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

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

|          |                 |                                                                                |
| -------- | --------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|  †10\.3  | UAL             | [First Amendment, dated January 29, 2018, to United Continental Holdings, Inc Profit Sharing Plan (Filed as Exhibit 10\.3 to UAL's Form 10\-K for the year ended December 31, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312518054235/d471340dex103.htm)                                                                                |
|  †10\.4  | UAL
United | [Employment Agreement, dated December 31, 2015, among United Continental Holdings, Inc\., United Airlines, Inc\. and Oscar Munoz (filed as Exhibit 10\.1 to UAL's Form 8\-K/A filed January 7, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000110465916088696/a16-1427_1ex10d1.htm)                                                                                |
|  †10\.5  | UAL
United | [Amendment to Employment Agreement, dated April 19, 2016, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and Oscar Munoz (filed as Exhibit 10\.1 to UAL's Form 8\-K filed April 20, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000110465916112678/a16-8741_1ex10d1.htm)                                                                   |
|  †10\.6  | UAL
United | [Second Amendment to Employment Agreement, dated April 21, 2017, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and Oscar Munoz (incorporated by reference to Exhibit 10\.1 to the Registrant's Current Report on Form 8\-K filed on April 21, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000110465917025203/a17-11675_1ex10d1.htm)       |
|  †10\.7  | UAL
United | [SERP Agreement, dated as of October 1, 2010, by and among United Continental Holdings, Inc\., Continental Airlines, Inc\. and Gerald Laderman (filed as Exhibit 10\.2 to UAL's Form 10\-Q for the quarter ended September 30, 2015, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312515350093/d63220dex102.htm)                                                    |
|  †10\.8  | UAL
United | [Performance Award Agreement, dated May 5, 2016, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and Brett J\. Hart (filed as Exhibit 10\.3 to UAL's Form 10\-Q for the quarter ended June 30, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312516651221/d188420dex103.htm)                                                            |
|  †10\.9  | UAL             | [Form of Stock Option Award Notice pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (filed as Exhibit 10\.1 to UAL's Form 10\-Q for the quarter ended September 30, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312516739859/d259980dex101.htm)                                                                            |
|  †10\.10 | UAL             | [Form of Restricted Stock Unit Award Notice pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (filed as Exhibit 10\.2 to UAL's Form 10\-Q for the quarter ended September 30, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312516739859/d259980dex102.htm)                                                                   |
|  †10\.11 | UAL
United | [Description of Benefits for Officers of United Continental Holdings, Inc\. and United Airlines, Inc\. (filed as Exhibit 10\.11 to UAL's Form 10\-K for the year ended December 31, 2015, Commission file number 1\-6033 and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312516468479/d13806dex1011.htm)                                                                                |
|  †10\.12 | UAL             | [United Continental Holdings, Inc\. Officer Travel Policy (filed as Exhibit 10\.24 to UAL's Form 10\-K for the year ended December 31, 2010, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312511042335/dex1024.htm)                                                                                |
|  †10\.13 | UAL             | [United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (filed as Annex A to UAL Corporation's 2013 Definitive Proxy Statement filed on April 26, 2013, Commission file number 1\-6033, and incorporated herein by reference) (now named the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan)](http://www.sec.gov/Archives/edgar/data/100517/000104746913004972/a2214585zdef14a.htm#la45701_annex_a)              |
|  †10\.14 | UAL             | [First Amendment to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (changing the name to United Continental Holdings, Inc\. 2008 Incentive Compensation Plan) (filed as Annex A to UAL's Definitive Proxy Statement filed on April 26, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000104746913004972/a2214585zdef14a.htm#la45701_annex_a) |
|  †10\.15 | UAL             | [Second Amendment to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (filed as Exhibit 10\.19 to UAL's Form 10\-K for the year ended December 31, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312517054129/d300268dex1019.htm)                                                                                |
|  †10\.16 | UAL             | [Form of Stock Option Award Notice pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (filed as Exhibit 10\.5 to UAL's Form 10\-Q for the quarter ended June 30, 2008, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000104746908008342/a2186941zex-10_5.htm)                                                                              |
|  †10\.17 | UAL             | [Form of Restricted Stock Unit Award Notice pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (stock settled) (filed as Exhibit 10\.21 to UAL's Form 10\-K for the year ended December 31, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312517054129/d300268dex1021.htm)                                                     |
|  †10\.18 | UAL             | [Form of Restricted Share Award Notice pursuant to the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan (awards during and after 2014) (filed as Exhibit 10\.27 to UAL's Form 10\-K for the year ended December 31, 2013, Commission file number 1\-6033, and incorporated by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312514060695/d624298dex1027.htm)                                                  |

98


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

ITEM 1A\. RISK FACTORS

Risk Factors Relating to Delta

We are at risk of losses and adverse publicity stemming from a serious accident involving our aircraft or aircraft of our airline partners\.

An aircraft crash or other serious accident could expose us to significant liability\. Although we believe that our insurance coverage is appropriate, we may be forced to bear substantial losses from an accident in the event that the coverage was not sufficient\.

In addition, any accident involving an aircraft that we operate or an aircraft that is operated by an airline that is one of our regional carriers or codeshare, alliance or joint venture partners could create a negative public perception about safety, which could harm our reputation, resulting in air travelers being reluctant to fly on our aircraft and therefore harm our business\.

Breaches or lapses in the security of our technology systems and the data we store could compromise passenger or employee information and expose us to liability, possibly having a material adverse effect on our business\.

As a regular part of our ordinary business operations, we collect and store sensitive data, including information necessary for our operations, personal information of our passengers and employees and information of our business partners\. The secure operation of the networks and systems on which this type of information is stored, processed and maintained is critical to our business operations and strategy\.

Our information systems and those of our service providers are subject to an increasing threat of continually evolving cybersecurity risks\. Unauthorized parties may attempt to gain access to our systems or information, or those of our service providers, including through fraud or other means of deception\. Hardware or software we develop, acquire or use in connection with our systems may contain defects that could unexpectedly compromise information security\. For example, we were notified in 2018 that a third\-party vendor of chat services for Delta and other companies determined it had been involved in a cyber incident for a short period in 2017\. We have incurred remedial, legal and other costs in connection with this incident but the costs are not material to our financial position or results of operations\.

The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time\. As a result of these types of risks and regular attacks on our systems, we regularly review and update procedures and processes to prevent and protect against unauthorized access to our systems and information and inadvertent misuse of data\. In addition to continuously risk assessing and reviewing our procedures, processes and technologies, we also continue to monitor, review and update the process and control requirements we expect our third parties and vendors to leverage and implement for the protection of Delta information that is in their care\. However, the constantly changing nature of the threats means that we may not be able to prevent all information security breaches or misuse of data\.

The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, our information or that of our customers, employees or business partners or failure to comply with regulatory or contractual obligations with respect to such information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business\. The costs to remediate breaches and similar system compromises that do occur could be material\. In addition, as cybercriminals become more sophisticated, the cost of proactive defensive measures may increase\.

13


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

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

The amount of, and changes to, our uncertain tax positions were not material in any of the years presented\. We accrue interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively\.

The 2017 Tax Act was enacted on December 22, 2017\. The 2017 Tax Act is the most comprehensive tax change in more than 30 years\. As of December 31, 2017, we have not completed our evaluation of the 2017 Tax Act; however, to the extent possible, we have made a reasonable estimate of its effects, including the impact of lower corporate income tax rates (21% vs\. 35%) on our deferred tax assets and liabilities and the one\-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred\. For the year ended December 31, 2017, we recognized a special income tax benefit of $7 million to reflect these impacts of the 2017 Tax Act\.

The 2017 Tax Act is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementation regulations by the Treasury and Internal Revenue Service\. In addition, it is unclear how these U\.S\. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities\. Accordingly, we have not yet been able to make a reasonable estimate of the impact of certain items and continue to account for those items based on the tax laws in effect prior to the 2017 Tax Act\.

