be required and allows for high Employee productivity (lower headcount per aircraft)\.

The Company's focus on controlling costs also includes a continued commitment to pursuing, implementing, and enhancing initiatives to reduce fuel consumption and improve fuel efficiency\. Fuel and oil expense remained the Company's second largest operating cost in 2017\. Although 2017 fuel prices were moderately higher than 2016 fuel prices, as evidenced by the table below, energy prices can fluctuate significantly in a relatively short amount of time\. The table below shows the Company's average cost of jet fuel for each year beginning in 2003 and during each quarter of 2017\.

|                     |                                |                                                   |                                                             |
| ------------------- | ------------------------------ | ------------------------------------------------- | ----------------------------------------------------------- |
| **Year**            | **Cost**

**(Millions)** | **Average**

**Cost Per**

**Gallon** | **Percentage of**

**Operating**

**Expenses** |
| 2003                | $920                           | $0\.80                                            | 16\.5%                                                      |
| 2004                | $1,106                         | $0\.92                                            | 18\.1%                                                      |
| 2005                | $1,470                         | $1\.13                                            | 21\.4%                                                      |
| 2006                | $2,284                         | $1\.64                                            | 28\.0%                                                      |
| 2007                | $2,690                         | $1\.80                                            | 29\.7%                                                      |
| 2008                | $3,713                         | $2\.44                                            | 35\.1%                                                      |
| 2009                | $3,044                         | $2\.12                                            | 30\.2%                                                      |
| 2010                | $3,620                         | $2\.51                                            | 32\.6%                                                      |
| 2011                | $5,644                         | $3\.19                                            | 37\.7%                                                      |
| 2012                | $6,120                         | $3\.30                                            | 37\.2%                                                      |
| 2013                | $5,763                         | $3\.16                                            | 35\.1%                                                      |
| 2014                | $5,293                         | $2\.93                                            | 32\.3%                                                      |
| 2015                | $3,616                         | $1\.90                                            | 23\.0%                                                      |
| 2016                | $3,647                         | $1\.82                                            | 21\.9%                                                      |
| 2017                | $3,940                         | $1\.92                                            | 22\.3%                                                      |
| First Quarter 2017  | $922                           | $1\.89                                            | 21\.8%                                                      |
| Second Quarter 2017 | $990                           | $1\.84                                            | 22\.0%                                                      |
| Third Quarter 2017  | $1,003                         | $1\.92                                            | 22\.6%                                                      |
| Fourth Quarter 2017 | $1,025                         | $2\.04                                            | 22\.8%                                                      |

The Company focuses on reducing fuel consumption and improving fuel efficiency through fleet modernization and other fuel initiatives\. For example, during 2017, the Company continued to replace its older aircraft with newer aircraft that are less maintenance intensive and more fuel efficient\. The Company retired all remaining Boeing 737\-300 aircraft

6


Annual Report of Southwest Airlines Co\. for year 2018

Other operating expenses for 2017 increased by $144 million, or 5\.3 percent, compared with 2016\. On a per ASM basis, Other operating expenses for 2017 increased 2\.2 percent, compared with 2016\. These increases were both impacted by charges associated with the retirement of the Company's remaining Classic aircraft\. These charges included a $63 million aircraft grounding charge related to the leased portion of the Classic fleet, representing the remaining net lease payments due and certain lease return requirements that could have to be performed on these leased aircraft prior to their return to the lessors, as of the cease\-use date\. The Classic fleet charges in 2017 also included $33 million in lease termination expenses associated with Classic aircraft being acquired off their operating leases, compared with $22 million related to the acquisition of aircraft coming off operating leases in 2016\. These charges related to the grounding or cease\-use of the Classic fleet were considered special items and thus excluded from the Company's non\-GAAP results\. See Note Regarding Use of Non\-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non\-GAAP Financial Measures for additional detail regarding non\-GAAP financial measures\. The remainder of the increase on a dollar basis was primarily due to increased personnel expenses due to higher travel expenses for Flight Crews and higher hotel rates, as well as new Heart\-themed uniforms for the Company's operations personnel\.

