Annual Report of Southwest Airlines Co\. for year 2017

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| [Supplemental Agreement No\. 65 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2010 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238010000079/ex10_1.htm) ; [Supplemental Agreement No\. 66 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2010 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238010000099/ex10_1.htm) ; [Supplemental Agreement No\. 67 (incorporated by reference to Exhibit 10\.1(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2010 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000119312511026045/dex101a.htm) ; [Supplemental Agreement No\. 68 (incorporated by reference to Exhibit 10\.1(b) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2010 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000119312511026045/dex101b.htm) ; [Supplemental Agreement No\. 69 (incorporated by reference to Exhibit 10\.1(c) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2010 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000119312511026045/dex101c.htm) ; [Supplemental Agreement No\. 70 (incorporated by reference to Exhibit 10\.1(d) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2010 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000119312511026045/dex101d.htm) ;[ Supplemental Agreement No\. 71 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2011 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238011000020/ex10_1.htm) ; [Supplemental Agreement No\. 72 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2011 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238011000020/ex10_2.htm) ; [Supplemental Agreement No\. 73 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2011 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238011000070/ex10_1.htm) ; [Supplemental Agreement No\. 74 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2011 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238011000088/ex10_1.htm) ; [Supplemental Agreement No\. 75 (incorporated by reference to Exhibit 10\.1(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2011 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000119312512049647/d293991dex101a.htm) ; [Supplemental Agreement No\. 76 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2012 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238012000089/ex10_1.htm) ; [Supplemental Agreement No\. 77 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2012 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238012000089/ex10_2.htm) ; [Supplemental Agreement No\. 78 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2012 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238012000103/ex10_1.htm) ; [Supplemental Agreement No\. 79 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2012 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238012000103/ex10_2.htm) ;[ Supplemental Agreement No\. 80 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2013 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238013000020/sa80topa18101redacted.htm) ; [Supplemental Agreement No\. 81 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2013 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238013000020/sa81topa1810redacted.htm) ; [Supplemental Agreement No\. 82 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238013000097/sa-82topax1810_redacted.htm) [Supplemental Agreement No\. 83 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238013000097/sa-83topax1810_redacted.htm) [Supplemental Agreement No\. 84 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238013000111/sa-84topax1810redacted.htm) [Supplemental Agreement No\. 85 (incorporated by reference to Exhibit 10\.1(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238014000010/luv-12312013xex101a.htm) [Supplemental Agreement No\. 86 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2014 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238014000024/sa-86topax18101redacted.htm) [Supplemental Agreement No\. 87 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238014000117/sa-87topax1810redacted.htm) [Supplemental Agreement No\. 88 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2014 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238014000151/sa-88pax18101redacted.htm) [Supplemental Agreement No\. 89 (incorporated by reference to Exhibit 10\.1(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2014 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238015000027/luv-12312014xex101a.htm) [Supplemental Agreement No\. 90 (incorporated by reference to Exhibit 10\.1(b) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2014 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238015000027/luv-12312014xex101b.htm) [Supplemental Agreement No\. 91 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2015 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238015000098/luv-6302015xex101.htm) [Supplemental Letter Agreement No\. 1810\-LA\-1501773 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2015 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238015000129/luv-9302015xex101.htm) [Supplemental Agreement No\. 92 (incorporated by reference to Exhibit 10\.1(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2015 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015xex101a.htm) [Supplemental Agreement No\. 93 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2016 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238016000213/luv-3312016xex101.htm) [Supplemental Agreement No\. 94 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2016 (File No\. 1\-7259)); ](http://www.sec.gov/Archives/edgar/data/92380/000009238016000252/luv-6302016xex101.htm)[Supplemental Agreement No\. 95 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2016 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238016000270/luv-9302016xex101.htm) [Supplemental Agreement No\. 96 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2016 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238016000270/luv-9302016xex102.htm) [Supplemental Agreement No\. 97 (incorporated by reference to Exhibit 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2016 (File No\. 1\-7259)); ](http://www.sec.gov/Archives/edgar/data/92380/000009238016000270/luv-9302016xex103.htm)<br><br>  <br> |

119


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

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

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(e)^ | Includes limited partnerships that invest primarily in U\.S\. (  94% ) and European (  6% ) buyout opportunities of a range of privately held companies\. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated\. It is estimated that the underlying assets of these funds will be gradually liquidated over the next  one  to   ten years \. Additionally, the pension plan’s master trust has future funding commitments of approximately   $1\.0 billion  over the next   ten years \. |

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

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(g)^ | Investment includes   45%  in an emerging market 103\-12 Investment Trust with investments in emerging country equity securities,   37%  in a collective interest trust investing primarily in short\-term securities,   12%  in Canadian segregated balanced value, income growth and diversified pooled funds and   6%  in a common/collective trust investing in securities of smaller companies located outside the U\.S\., including developing markets\. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred\. |

Changes in fair value measurements of Level 3 investments during the year ended  December 31, 2019 , were as follows (in millions):

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

**Annuity Contracts** |
| Beginning balance at December 31, 2018 | $7                              | $2                                               |
| Purchases                              | 3                               | —                                                |
| Ending balance at December 31, 2019    | $10                             | $2                                               |