As further interpretations, clarifications and amendments to the 2017 Tax Act are made, our future financial statements could be materially impacted\.

**7\. Risk Management**

Our economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel\.

Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, our revenues are heavily influenced by the condition of the U\.S\. economy and economies in other regions of the world\. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by our competitors, all of which in turn have had, and may have in the future, a negative effect on our business\. In addition, during challenging economic times, actions by our competitors to increase their revenues can have an adverse impact on our revenues\.

Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business\. Jet fuel market prices have fluctuated substantially over the past several years and prices continue to be highly volatile\. Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of fuel can have a material effect on our operating results and liquidity\.

These additional factors could impact our results of operations, financial performance and liquidity:

***(a) Credit Risk***

Most of our receivables relate to tickets sold to individual passengers through the use of major credit cards or to tickets sold by other airlines and used by passengers on American\. These receivables are short\-term, mostly settled within seven days after sale\. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts\. We do not believe we are subject to any significant concentration of credit risk\.

***(b) Interest Rate Risk***

We have exposure to market risk associated with changes in interest rates related primarily to our variable rate debt obligations\. Interest rates on $9\.6 billion principal amount of long\-term debt as of December 31, 2017 are subject to adjustment to reflect changes in floating interest rates\. The weighted average effective interest rate on our variable rate debt was 3\.4% at December 31, 2017\. We do not currently have an interest rate hedge program\.

104


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

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

Contract Carrier Agreements

We have contract carrier agreements with regional carriers expiring from  2018  to  2027 \.

Capacity Purchase Agreements \. Most of our contract carriers operate for us under capacity purchase agreements\. Under these agreements, the contract carriers operate some or all of their aircraft using our flight designator codes, and we control the scheduling, pricing, reservations, ticketing and seat inventories of those aircraft and retain the revenues associated with those flights\. We pay those airlines an amount, as defined in the applicable agreement, which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services\.

The following table shows our minimum fixed obligations under our existing capacity purchase agreements with third\-party regional carriers\. The obligations set forth in the table contemplate minimum levels of flying by the contract carriers under the respective agreements and also reflect assumptions regarding certain costs associated with the minimum levels of flying such as the cost of fuel, labor, maintenance, insurance, catering, property tax and landing fees\. Accordingly, our actual payments under these agreements could differ materially from the minimum fixed obligations set forth in the table below\.

|                   |                      |
| ----------------- | -------------------- |
| **(in millions)** | **Amount** **^(1)^** |
| 2018              | $1,772               |
| 2019              | 1,603                |
| 2020              | 1,320                |
| 2021              | 793                  |
| 2022              | 723                  |
| Thereafter        | 1,975                |
| Total             | $8,186               |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | These amounts exclude contract carrier payments accounted for as operating leases of aircraft, which are described in  Note 7 \.  |

Revenue Proration Agreement \. As of  December 31, 2017 , a portion of our contract carrier agreement with SkyWest Airlines, Inc\. is structured as a revenue proration agreement\. This revenue proration agreement establishes a fixed dollar or percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries\.

Legal Contingencies

We are involved in various legal proceedings related to employment practices, environmental issues, antitrust matters and other matters concerning our business\. We record liabilities for losses from legal proceedings when we determine that it is probable that the outcome in a legal proceeding will be unfavorable and the amount of loss can be reasonably estimated\. Although the outcome of the legal proceedings in which we are involved cannot be predicted with certainty, we believe that the resolution of current matters will not have a material adverse effect on our Consolidated Financial Statements\.

Credit Card Processing Agreements

Our VISA/MasterCard and American Express credit card processing agreements provide that no cash reserve ("Reserve") is required, and no withholding of payment related to receivables collected will occur, except in certain circumstances, including when we do not maintain a required level of liquidity as outlined in the merchant processing agreements\. In circumstances in which the credit card processor can establish a Reserve or withhold payments, the amount of the Reserve or payments that may be withheld would be equal to the potential liability of the credit card processor for tickets purchased with VISA/MasterCard or American Express credit cards, as applicable, that had not yet been used for travel\. We did not have a Reserve or an amount withheld as of  December 31, 2017  or  2016 \.

 80


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

PART I

ITEM 1\. BUSINESS

Overview

American Airlines Group Inc\. (AAG), a Delaware corporation, is a holding company and its principal, wholly\-owned subsidiaries are American Airlines, Inc\. (American), Envoy Aviation Group Inc\. (Envoy), PSA Airlines, Inc\. (PSA) and Piedmont Airlines, Inc\. (Piedmont)\. AAG was formed in 1982 under the name AMR Corporation (AMR) as the parent company of American, which was founded in 1934\.

AAG’s and American’s principal executive offices are located at 1 Skyview Drive, Fort Worth, Texas 76155 and their telephone number is 817\-963\-1234\.

Airline Operations

Our primary business activity is the operation of a major network carrier, providing scheduled air transportation for passengers and cargo\.

Together with our wholly\-owned regional airline subsidiaries and third\-party regional carriers operating as American Eagle, our airline operates an average of 6,800 flights per day to more than 365 destinations in 61 countries through our hubs and gateways in Charlotte, Chicago, Dallas/Fort Worth, London Heathrow, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D\.C\. In  2019 , approximately  215 million  passengers boarded our flights\. During  2019 , we launched new seasonal nonstop service to transatlantic markets Dubrovnik, Croatia and Berlin, Germany from Philadelphia International Airport (PHL)\. We also announced an international expansion beginning in summer 2020 that will, among other things, introduce new seasonal nonstop service between PHL and Casablanca, Morocco, representing our entry into the African market, new seasonal nonstop service between Chicago O’Hare International Airport (ORD) and Krakow, Poland, Prague, Czech Republic and Budapest, Hungary, and the return of service to Tel Aviv, Israel, with year\-round nonstop service from Dallas/Fort Worth International Airport (DFW)\. Beginning in October 2020, we also plan to operate new seasonal nonstop service between Los Angeles International Airport (LAX) and Christchurch, New Zealand and from DFW to Auckland, New Zealand, to which we currently operate seasonal service from LAX\.

As of  December 31, 2019 , we operated  942  mainline aircraft supported by our regional airline subsidiaries and third\-party regional carriers, which operated an additional  605  regional aircraft\. See Part I, Item 2\. Properties for further discussion on our mainline and regional aircraft and “ Regional ” below for further discussion on our regional operations\.

American is a founding member of the  one world ^®^  alliance, whose members serve 1,100 destinations in 180 countries and territories\. See below for further discussion on the  one world alliance and other agreements with domestic and international airlines\.

See Part II, Item 7\. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “ 2019  Financial Overview ,” “AAG’s Results of Operations”  and  “American’s Results of Operations”  for further discussion of AAG’s and American’s operating results and operating performance\. Also, see Note 14 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 12 to American’s Consolidated Financial Statements in Part II, Item 8B for information regarding operating segments and see Note 1(k) to each of AAG’s and American’s Consolidated Financial Statements in Part II, Items 8A and 8B, respectively, for passenger revenue by geographic region\.

Regional

Our regional carriers provide scheduled air transportation under the brand name “American Eagle\.” The American Eagle carriers include our wholly\-owned regional carriers Envoy, PSA and Piedmont, as well as third\-party regional carriers including Republic Airline Inc\. (Republic), Mesa Airlines, Inc\. (Mesa), SkyWest Airlines, Inc\. (SkyWest) and Compass Airlines, LLC (Compass)\. Our regional carriers are an integral component of our operating network\. We rely heavily on regional carriers to drive feeder traffic to our hubs from low\-density markets that are not economical for us to serve with larger, mainline aircraft\. In addition, regional carriers offer complementary service in many of our mainline markets\. During  2019 , approximately  59 million  passengers boarded our regional carriers’ planes, approximately  43%  of whom connected to or from our mainline flights\. All American Eagle carriers use logos, service marks, aircraft paint schemes and uniforms similar to those of our mainline operations\.