**Other**

Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses\.

Interest expense for 2017 decreased by $8 million, or 6\.6 percent, compared with 2016, primarily due to the timing of debt activity\. The Company had three debt facilities mature during or since 2016 with higher interest expense than the four debt facilities issued during or since 2016\. The three debt facilities that matured during or since 2016 included the Company's remaining 5\.25% convertible senior notes in October 2016, $300 million of 5\.75% senior unsecured notes in December 2016, and $300 million of 5\.125% senior unsecured notes in March 2017\. The four debt facilities issued during or since 2016 included a $215 million floating rate term loan in October 2016, $300 million of 3\.00% senior unsecured notes in November 2016, $300 million of 2\.75% senior unsecured notes in November 2017, and $300 million of 3\.45% senior unsecured notes in November 2017\.

Capitalized interest for 2017 increased by $2 million, or 4\.3 percent, compared with 2016, primarily due to interest on facility construction projects\.

Interest income for 2017 increased by $11 million, or 45\.8 percent, compared with 2016, primarily due to higher interest rates\.

Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities\. With the adoption of the New Hedging Standard, the elimination of the requirement to separately measure and record ineffectiveness for all future cash flow hedges in a hedging relationship, as well as a change in classification of premium expense associated with option contracts from Other (gains) losses, net, in the Consolidated Statement of Income, to Fuel and oil expense, has significantly reduced amounts reflected for hedging activities in Other (gains) losses, net\. With the adoption of the New Retirement Standard, the Company is required to include all components of its net periodic benefit cost (income), with the exception of service cost, in Other (gains) losses, net, versus previously having classified and reported such items as operating expenses in Salaries, wages, and benefits\. See Note 2 to the Consolidated Financial Statements for further information on both new standards\. See Note 10 to the Consolidated Financial Statements for further information on the Company's hedging activities\. The following table displays the components of Other (gains) losses, net, for the years ended December 31, 2017, and 2016:

48


Annual Report of Southwest Airlines Co\. for year 2017

passenger at the time of booking; (v) the same baggage allowances and fees must apply throughout a passenger’s trip; (vi) baggage fees must be disclosed on e\-ticket confirmations; and (vii) passengers must be promptly notified in the event of delays of more than 30 minutes or if there is a cancellation or diversion of their flight\.

In November 2016, the DOT finalized an additional "Passenger Protection Rule\." The new rule is intended to enhance the performance quality information collected by the DOT and made available to the public\. The DOT removed the assumption that every passenger checks a bag, and now calculates mishandled bags per overall checked bags, rather than per enplaned passengers\. The new rule also expands the pool of air carriers that must report performance data to the DOT's Bureau of Transportation Statistics by requiring reporting air carriers to include data for their domestic scheduled flights operated by their code\-share partners\.

The DOT has expressed its intent to aggressively investigate alleged violations of its consumer protection rules\. Airlines that violate any DOT regulation are subject to potential fines of up to $32,140 per occurrence\.

The Company is also monitoring other potential rulemakings that could impact its business\. The DOT is preparing a proposed rule for the purpose of improving accessibility of lavatories on single\-aisle aircraft and of in\-flight entertainment\. The proposed rule may require both short\-term and long\-term measures be taken to fully address the challenges persons with mobility impairments face when traveling on single\-aisle aircraft, including the eventual requirement that accessible lavatories be available for individuals who use wheelchairs\. The future proposed rule is also expected to address the improvement of accessibility of in\-flight entertainment by requiring certain movies and shows displayed on such aircraft to be captioned to provide access to deaf and hard of hearing passengers\. In addition, audio described entertainment would be available to enable people who are blind to listen to the visual narration of movies and shows\.

The DOT is also preparing a proposed rule to consider, among other things, (i) whether carriers should be required to supply in\-flight medical oxygen for a fee to passengers who require it to access air transportation; and (ii) whether to broaden the scope of passengers with disabilities who must be afforded seats with extra leg room, and whether carriers should be required to provide seating accommodations with extra leg room in all classes of service\. Additionally, the DOT is preparing a proposed rule that would address the definition of a service animal to reduce the likelihood of passengers falsely claiming that their pets are service animals\.