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

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

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

**Annuity Contracts** |
| Beginning balance at December 31, 2017              | $14                                        | $2                                               |
| Actual loss on plan assets:                         |                                            |                                                  |
| Relating to assets still held at the reporting date | (2

)                                | —                                                |
| Purchases                                           | 1                                          | —                                                |
| Sales                                               | (6

)                                | —                                                |
| Ending balance at December 31, 2018                 | $7                                         | $2                                               |

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

|                          |                                                                                |                                                                              |                                                                                |                                                     |
| ------------------------ | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- |
|                          | **Fair Value Measurements as of December 31, 2019**                                                 | **Fair Value Measurements as of December 31, 2019**                          | **Fair Value Measurements as of December 31, 2019**                            | **Fair Value Measurements as of December 31, 2019** |
| **Asset Category**       | **Quoted Prices in**

**Active Markets for**

**Identical Assets**

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

**Observable**

**Inputs**

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

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Money market fund        | $4                                                                                | $—                                                                           | $—                                                                             | $4                                                  |
| Mutual funds – AAL Class | —                                                                                | 200                                                                          | —                                                                              | 200                                                 |
| Total                    | $4                                                                                | $200                                                                         | $—                                                                             | $204                                                |

148


Annual Report of Southwest Airlines Co\. for year 2017

|                              |                       |                       |
| ---------------------------- | --------------------- | --------------------- |
| **(in millions)**            | **December 31, 2017** | **December 31, 2016** |
| Accounts payable trade       | $186                  | $138                  |
| Salaries payable             | 201                   | 200                   |
| Taxes payable                | 203                   | 184                   |
| Aircraft maintenance payable | 38                    | 26                    |
| Fuel payable                 | 123                   | 95                    |
| Other payable                | 569                   | 535                   |
| Accounts payable             | $1,320                | $1,178                |

|                                              |                       |     |                       |
| -------------------------------------------- | --------------------- | --- | --------------------- |
| **(in millions)**                            | **December 31, 2017** |     | **December 31, 2016** |
| Profitsharing and savings plans              | $579                  |     | $645                  |
| Aircraft and other lease related obligations | 40                    |     | 55                    |
| Permanently grounded aircraft liability      | 34                    | (a) | —                     |
| Vacation pay                                 | 365                   |     | 355                   |
| Contract ratification bonuses                | 83                    |     | 188                   |
| Health                                       | 100                   |     | 96                    |
| Derivative contracts                         | 1                     |     | 158                   |
| Workers compensation                         | 172                   |     | 183                   |
| Property and income taxes                    | 57                    |     | 68                    |
| Other                                        | 346                   |     | 237                   |
| Accrued liabilities                          | $1,777                |     | $1,985                |

|                                         |                       |     |                       |
| --------------------------------------- | --------------------- | --- | --------------------- |
| **(in millions)**                       | **December 31, 2017** |     | **December 31, 2016** |
| Postretirement obligation               | $275                  |     | $256                  |
| Non\-current lease\-related obligations | 85                    |     | 125                   |
| Permanently grounded aircraft liability | 13                    | (a) | —                     |
| Other deferred compensation             | 237                   |     | 204                   |
| Derivative contracts                    | 21                    |     | 35                    |
| Other                                   | 76                    |     | 108                   |
| Other noncurrent liabilities            | $707                  |     | $728                  |

(a) These amounts represent the current and noncurrent portion of the Company's cease\-use liability recorded during third quarter 2017, as a result of the Company grounding its remaining leased Boeing 737\-300 aircraft on September 29, 2017\. The liability reflects the remaining net lease payments due and certain lease return requirements that could have to be performed on these leased aircraft prior to their return to the lessors as of the cease\-use date, but does not include the write–off of approximately $15 million in net prepaid rents associated with the aircraft at the grounding date, which were included in the $63 million charge recorded\. See Note 7 for further information\. This loss related to the grounding of the Classic fleet was recorded to Other operating expenses in the Consolidated Statement of Income during third quarter 2017\. Approximately $3 million of this liability was paid during fourth quarter 2017\.

For further information on fuel derivative and interest rate derivative contracts, see Note 10\.

***Other Operating Expenses***

Other operating expenses consist of distribution costs, advertising expenses, personnel expenses, professional fees, and other operating costs, none of which individually exceed 10 percent of Operating expenses\.

86


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

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

We develop our expected long\-term rate of return assumption for our defined benefit plans based on historical experience and by evaluating input from the trustee managing the plans' assets\.Our expected long\-term rate of return on plan assets for these plans is based on a target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels\. The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio\. Plan fiduciaries regularly review our actual asset allocation and the pension plans' investments are periodically rebalanced to our targeted allocation when considered appropriate\. United's plan assets are allocated within the following guidelines:

|                          |                       |                                                   |
| ------------------------ | --------------------- | ------------------------------------------------- |
|                          |  **Percent of Total** | **Expected Long\-Term**

**Rate of Return** |
| Equity securities        | 30\-45%               | 9\.5%                                             |
| Fixed\-income securities | 30\-40                | 5\.8                                              |
| Alternatives             | 10\-25                | 7\.3                                              |
| Other                    | 0\-10                 | 7\.8                                              |

One\-hundred percent of other postretirement plan assets are invested in a deposit administration fund\.