5


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

|                                                                                |                                                                    |
| ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ |
| **Table of Contents**                                                                                | **Table of Contents**                                              |
|                                                                                | **Page**                                                           |
| [Forward\-Looking Statements](http://ir.delta.com/.#s992AE06DC10A5115AB0073AC799CC986)                                                                                |
[ 1](http://ir.delta.com/.#s992AE06DC10A5115AB0073AC799CC986)  |
| **PART I**                                                                                |                                                                    |
| [**ITEM 1\. BUSINESS**](http://ir.delta.com/.#s951939D656A15495A4F8A79DA3064AE2)                                                                                |
[ 2](http://ir.delta.com/.#s951939D656A15495A4F8A79DA3064AE2)  |
| [General](http://ir.delta.com/.#sB06D4D18CA6F5C638B45DB60E036DA0C)                                                                                |
[ 2](http://ir.delta.com/.#sB06D4D18CA6F5C638B45DB60E036DA0C)  |
| [Loyalty Program](http://ir.delta.com/.#sFB5D2C88205A5A9682C09F8B28BDC9BA)                                                                                |
[ 4](http://ir.delta.com/.#sFB5D2C88205A5A9682C09F8B28BDC9BA)  |
| [Fuel](http://ir.delta.com/.#s40C5E1D23A455059B4FA4CB869C3D356)                                                                                |
[ 5](http://ir.delta.com/.#s40C5E1D23A455059B4FA4CB869C3D356)  |
| [Other Businesses](http://ir.delta.com/.#sA1381EE1928F5F8D8DBFF607E5485799)                                                                                |
[ 5](http://ir.delta.com/.#sA1381EE1928F5F8D8DBFF607E5485799)  |
| [Competition](http://ir.delta.com/.#s92C437AD391C517BA0176A9882DE3EA4)                                                                                |
[ 6](http://ir.delta.com/.#s92C437AD391C517BA0176A9882DE3EA4)  |
| [Regulatory Matters](http://ir.delta.com/.#sE92B11F905C554719034E8F607390536)                                                                                |
[ 7](http://ir.delta.com/.#sE92B11F905C554719034E8F607390536)  |
| [Employee Matters](http://ir.delta.com/.#s0DB44555F9605C7C847B038F9521A76B)                                                                                |
[ 10](http://ir.delta.com/.#s0DB44555F9605C7C847B038F9521A76B) |
| [Executive Officers of the Registrant](http://ir.delta.com/.#s2E49E5AF1ADE58ED928257385F14CF33)                                                                                |
[ 11](http://ir.delta.com/.#s2E49E5AF1ADE58ED928257385F14CF33) |
| [Additional Information](http://ir.delta.com/.#sCC85457095DD5CAB8222E2CC970AE619)                                                                                |
[ 11](http://ir.delta.com/.#sCC85457095DD5CAB8222E2CC970AE619) |
| [**ITEM 1A\. RISK FACTORS**](http://ir.delta.com/.#sCABCD48666205E0AA9B39B7B979151B1)                                                                                |
[ 12](http://ir.delta.com/.#sCABCD48666205E0AA9B39B7B979151B1) |
| [Risk Factors Relating to Delta](http://ir.delta.com/.#sA7505CCFC67C537C8E22AACAC281DB74)                                                                                |
[ 12](http://ir.delta.com/.#sA7505CCFC67C537C8E22AACAC281DB74) |
| [Risk Factors Relating to the Airline Industry](http://ir.delta.com/.#s2464DEA1A1785C3D855CC8C880B9C4B6)                                                                                |
[ 17](http://ir.delta.com/.#s2464DEA1A1785C3D855CC8C880B9C4B6) |
| [**ITEM 1B\. UNRESOLVED STAFF COMMENTS**](http://ir.delta.com/.#s1EC570684CE05EBDAAB75E51DB39FB1A)                                                                                |
[ 19](http://ir.delta.com/.#s1EC570684CE05EBDAAB75E51DB39FB1A) |
| [**ITEM 2\. PROPERTIES**](http://ir.delta.com/.#sC73BCBAC6072565E8038553B69452194)                                                                                |
[ 20](http://ir.delta.com/.#sC73BCBAC6072565E8038553B69452194) |
| [Flight Equipment](http://ir.delta.com/.#sA1DD9FDB21EC5F9286E8FADC7AF615FE)                                                                                |
[ 20](http://ir.delta.com/.#sA1DD9FDB21EC5F9286E8FADC7AF615FE) |
| [Ground Facilities](http://ir.delta.com/.#sFED3F16F23DF5FFF804BEC12FBBAC7D2)                                                                                |
[ 21](http://ir.delta.com/.#sFED3F16F23DF5FFF804BEC12FBBAC7D2) |
| [**ITEM 3\. LEGAL PROCEEDINGS**](http://ir.delta.com/.#s75100405F0735ECDA2365C696E2CC5A3)                                                                                |
[ 22](http://ir.delta.com/.#s75100405F0735ECDA2365C696E2CC5A3) |
| [**ITEM 4\. MINE SAFETY DISCLOSURES**](http://ir.delta.com/.#s24C07B83713D5ECE9263429205106D20)                                                                                |
[ 22](http://ir.delta.com/.#s24C07B83713D5ECE9263429205106D20) |
| **PART II**                                                                                |                                                                    |
| [**ITEM 5\. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER**](http://ir.delta.com/.#s40BB2DD6A68B57E7BE9ED799E6854A9D)

[**MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**](http://ir.delta.com/.#s40BB2DD6A68B57E7BE9ED799E6854A9D) |
[ 23](http://ir.delta.com/.#s40BB2DD6A68B57E7BE9ED799E6854A9D) |
| [**ITEM 6\. SELECTED FINANCIAL DATA**](http://ir.delta.com/.#s29B3E21F72545EBAB0B798847370F388)                                                                                |
[ 25](http://ir.delta.com/.#s29B3E21F72545EBAB0B798847370F388) |
| [**ITEM 7\. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**](http://ir.delta.com/.#sF9178631131555C3ACFFA1302F494D71)

[**RESULTS OF OPERATION**](http://ir.delta.com/.#sF9178631131555C3ACFFA1302F494D71)**S**                   |
[ 27](http://ir.delta.com/.#sF9178631131555C3ACFFA1302F494D71) |
| [Financial Highlights \- 2018 Compared to 2017](http://ir.delta.com/.#sAC71E9E86EE1563FB49C4A2FF4AE660C)                                                                                |
[ 27](http://ir.delta.com/.#sAC71E9E86EE1563FB49C4A2FF4AE660C) |
| [Results of Operations \- 2018 Compared to 2017](http://ir.delta.com/.#sB1C075CEFDCE5C209E68C6420354B0EC)                                                                                |
[ 28](http://ir.delta.com/.#sB1C075CEFDCE5C209E68C6420354B0EC) |
| [Results of Operations \- 2017 Compared to 2016](http://ir.delta.com/.#s37C7A0BF28F15DC680491D7D01D919F8)                                                                                |
[ 32](http://ir.delta.com/.#s37C7A0BF28F15DC680491D7D01D919F8) |
| [Non\-Operating Results](http://ir.delta.com/.#sDB4C82A4EC7F586F82CDA47E9700C836)                                                                                |
[ 36](http://ir.delta.com/.#sDB4C82A4EC7F586F82CDA47E9700C836) |
| [Income Taxes](http://ir.delta.com/.#s8BBAB25EE8DB5AF39058258F0D6D4D2A)                                                                                |
[ 36](http://ir.delta.com/.#s8BBAB25EE8DB5AF39058258F0D6D4D2A) |
| [Refinery Segment](http://ir.delta.com/.#sD8625C5429955E819F66BB1508D86705)                                                                                |
[ 37](http://ir.delta.com/.#sD8625C5429955E819F66BB1508D86705) |
| [Financial Condition and Liquidity](http://ir.delta.com/.#sC75F3EB758995CFA97709E27EEE2EC10)                                                                                |
[ 38](http://ir.delta.com/.#sC75F3EB758995CFA97709E27EEE2EC10) |
| [Contractual Obligations](http://ir.delta.com/.#s88ED45F54B1A51A19F1ADBF9DCEDA98B)                                                                                |
[ 41](http://ir.delta.com/.#s88ED45F54B1A51A19F1ADBF9DCEDA98B) |
| [Critical Accounting Policies and Estimates](http://ir.delta.com/.#s17BE6D937AD252E5A9DEF51567CFFE0F)                                                                                |
[ 43](http://ir.delta.com/.#s17BE6D937AD252E5A9DEF51567CFFE0F) |
| [Supplemental Information](http://ir.delta.com/.#s395D4BF7969E556EBDD44F06CEDCB6E9)                                                                                |
[ 48](http://ir.delta.com/.#s395D4BF7969E556EBDD44F06CEDCB6E9) |
| [Glossary of Defined Terms](http://ir.delta.com/.#s2BAD2936462F568180B4874C54FDD165)                                                                                |
[ 49](http://ir.delta.com/.#s2BAD2936462F568180B4874C54FDD165) |
| [**ITEM 7A\. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**](http://ir.delta.com/.#sBF7B5E7769935B81878F022C78613B0A)                                                                                |
[ 50](http://ir.delta.com/.#sBF7B5E7769935B81878F022C78613B0A) |
| [**ITEM 8\. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**](http://ir.delta.com/.#sCAECD40F9F7754A88DF5F962B4B58248)                                                                                |
[ 51](http://ir.delta.com/.#sCAECD40F9F7754A88DF5F962B4B58248) |
| [**ITEM 9\. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND**](http://ir.delta.com/.#s6827A436637D578E9366E1AE5C504BFA)