***Aviation Taxes and Fees***

The statutory authority for the federal government to collect most types of aviation taxes, which are used, in part, to finance programs administered by the FAA, must be periodically reauthorized by the U\.S\. Congress\. In 2012, Congress adopted the FAA Modernization and Reform Act of 2012, which extended most commercial aviation taxes through September 30, 2015\. In September 2015, in July 2016, and again in September 2017, Congress extended the expiration date, which is currently March 31, 2018\. Congress is expected to try to enact a new FAA reauthorization bill in 2018, which may make substantive changes with respect to aviation taxes (including, possibly, an increase in airport\-assessed Passenger Facility Charges ("PFCs")) and/or FAA offices and programs that are financed through aviation tax revenue\. Congress must either adopt a new FAA reauthorization bill or pass a "status quo" extension by March 31, 2018; otherwise, a lapse in the statutory authority could affect the airlines' and passengers' respective tax burdens, as well as impact the FAA's ability to fund airport grants and regulate the airline industry\.

In addition to FAA\-related taxes, there are additional federal taxes related to the U\.S\. Department of Homeland Security\. These taxes do not need to be reauthorized periodically\. Congress has set the Transportation Security Fee paid by passengers at $5\.60 per one\-way passenger trip\. In addition, inbound international passengers are subject to immigration and customs fees that are indexed to inflation\. These fees are used to support the operations of U\.S\. Customs and Border Protection ("CBP")\. Finally, the U\.S\. Department of Agriculture's Animal and Plant Health Inspection Service imposes a per\-passenger agriculture inspection fee of $5\.00 and a per\-commercial aircraft fee of $225\.00\.

In 2018, the Company expects to benefit from the comprehensive U\.S\. tax reform legislation enacted by Congress in late 2017, which includes, among other items, a reduced federal corporate tax rate\. At the same time, the legislation eliminates certain tax deductions and preferences\. These changes not only impact the Company directly, but could impact the U\.S\. economy as a whole, including consumer demand\.

Finally, the annual congressional budget process is another legislative vehicle in which new aviation taxes or regulations may be imposed\. Congress is expected to approve an "omnibus" or comprehensive appropriations package for federal

12


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

|           |                                                                                |
| --------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 23\.1†    | [Consent of Independent Registered Public Accounting Firm (KPMG LLP)](https://www.example.com/alk10-k123117ex231.htm)                                                                                |
| 31\.1†    | [Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes\-Oxley Act of 2002](https://www.example.com/alk10-k123117ex311.htm)                                                                   |
| 31\.2†    | [Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes\-Oxley Act of 2002](https://www.example.com/alk10-k123117ex312.htm)                                                                   |
| 32\.1†    | [Certification of Chief Executive Officer Pursuant to 18 U\.S\.C\. Section 1350, as adopted pursuant to Section 906 of the Sarbanes\-Oxley Act of 2002](https://www.example.com/alk10-k123117ex321.htm)                 |
| 32\.2†    | [Certification of Chief Financial Officer Pursuant to 18 U\.S\.C\. Section 1350, as adopted pursuant to Section 906 of the Sarbanes\-Oxley Act of 2002](https://www.example.com/alk10-k123117ex322.htm)                 |
| 101\.INS† | XBRL Instance Document                                                                                |
| 101\.SCH† | XBRL Taxonomy Extension Schema Document                                                                                |
| 101\.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document                                                                                |
| 101\.DEF† | XBRL Taxonomy Extension Definition Linkbase Document                                                                                |
| 101\.LAB† | XBRL Taxonomy Extension Label Linkbase Document                                                                                |
| 101\.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document                                                                                |
| †         | Filed herewith                                                                                |
| \*        | Indicates management contract or compensatory plan or arrangement\.                                                                                |
| \#        | Pursuant to 17 CFR 240\.24b\-2, confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission\. |
| ^         | Filed by Virgin America Inc\., File Number 333\-197660                                                                                |

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