A one percentage point decrease in the weighted average discount rate would increase the Company's postretirement benefit liability by approximately $139 million and increase the estimated 2018 benefits expense by approximately $10 million\.

***Fair Value Information\.*** Accounting standards require us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs\. These inputs are prioritized as follows:

|         |                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |
| ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| Level 1 | Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value                                                                    | Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value                                                                    | Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value                                                                    | Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value                                                                    | Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value                                                                    | Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value                                                                    | Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value                                                                    |
| Level 2 | Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market\-corroborated inputs                                         | Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market\-corroborated inputs                                         | Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market\-corroborated inputs                                         | Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market\-corroborated inputs                                         | Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market\-corroborated inputs                                         | Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market\-corroborated inputs                                         | Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market\-corroborated inputs                                         |
| Level 3 | Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities | Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities | Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities | Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities | Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities | Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities | Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities |

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 market transactions involving identical or comparable assets and liabilities; and

(b)*Income approach\.* Techniques to convert future amounts to a single current value based on market expectations (including present value techniques, option\-pricing and excess earnings models)\.

The following tables present information about United's pension and other postretirement plan assets at December 31, (in millions):

|                                           |           |             |             |             |                               |           |             |             |             |                               |
| ----------------------------------------- | --------- | ----------- | ----------- | ----------- | ----------------------------- | --------- | ----------- | ----------- | ----------- | ----------------------------- |
|                                           | **2018**  | **2018**    | **2018**    | **2018**    | **2018**                      | **2017**  | **2017**    | **2017**    | **2017**    | **2017**                      |
| Pension Plan Assets:                      | **Total** | **Level 1** | **Level 2** | **Level 3** | **Assets Measured at NAV(a)** | **Total** | **Level 1** | **Level 2** | **Level 3** | **Assets Measured at NAV(a)** |
| Equity securities funds                   | $1,394    | $254        | $106        | $—          | $1,034                        | $1,406    | $269        | $133        | $—          | $1,004                        |
| Fixed\-income securities                  | 1,431     | —           | 605         | 21          | 805                           | 1,470     | —           | 834         | 18          | 618                           |
| Alternatives                              | 596       | —           | —           | 134         | 462                           | 637       | —           | —           | 139         | 498                           |
| Other investments                         | 406       | 224         | 40          | 142         | —                             | 419       | 32          | 124         | 172         | 91                            |
| Total                                     | $3,827    | $478        | $751        | $297        | $2,301                        | $3,932    | $301        | $1,091      | $329        | $2,211                        |
| Other Postretirement Benefit Plan Assets: |           |             |             |             |                               |           |             |             |             |                               |
| Deposit administration fund               | $53       | $—          | $—          | $53         | $—                            | $54       | $—          | $—          | $54         | $—                            |

(a) In accordance with the relevant accounting standards, certain investments that are measured at fair value using the net asset value ("NAV") per share (or its equivalent) have not been classified in the fair value hierarchy\. These investments are commingled funds that invest in fixed\-income instruments including bonds, debt securities, and other similar instruments issued by various U\.S\. and non\-U\.S\. public\- or private\-sector entities\. Redemption periods for these investments range from daily to semiannually\.

73


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

*Operating Special Items, Net*

|                                                                    |                             |                             |
| ------------------------------------------------------------------ | --------------------------- | --------------------------- |
|                                                                    | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                    | **2017**                    | **2016**                    |
|                                                                    | **(In millions)**           | **(In millions)**           |
| Merger integration expenses  ^(1)^                                 | $273                        | $514                        |
| Fleet restructuring expenses  ^(2)^                                | 232                         | 177                         |
| Employee 2017 Tax Act bonus expense  ^(3)^                         | 123                         | —                           |
| Labor contract expenses                                            | 46                          | —                           |
| Mark\-to\-market adjustments on bankruptcy obligations, net  ^(4)^ | 27                          | 25                          |
| Other operating charges (credits), net                             | 11                          | (7)                         |
| Total mainline operating special items, net                        | 712                         | 709                         |
| Regional operating special items, net                              | 3                           | 13                          |
| Total operating special items, net                                 | $715                        | $722                        |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(1)^ | Merger integration expenses included costs related to information technology, professional fees, re\-branding of aircraft and airport facilities and training, and in 2016, also included costs related to alignment of labor union contracts and the launch of re\-branded uniforms, both of which drove the $241 million year\-over\-year decrease in these expenses\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Fleet restructuring expenses principally included accelerated depreciation and remaining lease payments for aircraft and related equipment grounded or expected to be grounded earlier than planned\. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | Employee bonus expense included costs related to the $1,000 cash bonus and associated payroll taxes granted to mainline employees as of December 31, 2017 in recognition of the 2017 Tax Act\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------- |
| ^(4)^ | Bankruptcy obligations that will be settled in shares of AAG common stock are marked\-to\-market based on AAG’s stock price\. |

*Nonoperating Results*

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

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

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

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

**Increase**

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

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

**Increase**

**(Decrease)** |
|                                 | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Interest income                 | $215                                         | $104                                         | $111                                         | nm                                                    |
| Interest expense, net           | (988)                                        | (906)                                        | (82)                                         | 9\.1                                                  |
| Other income, net               | 123                                          | 18                                           | 105                                          | nm                                                    |
| Total nonoperating expense, net | $(650)                                       | $(784)                                       | $134                                         | (17\.1)                                               |

American’s short\-term investments in each period consisted of highly liquid investments that provided nominal returns\. Interest income increased $111 million due to higher interest\-bearing related party receivables from American’s parent company, AAG, as well as a 50 basis point increase in average yields in 2017 as compared to 2016\.