[**FINANCIAL DISCLOSURE**](http://ir.delta.com/.#s6827A436637D578E9366E1AE5C504BFA)                         |
[ 98](http://ir.delta.com/.#s6827A436637D578E9366E1AE5C504BFA) |
| [**ITEM 9A\. CONTROLS AND PROCEDURES**](http://ir.delta.com/.#sDD35F13317EA512098B6F2BD8FB4DD95)                                                                                |
[ 98](http://ir.delta.com/.#sDD35F13317EA512098B6F2BD8FB4DD95) |


Annual Report of Southwest Airlines Co\. for year 2018

**Reconciliation of Reported Amounts to Non\-GAAP Financial Measures** **(excluding special items)(unaudited) (in millions, except per share amounts and per ASM amounts)**

|                                                                                |                             |                             |             |
| ---------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | --------------------------- | ----------- |
|                                                                                | **Year ended December 31,** | **Year ended December 31,** |             |
|                                                                                | **2018**                    | **2017**                    | **Percent** |
|                                                                                |                             | **As Recast**               | **Change**  |
| **Fuel and oil expense, unhedged**                                                                                | $4,649                      | $3,524                      |             |
| Premium cost of fuel contracts                                                                                | 135                         | 136                         |             |
| Add (Deduct): Fuel hedge (gains) losses included in Fuel and oil expense, net                                                            | (168)                       | 416                         |             |
| **Fuel and oil expense, as reported**                                                                                | $4,616                      | $4,076                      |             |
| Add: Net impact from fuel contracts                                                                                | 14                          | 156                         |             |
| **Fuel and oil expense, excluding special items (economic)**                                                                             | $4,630                      | $4,232                      | 9\.4 %      |
| **Total operating expenses, as reported**                                                                                | $18,759                     | $17,739                     |             |
| Add: Reclassification between Fuel and oil and Other (gains) losses, net,

 associated with current period settled contracts       | —                           | 6                           |             |
| Add: Contracts settling in the current period, but for which gains and/or (losses)

 have been recognized in a prior period (a)   | 14                          | 150                         |             |
| Deduct: Lease termination expense                                                                                | —                           | (33)                        |             |
| Deduct: Aircraft grounding charge                                                                                | —                           | (63)                        |             |
| Add: Gain on sale of grounded aircraft                                                                                | 25                          | —                           |             |
| **Total operating expenses, excluding special items**                                                                                | $18,798                     | $17,799                     | 5\.6 %      |
| **Operating income, as reported**                                                                                | $3,206                      | $3,407                      |             |
| Deduct: Reclassification between Fuel and oil and Other (gains) losses, net,

 associated with current period settled contracts    | —                           | (6)                         |             |
| Deduct: Contracts settling in the current period, but for which gains and/or (losses)

 have been recognized in a prior period (a) | (14)                        | (150)                       |             |
| Add: Lease termination expense                                                                                | —                           | 33                          |             |
| Add: Aircraft grounding charge                                                                                | —                           | 63                          |             |
| Deduct: Gain on sale of grounded aircraft                                                                                | (25)                        | —                           |             |
| **Operating income, excluding special items**                                                                                | $3,167                      | $3,347                      | (5\.4)%     |
| **Provision (benefit) for income taxes, as reported**                                                                                | $699                        | $(92)                       |             |
| Add (Deduct): Net income tax impact of special items, excluding Tax reform

 impact (b)                                           | (9)                         | 17                          |             |
| Add: Tax reform impact (c)                                                                                | —                           | 1,270                       |             |
| **Provision for income taxes, excluding special items**                                                                                | $690                        | $1,195                      | (42\.3)%    |
| **Net income, as reported**                                                                                | $2,465                      | $3,357                      |             |
| Add: Mark\-to\-market impact from fuel contracts settling in future periods                                                              | —                           | 69                          |             |
| Add: Ineffectiveness from fuel hedges settling in future periods                                                                         | —                           | 31                          |             |
| Deduct: Other net impact of fuel contracts settling in the current or a prior period

 (excluding reclassifications)               | (14)                        | (150)                       |             |
| Add: Lease termination expense                                                                                | —                           | 33                          |             |
| Add: Aircraft grounding charge                                                                                | —                           | 63                          |             |
| Deduct: Gain on sale of grounded aircraft                                                                                | (25)                        | —                           |             |
| Add (Deduct): Net income tax impact of special items, excluding Tax reform impact (b)                                                    | 9                           | (17)                        |             |
| Deduct: Tax reform impact (c)                                                                                | —                           | (1,270)                     |             |
| **Net income, excluding special items**                                                                                | $2,435                      | $2,116                      | 15\.1 %     |

50


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

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

The Company could experience adverse publicity, harm to its brand, reduced travel demand and potential tort liability as a result of an accident, catastrophe or incident involving its aircraft or its operations, the aircraft or operations of its regional carriers, the aircraft or operations of its codeshare partners, or the aircraft or operations of another airline, which may result in a material adverse effect on the Company's business, operating results and financial condition\.

An accident, catastrophe or incident involving an aircraft that the Company operates, or an aircraft that is operated by a codeshare partner, one of the Company's regional carriers or another airline, or an incident involving the Company's operations, or the operations of a codeshare partner, one of the Company's regional carriers or of another airline, could have a material adverse effect on the Company if such accident, catastrophe or incident created a public perception that the Company's operations, or the operations of its codeshare partners or regional carriers, are not safe or reliable, or are less safe or reliable than other airlines\. Additionally, any accident, catastrophe or incident involving an aircraft type that is operated by the Company, its codeshare partners or regional carriers could have a material adverse effect on the Company if such accident, catastrophe or incident creates a public perception that such aircraft type was not safe or reliable\. Such public perception could, in turn, result in adverse publicity for the Company, cause harm to the Company's brand and reduce travel demand on the Company's flights, or the flights of its codeshare partners or regional carriers\.

