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

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

**Number** | **Description**                                                                                |
| 4\.149                        | [Escrow and Paying Agent Agreement (Class A), dated as of January 13, 2017, among Wilmington Trust, National Association, as Escrow Agent, Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc\. and Deutsche Bank Securities Inc\., for themselves and on behalf of the several Underwriters, Wilmington Trust Company, not in its individual capacity, but solely as Pass Through Trustee for and on behalf of American Airlines Pass Through Trust 2017\-1A, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4\.10 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex410.htm) |
| 4\.150                        | [Escrow and Paying Agent Agreement (Class B), dated as of January 13, 2017, among Wilmington Trust, National Association, as Escrow Agent, Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc\. and Deutsche Bank Securities Inc\., for themselves and on behalf of the several Underwriters, Wilmington Trust Company, not in its individual capacity, but solely as Pass Through Trustee for and on behalf of American Airlines Pass Through Trust 2017\-1A, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4\.11 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex411.htm) |
| 4\.151                        | [Note Purchase Agreement, dated as of January 13, 2017, 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, National Association, as Escrow Agent, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4\.12 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex412.htm)                                                                                |
| 4\.152                        | [Form of Participation Agreement (Participation Agreement 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 B to Exhibit 4\.12 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex412.htm)                                                                                |
| 4\.153                        | [Form of Indenture and Security Agreement (Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (incorporated by reference to Exhibit C to Exhibit 4\.12 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex412.htm)                                                                                |
| 4\.154                        | [Form of Pass Through Trust Certificate, Series 2017\-1AA (incorporated by reference to Exhibit A to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex42.htm)                                                                                |
| 4\.155                        | [Form of Pass Through Trust Certificate, Series 2017\-1A (incorporated by reference to Exhibit A to Exhibit 4\.3 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex43.htm)                                                                                |
| 4\.156                        | [Form of Pass Through Trust Certificate, Series 2017\-1B (incorporated by reference to Exhibit A to Exhibit 4\.4 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex44.htm)                                                                                |
| 4\.157                        | [Revolving Credit Agreement (2017\-1AA), dated as of January 13, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1AA, as Borrower, and Citibank N\.A\., as Liquidity Provider (incorporated by reference to Exhibit 4\.18 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex418.htm)                                                                                |
| 4\.158                        | [Revolving Credit Agreement (2017\-1A), dated as of January 13, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1A, as Borrower, and Citibank N\.A\., as Liquidity Provider (incorporated by reference to Exhibit 4\.19 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex419.htm)                                                                                |
| 4\.159                        | [Revolving Credit Agreement (2017\-1B), dated as of January 13, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1B, as Borrower, and Citibank N\.A\., as Liquidity Provider (incorporated by reference to Exhibit 4\.20 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex420.htm)                                                                                |
| 4\.160                        | [Acknowledgment and Agreement (2017\-1), dated as of March 31, 2017, by and among American Airlines Inc\., Citibank, N\.A\., as initial Liquidity Provider, National Australia Bank Limited, as Replacement Liquidity Provider, and Wilmington Trust Company, as Subordination Agent and trustee (incorporated by reference to Exhibit 4\.20 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex420.htm)                                                                                |
| 4\.161                        | [Revolving Credit Agreement (2017\-1AA), dated as of March 31, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1AA, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.21 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex421.htm)                                                                                |
| 4\.162                        | [Revolving Credit Agreement (2017\-1A), dated as of March 31, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1A, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.22 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex422.htm)                                                                                |
| 4\.163                        | [Revolving Credit Agreement (2017\-1B), dated as of March 31, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1B, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.23 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex423.htm)                                                                                |

187


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

***Union disputes, employee strikes and other labor\-related disruptions, or our inability to otherwise maintain labor costs at competitive levels may adversely affect our operations and financial performance\.***

Relations between air carriers and labor unions in the U\.S\. are governed by the RLA\. Under the RLA, CBAs generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi\-stage and usually lengthy series of bargaining processes overseen by the NMB\. For the dates that the CBAs with our major work groups become amendable under the RLA, see Part I, Item 1\. Business – *“Employees and Labor Relations*\.”