Interest expense, net increased $82 million in 2017 primarily due to higher outstanding debt as a result of aircraft financings associated with American’s fleet renewal program\.

Other nonoperating income, net in 2017 and 2016, principally included $138 million and $77 million, respectively, of non\-service related pension and other postretirement benefit plan income, which reflects an increase in the expected return on pension plan assets in 2017 as compared to 2016\. In 2017 and 2016, this income was offset in part by $22 million and $49 million, respectively, of net special charges associated with debt refinancings and extinguishments\.

*Income Taxes*

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

64


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

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized\.

|                         |                                   |                                      |
| ----------------------- | --------------------------------- | ------------------------------------ |
|                         | **American Airlines Group Inc\.** | **American Airlines Group Inc\.**    |
| Date: February 25, 2019 | By:                               | /s/ W\. Douglas Parker               |
|                         |                                   | W\. Douglas Parker                   |
|                         |                                   | Chairman and Chief Executive Officer |
|                         |                                   | (Principal Executive Officer)        |

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized\.

|                         |                              |                                      |
| ----------------------- | ---------------------------- | ------------------------------------ |
|                         | **American Airlines, Inc\.** | **American Airlines, Inc\.**         |
| Date: February 25, 2019 | By:                          | /s/ W\. Douglas Parker               |
|                         |                              | W\. Douglas Parker                   |
|                         |                              | Chairman and Chief Executive Officer |
|                         |                              | (Principal Executive Officer)        |

200


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

***BRAND AND REPUTATION***

***As we evolve our brand to appeal to a changing demographic and grow into new markets, we will engage in strategic initiatives that may not be favorably received by all of our guests\.***

We continue to focus on strategic initiatives designed to increase our brand appeal to a diverse and evolving demographic of airline travelers\. These efforts could include significant enhancements to our in\-airport and on\-board environments, increasing our direct customer relationships through improvements to our purchasing portals (digital and mobile) and optimization of our customer loyalty programs\. In pursuit of these efforts we may negatively affect our reputation with some of our existing customer base\.

***LABOR RELATIONS AND LABOR STRATEGY***

***Failure to fully integrate Virgin America’s workforce with Alaska’s workforce, unsuccessful attempts to strengthen our relationships with union employees or loss of key personnel, or a significant increase in labor costs could adversely affect our business and results of operations\.***

Since acquiring Virgin America, joint collective bargaining agreements or transition agreements have been signed with all unionized workforces except aircraft technicians\. Work will continue in 2019 to fully implement these integration agreements, and to reach an agreement with the aircraft technicians\. Failure to reach fully integrated work groups presents the potential for delays in achieving expected synergies and other benefits of integration, or labor disputes that could adversely affect our operations and costs\.

Should employees engage in job actions, such as slow\-downs, sick\-outs, or other actions designed to disrupt normal operations and pressure the employer to acquiesce to bargaining demands during Section 6 negotiations or transition agreement discussions, although unlawful until after lengthy mediation attempts, the operation could be significantly impacted\. Although we have a long track record of fostering good communications, negotiating approaches and developing other strategies to enhance workforce engagement in our long\-term vision, unsuccessful attempts to strengthen relationships with union employees or loss of key personnel could divert management’s attention from other projects and issues, which could adversely affect our business and results of operations\.

Labor costs remain a significant component of our total expenses\. In addition to costs associated with represented employee groups, labors costs could also increase for non\-unionized employees and via vendor agreements as we work to compete for highly skilled and qualified employees against the major U\.S\. airlines and other businesses in a thriving job market\. Although ample efforts have been dedicated to right\-sizing our management structure following the merger with Virgin America, these increased labor costs may adversely affect our financial performance\.

***The inability to attract, retain and train qualified personnel could result in guest impacts and adversely affect our business and results of operations\.***

We compete against other major U\.S\. airlines for pilots, aircraft technicians and other skilled labor\. As more pilots in the industry approach mandatory retirement age, the U\.S\. airline industry may be affected by a pilot shortage\. Attrition beyond normal levels, the inability to attract new pilots, or our key vendors' inability to attract and retain mechanics or other skilled labor positions could negatively impact our operating results\. As a result, our business prospects could be harmed\. Additionally, we may be required to increase our wage and benefit packages, or pay increased rates to our vendors, to retain these positions\. This would result in increased overall costs and impacts to our financial position\.

|                                         |
| --------------------------------------- |
| **ITEM 1B\. UNRESOLVED STAFF COMMENTS** |

 None\.

|                         |
| ----------------------- |
| **ITEM 2\. PROPERTIES** |

 25


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

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated 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 consolidated 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\.