In addition, any such accident, catastrophe or incident involving the Company, its regional carriers or its codeshare partners could expose the Company to significant tort liability\. Although the Company currently maintains liability insurance in amounts and of the type the Company believes to be consistent with industry practice to cover damages arising from any such accident, catastrophe or incident, and the Company's codeshare partners and regional carriers carry similar insurance and generally indemnify the Company for their operations, if the Company's liability exceeds the applicable policy limits or the ability of another carrier to indemnify it, the Company could incur substantial losses from an accident, catastrophe or incident which may result in a material adverse effect on the Company's operating results and financial condition\.

Terrorist attacks, international hostilities or other security events, or the fear of terrorist attacks or hostilities, even if not made directly on the airline industry, could negatively affect the Company and the airline industry\.

Terrorist attacks or international hostilities, even if not made on or targeted directly at the airline industry, or the fear of or the precautions taken in anticipation of such attacks (including elevated national threat warnings, travel restrictions, selective cancellation or redirection of flights and new security regulations) could materially and adversely affect the Company and the airline industry\. Security events pose a significant risk to our passenger and cargo operations\. These events could include acts of violence in public areas that we cannot control\. The Company's financial resources may not be sufficient to absorb the adverse effects of any future terrorist attacks, international hostilities or other security events\. Any such events could have a material adverse impact on the Company's financial condition, liquidity and operating results\.

Increasing privacy and data security obligations or a significant data breach may adversely affect the Company's business\.

In our regular business operations, we collect, transmit, process and store sensitive data, including personal information of our customers and employees such as payment processing information and information of our business partners\. The Company depends on the ability to use information we collect to provide our services and operate our business\.

The Company must manage increasing legislative, regulatory and consumer focus on privacy issues and data security\. For example, in May 2018, the EU's General Data Protection Regulation became effective, which imposes significant privacy and data security requirements, as well as potential for substantial penalties for non\-compliance\. Recent penalties imposed by regulators have resulted in substantial adverse financial consequences to those companies\. Also, some of the Company's commercial partners, such as credit card companies, have imposed data security standards that the Company must meet\. These standards continue to evolve\. The Company will continue its efforts to meet its privacy and data security obligations; however, it is possible that certain new obligations or customer expectations may be difficult to meet and could increase the Company's costs\.

Additionally, the Company must manage evolving cybersecurity risks\. Our network systems and storage applications, and those systems and storage and other business applications maintained by our third\-party providers, may be subject to attempts to gain unauthorized access, breach, malfeasance or other system disruptions\. In some cases, it is difficult to anticipate or to detect immediately such incidents and the damage caused thereby\. In addition, as attacks by cybercriminals become more sophisticated, frequent and intense, the costs of proactive defense measures may increase\. While we continually work to safeguard our internal network systems, including through risk assessments, system monitoring, information security policies and employee awareness and training, and review and validate our third\-party security standards, there is no assurance that such actions will be sufficient to prevent cyber\-attacks or data breaches\.

The loss, disclosure, misappropriation of or access to customers', employees' or business partners' information or the Company's failure to meet its obligations could result in legal claims or proceedings, penalties and remediation costs\. A

13


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

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

Landing fees and other rent increased $75 million, or 3\.5%, in 2017 as compared to the year\-ago period due to higher rental and landing fee rates\.

Regional capacity purchase costs increased $35 million, or 1\.6%, in 2017 as compared to the year\-ago period despite regional capacity being down 3\.8% in 2017 as compared to 2016 due to increases in annual rates, maintenance cycle\-related costs and lease return costs\.

Depreciation and amortization increased $172 million, or 8\.7%, in 2017 as compared to 2016, primarily due to additions of new and used aircraft, aircraft improvements and increases in information technology infrastructure and application development projects\.

Aircraft maintenance materials and outside repairs increased $107 million, or 6\.1%, in 2017 as compared to 2016, primarily due to an increase in airframe and engine maintenance visits and additional repairs to wireless and inflight entertainment equipment\.

Aircraft rent decreased $59 million, or 8\.7%, in 2017 as compared to 2016, primarily due to the purchase of leased aircraft and lower lease renewal rates\.

The table below presents special charges incurred by the Company during the years ended December 31 (in millions):

|                                                            |          |          |
| ---------------------------------------------------------- | -------- | -------- |
|                                                            | **2017** | **2016** |
| Severance and benefit costs                                | $116     | $37      |
| Impairment of assets                                       | 25       | 412      |
| Cleveland airport lease restructuring                      | —        | 74       |
| Labor agreement costs                                      | —        | 171      |
| (Gains) losses on sale of assets and other special charges | 35       | 51       |
| Total special charges                                      | $176     | $745     |

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

Other operating expenses increased $233 million, or 4\.4%, in 2017 as compared to 2016, primarily due to increased costs in food, marketing and technology associated with the Company's enhanced customer experience initiatives, and due to volume\-driven increases in cargo trucking and handling costs\.

***Nonoperating Income (Expense)***

The following table illustrates the year\-over\-year dollar and percentage changes in the Company's nonoperating income (expense) for the years ended December 31 (in millions, except percentage changes):

|                                 |          |          |                         |              |
| ------------------------------- | -------- | -------- | ----------------------- | ------------ |
|                                 | **2017** | **2016** | **Increase (Decrease)** | **% Change** |
| Interest expense                | $(671)   | $(674)   | $(3)                    | (0\.4)       |
| Interest capitalized            | 84       | 72       | 12                      | 16\.7        |
| Interest income                 | 57       | 42       | 15                      | 35\.7        |
| Miscellaneous, net              | (101)    | (11)     | 90                      | NM           |
| Total nonoperating expense, net | $(631)   | $(571)   | $60                     | 10\.5        |

Miscellaneous, net increased $90 million in 2017 as compared to 2016 primarily due to 2016 curtailments gains related to changes in the new labor agreements\. See Note 14 to the financial statements included in Part II, Item 8 of this report for additional information\.

***Liquidity and Capital Resources***

As of December 31, 2018, the Company had $4\.0 billion in unrestricted cash, cash equivalents and short\-term investments, an increase of $0\.2 billion from December 31, 2017\. The Company had its entire commitment capacity of $2\.0 billion under the revolving credit facility of the Credit Agreement available for borrowings as of December 31, 2018\.

We have a significant amount of fixed obligations, including debt, aircraft leases and financings, leases of airport property and other facilities and pension funding obligations\. At December 31, 2018, the Company had approximately $14\.7 billion of debt and capital lease obligations, including $1\.4 billion that are due within the next 12 months\. In addition, we have substantial noncancelable commitments for capital expenditures, including the acquisition of new aircraft and related spare engines\. As of

29


Annual Report of Southwest Airlines Co\. for year 2019

PART II

Item 5\.   Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

The Company’s common stock is listed on the New York Stock Exchange ("NYSE") and is traded under the symbol "LUV\." The Company currently intends to continue declaring dividends on a quarterly basis for the foreseeable future; however, the Company’s Board of Directors may elect to alter the timing, amount, and payment of dividends on the basis of operational results, financial condition, cash requirements, future prospects, and other factors deemed relevant by the Board\. As of  January 30, 2020 , there were approximately  11,920  holders of record of the Company’s common stock\.

35


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

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

These credit ratings are below investment grade levels\. Downgrades from these rating levels, among other things, could restrict the availability, or increase the cost, of future financing for the Company\.

**Other Liquidity Matters**

Below is a summary of additional liquidity matters\. See the indicated notes to our consolidated financial statements included in Part II, Item 8 of this report for additional details related to these and other matters affecting our liquidity and commitments\.

|                                         |         |
| --------------------------------------- | ------- |
| Pension and other postretirement plans  | Note 8  |
| Long\-term debt and debt covenants      | Note 10 |
| Leases and capacity purchase agreements | Note 11 |
| Commitments and contingencies           | Note 13 |

***Contractual Obligations\.*** The Company’s business is capital intensive, requiring significant amounts of capital to fund the acquisition of assets, particularly aircraft\. In the past, the Company has funded the acquisition of aircraft through outright purchase, by issuing debt, by entering into capital or operating leases, or through vendor financings\. The Company also often enters into long\-term lease commitments with airports to ensure access to terminal, cargo, maintenance and other required facilities\.

The table below provides a summary of the Company’s material contractual obligations as of December 31, 2017 (in billions):

|                                                    |          |          |          |          |          |                     |           |
|:-------------------------------------------------- | --------:| --------:| --------:| --------:| --------:| -------------------:| ---------:|
|                                                    | **2018** | **2019** | **2020** | **2021** | **2022** | **After  <br>2022** | **Total** |
| Long\-term debt (a)                                |   $1\.6  |   $1\.2  |   $1\.2  |   $1\.2  |   $1\.5  |              $6\.9  |   $13\.4  |
| Capital lease obligations—principal portion        |    0\.1  |    0\.1  |    0\.1  |    0\.1  |    0\.1  |               0\.8  |     1\.1  |
| Total debt and capital lease obligations           |    1\.7  |    1\.3  |    1\.3  |    1\.3  |    1\.6  |               7\.7  |    14\.5  |
| Interest on debt and capital lease obligations (b) |    0\.6  |    0\.5  |    0\.5  |    0\.4  |    0\.4  |               1\.0  |     3\.4  |
| Aircraft operating lease obligations               |    1\.0  |    0\.9  |    0\.6  |    0\.5  |    0\.4  |               1\.5  |     4\.9  |
| Regional CPAs (c)                                  |    2\.0  |    1\.8  |    1\.6  |    1\.5  |    1\.4  |               3\.2  |    11\.5  |
| Other operating lease obligations                  |    1\.2  |    1\.1  |    1\.2  |    0\.9  |    0\.8  |               6\.1  |    11\.3  |
| Postretirement obligations (d)                     |    0\.1  |    0\.1  |    0\.1  |    0\.1  |    0\.1  |               0\.6  |     1\.1  |
| Pension obligations (e)                            |       —  |       —  |       —  |       —  |    0\.1  |               0\.7  |     0\.8  |
| Capital purchase obligations (f)                   |    3\.2  |    2\.9  |    2\.1  |    2\.4  |    1\.8  |               9\.8  |    22\.2  |
| Total contractual obligations                      |   $9\.8  |   $8\.6  |   $7\.4  |   $7\.1  |   $6\.6  |             $30\.6  |   $69\.7  |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| (a) | Long\-term debt presented in the Company’s financial statements is net of $163 million of debt discount, premiums and debt issuance costs which are being amortized over the debt terms\. Contractual payments are not net of the debt discount, premiums and debt issuance costs\.  |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | Includes interest portion of capital lease obligations of $72 million in 2018, $63 million in 2019, $59 million in 2020, $56 million in 2021, $52 million in 2022 and $391 million thereafter\. Interest payments on variable interest rate debt were calculated using London interbank offered rates (“LIBOR”) applicable at December 31, 2017\.  |

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

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (d) | Amounts represent postretirement benefit payments, net of subsidy receipts, through 2026\. Benefit payments approximate plan contributions as plans are substantially unfunded\.  |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (e) | Represents an estimate of the minimum funding requirements as determined by government regulations for United’s U\.S\. pension plans\. Amounts are subject to change based on numerous assumptions, including the performance of assets in the plans and bond rates\. See *Critical Accounting Policies*, below, for a discussion of our current year assumptions regarding United’s pension plans\.  |

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

38


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

**ALASKA AIR GROUP, INC\.**

**ANNUAL REPORT ON FORM 10\-K FOR THE YEAR ENDED** **DECEMBER 31, 2018**

**TABLE OF CONTENTS**

|                                                                        |                                                                                |                                                                      |
| ---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------- |
| [PART I](https://www.example.com#sA5D1B22A3DAF6C4179F85D19E29969AE)    |                                                                                |
[ 4](https://www.example.com#sA5D1B22A3DAF6C4179F85D19E29969AE)  |
| [ITEM 1\.](https://www.example.com#s3D650B7CBDB9FFA84B035D19E2B934C5)  | [OUR BUSINESS](https://www.example.com#s3D650B7CBDB9FFA84B035D19E2B934C5)                                                                                |
[ 4](https://www.example.com#s3D650B7CBDB9FFA84B035D19E2B934C5)  |
| [ITEM 1A\.](https://www.example.com#sD600DDF767DC588F86DE5D19E5FD72E3) | [RISK FACTORS](https://www.example.com#sD600DDF767DC588F86DE5D19E5FD72E3)                                                                                |
[ 19](https://www.example.com#sD600DDF767DC588F86DE5D19E5FD72E3) |
| [ITEM 1B\.](https://www.example.com#sAB6BE31F6E86F15B7AE85D19E6389452) | [UNRESOLVED STAFF COMMENTS](https://www.example.com#sAB6BE31F6E86F15B7AE85D19E6389452)                                                                                |
[ 25](https://www.example.com#sAB6BE31F6E86F15B7AE85D19E6389452) |
| [ITEM 2\.](https://www.example.com#sA69A80D8BE46BCA7353E5D19E64F8DD3)  | [PROPERTIES](https://www.example.com#sA69A80D8BE46BCA7353E5D19E64F8DD3)                                                                                |
[ 25](https://www.example.com#sA69A80D8BE46BCA7353E5D19E64F8DD3) |
| [ITEM 3\.](https://www.example.com#s10126C0C4F9833F41C325D19E6D67A1F)  | [LEGAL PROCEEDINGS](https://www.example.com#s10126C0C4F9833F41C325D19E6D67A1F)                                                                                |
[ 26](https://www.example.com#s10126C0C4F9833F41C325D19E6D67A1F) |
| [ITEM 4\.](https://www.example.com#s32D68F92D014BA0A5F0F5D19E6F8C98A)  | [MINE SAFETY DISCLOSURES](https://www.example.com#s32D68F92D014BA0A5F0F5D19E6F8C98A)                                                                                |
[ 27](https://www.example.com#s32D68F92D014BA0A5F0F5D19E6F8C98A) |
| [PART II](https://www.example.com#sD9125574169F225650FB5D19E7287FB9)   |                                                                                |
[ 27](https://www.example.com#sD9125574169F225650FB5D19E7287FB9) |
| [ITEM 5\.](https://www.example.com#s3677B141B1DB8978B3895D19E7496719)  | [MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES](https://www.example.com#s3677B141B1DB8978B3895D19E7496719) |
[ 27](https://www.example.com#s3677B141B1DB8978B3895D19E7496719) |
| [ITEM 6\.](https://www.example.com#s3126538E130F3A4935605D19E7F120CD)  | [SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA](https://www.example.com#s3126538E130F3A4935605D19E7F120CD)                                                                |
[ 29](https://www.example.com#s3126538E130F3A4935605D19E7F120CD) |
| [ITEM 7\.](https://www.example.com#sB8C69A7F2294DDD169B25D19E85F3334)  | [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](https://www.example.com#sB8C69A7F2294DDD169B25D19E85F3334)                             |
[ 31](https://www.example.com#sB8C69A7F2294DDD169B25D19E85F3334) |
| [ITEM 7A\.](https://www.example.com#s252275E89F31D084C3D05D19EB915733) | [QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK](https://www.example.com#s252275E89F31D084C3D05D19EB915733)                                                         |
[ 52](https://www.example.com#s252275E89F31D084C3D05D19EB915733) |
| [ITEM 8\.](https://www.example.com#s34AC1FC357CC03E3FEF15D19EBB72055)  | [CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](https://www.example.com#s34AC1FC357CC03E3FEF15D19EBB72055)                                                          |
[ 53](https://www.example.com#s34AC1FC357CC03E3FEF15D19EBB72055) |
| [ITEM 9\.](https://www.example.com#s12671DA7BE3E55F21FF35D19F0BA4AD5)  | [CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE](https://www.example.com#s12671DA7BE3E55F21FF35D19F0BA4AD5)                              |
[ 91](https://www.example.com#s12671DA7BE3E55F21FF35D19F0BA4AD5) |
| [ITEM 9A\.](https://www.example.com#s6E84CAB6888CCF43FDFE5D19F0C1D496) | [CONTROLS AND PROCEDURES](https://www.example.com#s6E84CAB6888CCF43FDFE5D19F0C1D496)                                                                                |
[ 92](https://www.example.com#s6E84CAB6888CCF43FDFE5D19F0C1D496) |
| [ITEM 9B\.](https://www.example.com#s401D7A1F9BD14473CA595D19F19311A8) | [OTHER INFORMATION](https://www.example.com#s401D7A1F9BD14473CA595D19F19311A8)                                                                                |
[ 95](https://www.example.com#s401D7A1F9BD14473CA595D19F19311A8) |
| [PART III](https://www.example.com#s274255E8C3244945D0CE5D19F1B679F6)  |                                                                                |
[ 95](https://www.example.com#s274255E8C3244945D0CE5D19F1B679F6) |
| [ITEM 10\.](https://www.example.com#s6DFEA91F38DBAADF01C75D19F1E68E8A) | [DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE](https://www.example.com#s6DFEA91F38DBAADF01C75D19F1E68E8A)                                                            |
[ 95](https://www.example.com#s6DFEA91F38DBAADF01C75D19F1E68E8A) |
| [ITEM 11\.](https://www.example.com#s8FD677DAECC54F68AACA5D19F207CBD9) | [EXECUTIVE COMPENSATION](https://www.example.com#s8FD677DAECC54F68AACA5D19F207CBD9)                                                                                |
[ 95](https://www.example.com#s8FD677DAECC54F68AACA5D19F207CBD9) |
| [ITEM 12\.](https://www.example.com#sA90DBF528EA91F14A9CF5D19BDDFD585) | [SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS](https://www.example.com#sA90DBF528EA91F14A9CF5D19BDDFD585)                   |
[ 95](https://www.example.com#sA90DBF528EA91F14A9CF5D19BDDFD585) |
| [ITEM 13\.](https://www.example.com#sFD3FB2FBA4EF0849D2795D19F25B4546) | [CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE](https://www.example.com#sFD3FB2FBA4EF0849D2795D19F25B4546)                                         |
[ 96](https://www.example.com#sFD3FB2FBA4EF0849D2795D19F25B4546) |
| [ITEM 14\.](https://www.example.com#s477E09E7B675A0D2D2385D19F28DD879) | [PRINCIPAL ACCOUNTANT FEES AND SERVICES ](https://www.example.com#s477E09E7B675A0D2D2385D19F28DD879)                                                                           |
[ 96](https://www.example.com#s477E09E7B675A0D2D2385D19F28DD879) |
| [PART IV](https://www.example.com#sE1B730F2B093BD464AAA5D19F2B01986)   |                                                                                |
[ 96](https://www.example.com#sE1B730F2B093BD464AAA5D19F2B01986) |
| [ITEM 15\.](https://www.example.com#s1755EF1BA3D4EDA0DC485D19F2E29E1C) | [EXHIBITS](https://www.example.com#s1755EF1BA3D4EDA0DC485D19F2E29E1C)                                                                                |
[ 96](https://www.example.com#s1755EF1BA3D4EDA0DC485D19F2E29E1C) |
|                                                                        | [SIGNATURES](https://www.example.com#s1C76220E19BED7D080555D19F302C47B)                                                                                |
[ 97](https://www.example.com#s1C76220E19BED7D080555D19F302C47B) |