Evaluation of estimated passenger travel revenue

As discussed in Note 1(k) to the consolidated financial statements, American recorded passenger travel revenue of $38\.8 billion for the year ended December 31, 2019\. Passenger travel revenue includes an estimate for the amount of revenue recognized for tickets that will expire unused in whole or in part\. The percentage of passenger tickets that are expected to expire unused is estimated based on an analysis of American’s historical data\.

We identified the evaluation of estimated passenger travel revenue as a critical audit matter\. A high degree of auditor judgment was required to assess the underlying assumption made by American to develop this estimate\.

The primary procedures we performed to address this critical audit matter included the following\. We tested certain internal controls over American’s passenger revenue recognition process, including controls related to the estimation of the percentage of passenger tickets that are expected to expire unused\. We assessed American’s estimate of the percentage of passenger tickets expected to expire unused by comparing previous years’ estimates to the actual percentage of passenger tickets expired unused for the year\. We evaluated the estimated amount of revenue recorded in the current year related to passenger tickets that are expected to expire unused by developing an independent expectation using actual historical ticket expirations\. We compared our independent expectation to that of American\.

Assessment of the estimated selling price for mileage credits earned through travel

As discussed in Note 1(k) to the consolidated financial statements, American applies a relative selling price approach whereby the total amount collected from each applicable passenger ticket sale is allocated between the air transportation and the mileage credits earned\. The mileage credits earned are deferred and recognized in passenger revenue at the time mileage credits are redeemed and transportation is provided\. American estimates the selling price of mileage credits earned through travel using an approach based on inputs and assumptions derived from historical data\. Additionally, an adjustment is made to the estimated selling price of mileage credits earned to account for the estimate of mileage credits not expected to be redeemed\. American’s loyalty program liability was $8\.6 billion as of December 31, 2019, and the associated passenger revenue for mileage credits redeemed for travel was $3\.2 billion for the year ended December 31, 2019\.

We identified the assessment of the estimated selling price for mileage credits earned through travel, including the estimated number of mileage credits not expected to be redeemed, as a critical audit matter\. A high degree of auditor judgment was required to evaluate the historical data used to develop the estimate\.

The primary procedures we performed to address this critical audit matter included the following\. We tested certain internal controls over American’s loyalty program accounting process, including controls related to the estimation of the selling price for mileage credits earned through travel\. We evaluated that American’s methodology used to develop the estimated selling price of mileage credits earned through travel, including estimated mileage credits not expected to be redeemed, was consistent with that of historical periods\. We performed sensitivity analyses over the estimated selling price of mileage credits earned through travel, including estimated mileage credits not expected to be redeemed\. We assessed the results of the sensitivity analyses to American’s recorded amount of loyalty program liability and the associated passenger revenue\. We compared American’s estimate of mileage credits not expected to be redeemed to that of other airlines within the industry\.

/s/ KPMG LLP

We have served as American’s auditor since 2014\.

Dallas, Texas

February 19, 2020

116


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

• giving our Mileage Plan^TM^  program a competitive advantage because of our partnership with both unaffiliated international carriers and carriers from all three major worldwide alliances;

• giving us access to more connecting traffic from other airlines; and

• providing members of our alliance partners’ frequent flyer programs an opportunity to travel on Alaska and our regional partners while earning mileage credit in our partners’ programs\.

Most of our codeshare relationships are free\-sale codeshares, where the marketing carrier sells seats on the operating carrier’s flights from the operating carrier’s inventory, but takes no inventory risk\. Our marketing agreements have various termination dates, and one or more may be in the process of renegotiation at any time\. Our codeshare and interline agreements generated 5%, 5%, and 6% of our total marketed revenues as of December 31, 2019, 2018 and 2017\.

The comprehensive summary of Alaska's alliances with other airlines is as follows:

|                                        |                                        |                                        |                                    |                                    |                                    |  |  |  |                                                                 |                                                                 |                                                                 |           |           |           |                                                                                |                                                                                |                                                                                |  |  |  |  |  |  |
|:-------------------------------------- |:-------------------------------------- |:-------------------------------------- |:----------------------------------:|:----------------------------------:|:----------------------------------:|:- |:- |:- |:---------------------------------------------------------------:|:---------------------------------------------------------------:|:---------------------------------------------------------------:|:---------:|:---------:|:---------:|:-------------------------------------------------------------------------------:|:-------------------------------------------------------------------------------:|:-------------------------------------------------------------------------------:|:- |:- |:- |:- |:- |:- |
|                                        |                                        |                                        |                                    |                                    |                                    |  |  |  |                            Codeshare                            |                            Codeshare                            |                            Codeshare                            | Codeshare | Codeshare | Codeshare |                                    Codeshare                                    |                                    Codeshare                                    |                                    Codeshare                                    |  |  |  |  |  |  |
|                                        |                                        |                                        | Frequent
Flyer
Agreement | Frequent
Flyer
Agreement | Frequent
Flyer
Agreement |  |  |  | Alaska Flight \# on
Flights Operated by
Other Airline | Alaska Flight \# on
Flights Operated by
Other Airline | Alaska Flight \# on
Flights Operated by
Other Airline |           |           |           | Other Airline Flight \#
on Flights Operated by
Alaska or CPA Partners | Other Airline Flight \#
on Flights Operated by
Alaska or CPA Partners | Other Airline Flight \#
on Flights Operated by
Alaska or CPA Partners |
| Major U\.S\. or International Airlines | Major U\.S\. or International Airlines | Major U\.S\. or International Airlines |                                    |                                    |                                    |  |  |  |                                                                 |                                                                 |                                                                 |           |           |           |                                                                                |                                                                                |                                                                                |
| Aer Lingus                             | Aer Lingus                             | Aer Lingus                             |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       No                                        |                                       No                                        |                                       No                                        |
| American Airlines                      | American Airlines                      | American Airlines                      |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               Yes                               |                               Yes                               |                               Yes                               |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| British Airways                        | British Airways                        | British Airways                        |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Cathay Pacific Airways                 | Cathay Pacific Airways                 | Cathay Pacific Airways                 |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Condor Airlines^(a)^                   | Condor Airlines^(a)^                   | Condor Airlines^(a)^                   |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       No                                        |                                       No                                        |                                       No                                        |
| EL AL Israel Airlines                  | EL AL Israel Airlines                  | EL AL Israel Airlines                  |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Emirates                               | Emirates                               | Emirates                               |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Fiji Airways^(a)^                      | Fiji Airways^(a)^                      | Fiji Airways^(a)^                      |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Finnair                                | Finnair                                | Finnair                                |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Hainan Airlines                        | Hainan Airlines                        | Hainan Airlines                        |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       No                                        |                                       No                                        |                                       No                                        |
| Icelandair                             | Icelandair                             | Icelandair                             |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Japan Airlines                         | Japan Airlines                         | Japan Airlines                         |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Korean Air                             | Korean Air                             | Korean Air                             |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| LATAM                                  | LATAM                                  | LATAM                                  |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Qantas                                 | Qantas                                 | Qantas                                 |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               Yes                               |                               Yes                               |                               Yes                               |           |           |           |                                       Yes                                       |                                       Yes                                       |                                       Yes                                       |
| Singapore Airlines                     | Singapore Airlines                     | Singapore Airlines                     |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               No                                |                               No                                |                               No                                |           |           |           |                                       No                                        |                                       No                                        |                                       No                                        |
| Regional Airlines                      | Regional Airlines                      | Regional Airlines                      |                                    |                                    |                                    |  |  |  |                                                                 |                                                                 |                                                                 |           |           |           |                                                                                |                                                                                |                                                                                |
| Ravn Alaska                            | Ravn Alaska                            | Ravn Alaska                            |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               Yes                               |                               Yes                               |                               Yes                               |           |           |           |                                       No                                        |                                       No                                        |                                       No                                        |
| PenAir^(a)^                            | PenAir^(a)^                            | PenAir^(a)^                            |                Yes                 |                Yes                 |                Yes                 |  |  |  |                               Yes                               |                               Yes                               |                               Yes                               |           |           |           |                                       No                                        |                                       No                                        |                                       No                                        |

(a) These airlines do not have their own frequent flyer program\. However, Alaska's Mileage Plan^TM^  members can earn and redeem miles on these airlines' route systems\.

CARGO AND OTHER REVENUE

The Company provides freight and mail services (cargo)\. The majority of cargo services are provided to commercial businesses and the United States Postal Service\. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination, or is transferred to a third\-party carrier for delivery\.

The Company also earns other revenue for lounge memberships, hotel and car commissions, and certain other immaterial items not intrinsically tied to providing air travel to passengers\. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue\.

9


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

one year, and $14 million represents airport gates to be amortized on a straight\-line basis over the remaining lease term of eleven years\.

The Company considered examples of intangible assets that the FASB believes meet the criteria for recognition apart from goodwill, as well as any other intangible assets common to the airline industry, and did not identify any other such intangible assets acquired in the transaction\.

***Goodwill***

Goodwill of $1\.9 billion represents the excess of the purchase price over the fair value of the underlying net assets acquired and largely results from expected future synergies from combining operations as well as an assembled workforce, which does not qualify for separate recognition\. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually, absent any indicators of impairment\.

***Merger\-related costs***

The Company incurred pretax merger\-related costs of $118 million and $117 million for the twelve months ended December 31, 2017 and 2016, respectively\. Costs classified as merger\-related are directly attributable to merger activities and are recorded as "Special items—merger\-related costs" within the Statements of Operations\. Refer to Note 10 for further information on special items\. The Company expects to continue to incur merger\-related costs in the future as the integration continues\.

***Pro forma impact of the acquisition***

The unaudited pro forma financial information presented below represents a summary of the consolidated results of operations for the Company including Virgin America as if the acquisition of Virgin America had been consummated as of January 1, 2015\. The pro forma results do not include any anticipated synergies, or other expected benefits of the acquisition\. Accordingly, the unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 1, 2015\.

|                                           |                              |                              |
| ----------------------------------------- | ---------------------------- | ---------------------------- |
| *(in millions, except per share amounts)* | **Years Ended December 31,** | **Years Ended December 31,** |
|                                           | **2016**                     | **2015**                     |
| Revenue                                   | $7,511                       | $7,111                       |
| Net Income                                | 1,008                        | 914                          |

**NOTE 3\. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT**

***Fuel Hedge Contracts***

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel\. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options for crude oil\.