**As used in this Form 10\-K, the terms “Air Group,” the "Company," “our,” “we” and "us," refer to Alaska Air Group, Inc\. and its subsidiaries, unless the context indicates otherwise\. Alaska Airlines, Inc\., Virgin America Inc\. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, Inc\.), and Horizon Air Industries, Inc\. are referred to as “Alaska,” "Virgin America" and “Horizon,” respectively, and together as our “airlines\.”**

**CAUTIONARY NOTE REGARDING FORWARD\-LOOKING STATEMENTS**

In addition to historical information, this Form 10\-K contains forward\-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995\. Forward\-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters\. You can generally identify forward\-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward\-looking statements contain these identifying words\. Forward\-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations\.

 2


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

Exhibits

Exhibits required to be filed by Item 601 of Regulation S\-K: Where the amount of securities authorized to be issued under any of our long\-term debt agreements does not exceed 10 percent of our assets, pursuant to paragraph (b)(4) of Item 601 of Regulation S\-K, in lieu of filing such as an exhibit, we hereby agree to furnish to the Commission upon request a copy of any agreement with respect to such long\-term debt\.

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

**Number** | **Description**                                                                                |
| 2\.1                          | [Confirmation Order and Plan (incorporated by reference to Exhibit 2\.1 to AMR’s Current Report on Form 8\-K filed on October 23, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513408263/d605556dex21.htm)                                                                                |
| 2\.2                          | [Agreement and Plan of Merger, dated as of December 28, 2015, between American Airlines, Inc\. and US Airways, Inc\. (incorporated by reference to Exhibit 2\.1 to AAG’s Current Report on Form 8\-K filed on December 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515418305/d110614dex21.htm)                                                                                |
| 3\.1                          | [Restated Certificate of Incorporation of American Airlines Group Inc\., including the Certificate of Designations, Powers, Preferences and Rights of the American Airlines Group Inc\. Series A Convertible Preferred Stock attached as Annex I thereto (incorporated by reference to Exhibit 3\.1 to AAG’s Current Report on Form 8\-K filed on December 9, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513466973/d640718dex31.htm)                                                                                |
| 3\.2                          | [Certificate of Amendment of Restated Certificate of Incorporation of American Airlines Group Inc\. (incorporated by reference to Exhibit 3\.1 to AAG’s Current Report on Form 8\-K filed on June 13, 2018 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000119312518191662/d594984dex31.htm)                                                                                |
| 3\.3                          | [Third Amended and Restated Bylaws of American Airlines Group Inc\. (incorporated by reference to Exhibit 3\.2 to AAG’s Current Report on Form 8\-K filed on June 13, 2018 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000119312518191662/d594984dex32.htm)                                                                                |
| 3\.4                          | [Amended and Restated Certificate of Incorporation of American Airlines, Inc\. (incorporated by reference to Exhibit 3\.3 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000004/d682697dex33.htm)                                                                                |
| 3\.5                          | [Amended and Restated Bylaws of American Airlines, Inc\. (incorporated by reference to Exhibit 3\.4 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000004/d682697dex34.htm)                                                                                |
| 4\.1                          | [Description of securities registered under Section 12 of the Exchange Act\.](https://americanairlines.gcs-web.com/email-alerts/ex4110k2019.htm)                                                                                |
| 4\.2                          | [Pass Through Trust Agreement, dated as of March 12, 2013, between American Airlines, Inc\. and Wilmington Trust Company (incorporated by reference to Exhibit 4\.1 to AMR’s Current Report on Form 8\-K filed on March 12, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000119312513103330/d501326dex41.htm)                                                                                |
| 4\.3                          | [Trust Supplement No\. 2013\-2B, dated as of November 27, 2013, among American Airlines, Inc\. and Wilmington Trust Company, as Class B Trustee, to the Pass Through Trust Agreement, dated as of March 12, 2013 (incorporated by reference to Exhibit 4\.2 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex42.htm)                                                                                |
| 4\.4                          | [Form of Pass Through Trust Certificate, Series 2013\-2B (incorporated by reference to Exhibit A to Exhibit 4\.2 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex42.htm)                                                                                |
| 4\.5                          | [Revolving Credit Agreement (2013\-2B), dated as of November 27, 2013, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for Trustee of American Airlines Pass Through Trust 2013\-2B and as Borrower, and Morgan Stanley Bank, N\.A\., as Class B Liquidity Provider (incorporated by reference to Exhibit 4\.5 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex45.htm)                                                                                |
| 4\.6                          | [Participation Agreement (N907AN), dated as of September 9, 2013, among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements in effect as of the date thereof, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein (incorporated by reference to Exhibit 4\.6 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex46.htm) |
| 4\.7                          | [Indenture and Security Agreement (N907AN), dated as of September 9, 2013, between American Airlines, Inc\. and Wilmington Trust Company, as Loan Trustee (incorporated by reference to Exhibit 4\.7 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex47.htm)                                                                                |
| 4\.8                          | [First Amendment to Participation Agreement (N907AN), dated as of November 27, 2013, among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein (incorporated by reference to Exhibit 4\.8 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex48.htm)               |
| 4\.9                          | [First Amendment to Indenture and Security Agreement (N907AN), dated as of November 27, 2013, between American Airlines, Inc\. and Wilmington Trust Company, as Loan Trustee (incorporated by reference to Exhibit 4\.9 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex49.htm)                                                                                |
| 4\.10                         | [Series 2013\-2A N907AN Equipment Note No\. 1, dated as of September 9, 2013 (incorporated by reference to Exhibit 4\.10 to AMR’s Current Report on Form 8\-K filed on November 27, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312513456230/d634326dex410.htm)                                                                                |