As of December 31, 2017, the Company had outstanding fuel hedge contracts covering 434 million gallons of crude oil that will be settled from January 2018 to June 2019\.

***Interest Rate Swap Agreements***

The Company is exposed to market risk from adverse changes in variable interest rates on long term debt and certain aircraft lease agreements\. To manage this risk, the Company periodically enters into interest rate swap agreements\. As of December 31, 2017, the Company has outstanding interest rate swap agreements with a third party designed to hedge the volatility of the underlying variable interest rates on lease agreements for six B737\-800 aircraft, as well as two interest rate swap agreements with third parties designed to hedge the volatility of the underlying variable interest rates on $265 million of the debt obtained in 2016\. All of the interest rate swap agreements stipulate that the Company pay a fixed interest rate and receive a floating interest rate over the term of the underlying contracts\. The interest rate swap agreements expire from February 2020 through March 2021 to coincide with the lease termination dates, and October 2022 through September 2026 to coincide with the debt maturity dates\. All significant terms of the swap agreements match the terms of the underlying hedged items, and have been designated as qualifying hedging instruments, which are accounted for as cash flow hedges\.

 75


Annual Report of Southwest Airlines Co\. for year 2017

|                                        |          |          |          |
| -------------------------------------- | -------- | -------- | -------- |
|                                        | **2017** | **2016** | **2015** |
| Weighted\-average discount rate        | 3\.65%   | 4\.25%   | 4\.50%   |
| Assumed healthcare cost trend rate (1) | 7\.08%   | 7\.08%   | 7\.08%   |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (1) | The assumed healthcare cost trend rate is assumed to remain at  7\.08%  for  2018 , then decline gradually to  5\.19%  by  2028  and remain level thereafter\. |

The assumed healthcare cost trend rates have a significant effect on the amounts reported for the consolidated postretirement plans\. A one percent change in all healthcare cost trend rates used in measuring the APBO at December 31, 2017, would have the following effects:

|                                                         |                 |                 |
| ------------------------------------------------------- | --------------- | --------------- |
| **(in millions)**                                       | **1% increase** | **1% decrease** |
| Increase (decrease) in total service and interest costs | $5              | $(4)            |
| Increase (decrease) in the APBO                         | $37             | $(32)           |

The selection of a discount rate is made annually and is selected by the Company based upon comparison of the expected future cash flows associated with the Company’s future payments under its consolidated postretirement obligations to a yield curve created using high quality bonds that closely match those expected future cash flows\. This rate decreased during 2017 due to market conditions\. The assumed healthcare trend rate is also reviewed at least annually and is determined based upon both historical experience with the Company’s healthcare benefits paid and expectations of how those trends may or may not change in future years\.

**14****\. INCOME TAXES**

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes\. The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017\. The Act reduces the U\.S\. federal corporate tax rate from the previous rate of 35 percent to 21 percent, requires companies to pay a one\-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings\. At December 31, 2017, the Company has calculated the accounting for the tax effects of enactment of the Act as written, and made a reasonable estimate of the effects on the existing deferred tax balances\. The Company will continue to refine the calculations as additional analysis is completed\. In addition, these estimates may also be affected as the Company gains a more thorough understanding of the tax law, including those related to the deductibility of purchased assets, state tax treatment, and amounts related to Employee compensation\. This re\-measurement in 2017 resulted in a reduction in the Company's net deferred tax liability, as noted by the change in federal statutory tax rate as noted in the provision for income taxes below\. The components of deferred tax assets and liabilities at December 31, 2017 and 2016, are as follows:

|                                |          |          |
| ------------------------------ | -------- | -------- |
| **(in millions)**              | **2017** | **2016** |
| **DEFERRED TAX LIABILITIES:**  |          |          |
| Accelerated depreciation       | $3,193   | $4,726   |
| Other                          | 86       | 134      |
| Total deferred tax liabilities | 3,279    | 4,860    |
| **DEFERRED TAX ASSETS:**       |          |          |
| Fuel derivative instruments    | 12       | 233      |
| Construction obligation        | 326      | 402      |
| Accrued employee benefits      | 309      | 451      |
| Other                          | 274      | 400      |
| Total deferred tax assets      | 921      | 1,486    |
| Net deferred tax liability     | $2,358   | $3,374   |

The provision for income taxes is composed of the following:

107


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

***OPERATING REVENUES***

Total operating revenues increased$370 million, or 5%, during 2018 compared to the same period in 2017\. The changes are summarized in the following table:

|                            |                                      |                                      |                                      |
| -------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                            | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
| ***(in millions)***        | **2018**                             | **2017**                             | **% Change**                         |
| Passenger revenue          | **$7,632**                           | $7,301                               | 4\.5%                                |
| Mileage Plan other revenue | **434**                              | 418                                  | 3\.8%                                |
| Cargo and other            | **198**                              | 175                                  | 13\.1%                               |
| Total operating revenues   | **$8,264**                           | $7,894                               | 4\.7%                                |

***Passenger Revenue***

On a consolidated basis, passenger revenue for 2018increased by $331 million, or 5%, on a 5%increase in capacity, partially offset by a 0\.6 pt decrease in load factor\. The capacity increase was driven by the expansion of our network and fleet over the past year, although growth was lower than in 2017 as we slowed our expansion to allow for the maturation of a significant number of markets added after our acquisition of Virgin America\. Lower load factor is a result of our growth and an increase in competitive capacity in markets we serve\. In 2018, we began the first of a number of initiatives to combat competitive pressures, including increasing our bag fees, reconfiguring our Airbus cabins, and the introduction of our "Saver Fare" in the fourth quarter\.

***Mileage Plan other revenue***

On a consolidated basis, Mileage Plan other revenue increased$16 million, or 4%, as compared to 2017, primarily due to growth in our affinity credit card program resulting in an increase in miles sold to our affinity credit card partner\.

***Cargo and Other Revenue***

On a consolidated basis, Cargo and other revenue increased$23 million, or 13%, from 2017***\.*** The increase is primarily attributable to increased freight and mail capacity from our three freighters and utilizing our Airbus fleet to transport cargo\. The remainder of the increase was due to increased lounge revenue as a result of our new lounges at JFK and Sea\-Tac Airports\.

***OPERATING EXPENSES***

Total operating expenses increased$935 million, or 14%, compared to 2017\. We consider it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

|                                        |                                      |                                      |                                      |
| -------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                        | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
| ***(in millions)***                    | **2018**                             | **2017**                             | **% Change**                         |
| Fuel expense                           | **$1,936**                           | $1,447                               | 33\.8 %                              |
| Non\-fuel expenses                     | **5,553**                            | 5,123                                | 8\.4 %                               |
| Special items \- merger\-related costs | **87**                               | 116                                  | (25\.0)%                             |
| Special items \- other                 | **45**                               | —                                    | NM                                   |
| Total Operating Expenses               | **$7,621**                           | $6,686                               | 14\.0 %                              |

Significant operating expense variances from 2017 are more fully described below\.

***Aircraft Fuel***

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

 37


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

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

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 results of operations or financial position\.

***If we experience changes in, or are unable to retain, our senior management team or other key employees, our operating results could be adversely affected\.***

Much of our future success depends on the continued availability of skilled personnel with industry experience and knowledge, including our senior management team and other key employees\. If we are unable to attract and retain talented, highly qualified senior management and other key employees, or if we are unable to effectively provide for the succession of senior management, our business may be adversely affected\.

***High and/or volatile fuel prices or significant disruptions in the supply of aircraft fuel could have a material adverse impact on the Company’s strategic plans, operating results, financial position and liquidity\.***

Aircraft fuel is critical to the Company’s operations and is one of its single largest operating expenses\. The timely and adequate supply of fuel to meet operational demand depends on the continued availability of reliable fuel supply sources, as well as related service and delivery infrastructure\. Although the Company has some ability to cover short\-term fuel supply and infrastructure disruptions at some major demand locations, it can neither predict nor guarantee the continued timely availability of aircraft fuel throughout the Company’s system\. The Company generally sources fuel at prevailing market prices\.

Aircraft fuel has historically been the Company’s most volatile operating expense due to the highly unpredictable nature of market prices for fuel\. Market prices for aircraft fuel have historically fluctuated substantially in short periods of time and continue to be highly volatile due to a dependence on a multitude of unpredictable factors beyond the Company’s control\. These factors include changes in global crude oil prices, the balance between aircraft fuel supply and demand, natural disasters, prevailing inventory levels and fuel production and transportation infrastructure\. Prices of fuel are also impacted by indirect factors that may potentially impact fuel supply or demand balance, such as geopolitical events, economic growth indicators, fiscal/monetary policies, fuel tax policies, environmental concerns and financial investments in energy markets\. Both actual changes in these factors, as well as changes in market expectations of these factors can potentially drive rapid changes in fuel price levels in short periods of time\.

Given the highly competitive nature of the airline industry, the Company may not be able to increase its fares and fees sufficiently to offset the full impact of increases in fuel prices, especially if these increases are significant, rapid and sustained\. Further, any such fare and fee increases may not be sustainable, may reduce the general demand for air travel and may also eventually impact the Company’s strategic growth and investment plans for the future\. In addition, decreases in fuel prices for an extended period of time may result in increased industry capacity, increased competitive actions for market share and lower fares or surcharges in general\. If fuel prices were to then subsequently rise quickly, there may be a lag between the rise in fuel prices and any improvement of the revenue environment\.

To protect against increases in the market prices of fuel, the Company may hedge a portion of its future fuel requirements\. However, the Company’s hedging program may not be successful in mitigating higher fuel costs, and any price protection provided may be limited due to choice of hedging instruments and market conditions, including breakdown of correlation between hedging instrument and market price of aircraft fuel and failure of hedge counterparties\. To the extent that the Company decides to hedge a portion of its future fuel requirements and uses hedge contracts that have the potential to create an obligation to pay upon settlement if fuel prices decline significantly, such hedge contracts may limit the Company’s ability to benefit fully from lower fuel costs in the future\. If fuel prices decline significantly from the levels existing at the time the Company enters into a hedge contract, the Company may be required to post collateral (margin) beyond certain thresholds\. There can be no assurance that the Company’s hedging arrangements will provide any particular level of protection against rises in fuel prices or that its counterparties will be able to perform under the Company’s hedging arrangements\.

14