164


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

aircraft or those of our regional operators or codeshare partners, and adversely impact our business, results of operations and financial condition\.

***Delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity, and failure of new aircraft to perform as expected, may adversely impact our business, results of operations and financial condition\.***

The success of our business depends on, among other things, effectively managing the number and types of aircraft we operate\. If for any reason we are unable to accept or secure deliveries of new aircraft on contractually scheduled delivery dates, this could have a negative impact on our business, results of operations and financial condition\. Our failure to integrate newly purchased aircraft into our fleet as planned might require us to seek extensions of the terms for some leased aircraft or otherwise delay the exit of certain aircraft from our fleet\. Such unanticipated extensions or delays may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs\. If new aircraft orders are not filled on a timely basis, we could face higher operating costs than planned\. In addition, if the aircraft we receive do not meet expected performance or quality standards, including with respect to fuel efficiency and reliability, our business, results of operations and financial condition could be adversely impacted\.

***We depend on a limited number of suppliers for aircraft, aircraft engines and parts\.***

We depend on a limited number of suppliers for aircraft, aircraft engines and many aircraft and engine parts\. For example, under our current fleet plan, by 2020 all of our mainline aircraft will have been manufactured by either Airbus or Boeing and all of our regional aircraft will have been manufactured by either Bombardier or Embraer\. Further, our supplier base continues to consolidate as evidenced by the recent acquisition of Rockwell Collins by United Technologies, the recently completed transaction involving Airbus and Bombardier and the pending transaction involving Boeing and Embraer\. Due to the limited number of these suppliers, we are vulnerable to any problems associated with the performance of their obligation to supply key aircraft, parts and engines, including design defects, mechanical problems, contractual performance by suppliers, adverse perception by the public that would result in customer avoidance of any of our aircraft or any action by the FAA or any other regulatory authority resulting in an inability to operate our aircraft, even temporarily\.

***Our business has been and will continue to be affected by many changing economic and other conditions beyond our control, including global events that affect travel behavior, and our results of operations could be volatile and fluctuate due to seasonality\.***

Our business, results of operations and financial condition have been and will continue to be affected by many changing economic and other conditions beyond our control, including, among others:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | actual or potential changes in international, national, regional and local economic, business and financial conditions, including recession, inflation, higher interest rates, wars, terrorist attacks and political instability; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------- |
| • | changes in consumer preferences, perceptions, spending patterns and demographic trends; |

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

|   |                                                     |
| - | --------------------------------------------------- |
| • | actual or potential disruptions to the ATC systems; |

|   |                                                                     |
| - | ------------------------------------------------------------------- |
| • | increases in costs of safety, security, and environmental measures; |

|   |                                                        |
| - | ------------------------------------------------------ |
| • | outbreaks of diseases that affect travel behavior; and |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------- |
| • | weather and natural disasters, including increases in such disasters and related costs caused by more severe weather due to climate change\. |

In particular, an outbreak of a contagious disease such as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus or any other similar illness, if it were to become associated with air travel or persist for an extended period, could materially affect the airline industry and us by reducing revenues and adversely impacting our operations and passengers’ travel behavior\. As a result of these or other conditions beyond our control, our results of operations could be volatile and subject to rapid and unexpected change\. In addition, due to generally weaker demand for air travel during the winter, our revenues in the first and fourth quarters of the year could be weaker than revenues in the second and third quarters of the year\.

31


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

Ancillary Businesses and Refinery\.  Ancillary businesses and refinery includes aircraft maintenance and staffing services provided to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties\.  Third\-party refinery production sales are at or near cost; accordingly, the margin on these sales is de minimis\. See  Note 15 , "Segments and Geographic Information," for more information on revenue recognition within our refinery segment\.

In December 2018, we sold DAL Global Services, LLC (“DGS”), which provides aviation\-related, ground support equipment maintenance and professional security services, to a new subsidiary of Argenbright Holdings, LLC\. We received a non\-controlling   49%  equity stake in the new company and   $40 million  cash\. The new company will continue to service our customers and third parties, and is expected to continue operating at the same airport locations it currently serves\. In 2019, DGS will no longer be reflected within ancillary businesses and refinery\.

Loyalty Program\.  Loyalty program revenues relate to brand usage by third parties and other performance obligations embedded in mileage credits sold, including redemption of mileage credits for non\-travel awards\.  These revenues are included within the total cash sales from marketing agreements, discussed above\.

Miscellaneous\.  Miscellaneous revenue is primarily composed of lounge access and codeshare revenues\.

Accounts Receivable

Accounts receivable primarily consist of amounts due from credit card companies from the sale of passenger tickets, ancillary businesses and refinery sales, and other companies for the purchase of mileage credits under the loyalty program\. We provide an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical chargebacks, write\-offs, bankruptcies and other specific analyses\. Bad debt expense was not material in any period presented\.

Passenger Taxes and Fees

We are required to charge certain taxes and fees on our passenger tickets, including U\.S\. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and departure taxes\. These taxes and fees are assessments on the customer for which we act as a collection agent\. Because we are not entitled to retain these taxes and fees, we do not include such amounts in passenger revenue\. We record a liability when the amounts are collected and reduce the liability when payments are made to the applicable government agency or operating carrier (i\.e\., for codeshare\-related fees)\.

NOTE 3 \. FAIR VALUE MEASUREMENTS

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants\. Fair value is a market\-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability\.

|   |                                                                          |
| - | ------------------------------------------------------------------------ |
| • | *Level 1\.*  Observable inputs such as quoted prices in active markets;  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------- |
| • | *Level 2* \. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | *Level 3* \. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions\. |

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

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| (a) | *Market Approach* \. Prices and other relevant information generated by observable transactions involving identical or comparable assets or liabilities; and |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | *Income Approach\.*  Techniques to convert future amounts to a single present value amount based on market expectations (including present value techniques and option\-pricing models)\. |

 68


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

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

ITEM 8\. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of United Airlines Holdings, Inc\.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of United Airlines Holdings, Inc\. (the "Company") as of  December 31, 2019  and  2018 , the related statements of consolidated operations, comprehensive income (loss), cash flows, and stockholders' equity for each of the three years in the period ended  December 31, 2019 , and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements")\. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at  December 31, 2019  and  2018 , and the results of its operations and its cash flows for each of the three years in the period ended  December 31, 2019 , in conformity with U\.S\. generally accepted accounting principles\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of  December 31, 2019 , based on criteria established in Internal Control\-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated  February 24, 2020 , expressed an unqualified opinion thereon\.

Adoption of ASU No\. 2016\-02

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019, 2018 and 2017 due to the adoption of ASU No\. 2016\-02,  Leases (Topic 842)\.

Basis for Opinion

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

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

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments\. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate\.

39