In the case of a CBA that is amendable under the RLA, if no agreement is reached during direct negotiations between the parties, either party may request that the NMB appoint a federal mediator\. The RLA prescribes no timetable for the direct negotiation and mediation processes, and it is not unusual for those processes to last for many months or even several years\. If no agreement is reached in mediation, the NMB in its discretion may declare that an impasse exists and proffer binding arbitration to the parties\. Either party may decline to submit to arbitration, and if arbitration is rejected by either party, a 30\-day “cooling off” period commences\. During or after that period, a PEB may be established, which examines the parties’ positions and recommends a solution\. The PEB process lasts for 30 days and is followed by another 30\-day “cooling off” period\. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self\-help,” such as a strike, which could materially adversely affect our business, results of operations and financial condition\.

None of the unions representing our employees presently may lawfully engage in concerted slowdowns or refusals to work, such as strikes, sick\-outs or other similar activity, against us\. Nonetheless, there is a risk that disgruntled employees, either with or without union involvement, could engage in one or more concerted refusals to work that could individually or collectively harm the operation of our airline and impair our financial performance\. Additionally, some of our unions have brought and may continue to bring grievances to binding arbitration, including those related to wages\. If successful, there is a risk these judicial or arbitral avenues could result in material additional costs that we did not anticipate\. See also Part I, Item 1\. Business – *“Employees and Labor Relations\.*”

As of December 31, 2018, approximately 84% of our employees were represented for collective bargaining purposes by labor unions\. Currently, we believe our labor costs are competitive relative to the other large network carriers\. However, we cannot provide assurance that labor costs going forward will remain competitive because we are in negotiations for some new agreements now and other agreements may become amendable, competitors may significantly reduce their labor costs or we may agree to higher\-cost provisions unilaterally or in connection with our current or future labor negotiations\.

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

We operate principally through hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D\.C\. Substantially all of our flights either originate at or fly into one of these locations\. A significant interruption or disruption in service at one of our hubs or other airports where we have a significant presence, such as LHR, resulting from ATC delays, weather conditions, natural disasters, growth constraints, performance by third\-party service providers (such as electric utility or telecommunications providers), failure of computer systems, disruptions at airport facilities or other key facilities used by us to manage our operations (such as occurred in the United Kingdom at LGW on December 20, 2018 and LHR on January 8, 2019 due to unauthorized drone activity), labor relations, power supplies, fuel supplies, terrorist activities, or otherwise could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe impact on our business, results of operations and financial condition\. We have limited control, particularly in the short\-term, over the operation, quality or maintenance of many of the services on which our operations depend and over whether vendors of such services will improve or continue to provide services that are essential to our business\.

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

In order to operate our existing and proposed flight schedule and, where desirable, add service along new or existing routes, we must be able to maintain and/or obtain adequate gates, check\-in counters, operations areas, operations control facilities and administrative support space\. As airports around the world become more congested, it may not be possible for us to ensure that our plans for new service can be implemented in a commercially viable manner, given operating constraints at airports throughout our network, including those imposed by inadequate facilities at desirable airports\.

21


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

***Goodwill and Indefinite\-lived Assets***

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and liabilities assumed\. Goodwill is not amortized but assessed for impairment annually on October 1^st^ or more frequently if events or circumstances indicate that goodwill may be impaired\. We have one consolidated reporting unit\.

Indefinite\-lived intangible assets other than goodwill include certain domestic airport slots at our hubs and international slots and route authorities\. Indefinite\-lived intangible assets are not amortized but instead are assessed for impairment annually on October 1^st^ or more frequently if events or circumstances indicate that the asset may be impaired\.

In the second quarter of 2018, American recorded a $26 million impairment charge on a Brazil route authority as a result of the U\.S\.\-Brazil open skies agreement\.

Goodwill and indefinite\-lived intangible assets are assessed for impairment by initially performing a qualitative assessment\. Under the qualitative approach, we analyze the following factors, among others, to determine if events and circumstances have affected the fair value of goodwill and indefinite\-lived intangible assets: (1) negative trends in our market capitalization, (2) an increase in fuel prices, (3) declining per mile passenger yields, (4) lower passenger demand as a result of a weakened U\.S\. and global economy and (5) changes to the regulatory environment\.

Based upon our annual assessment, there were no impairments of our goodwill and no additional impairments of our indefinite\-lived assets in 2018 other than the Brazil route authority described above\.

***Pensions and Retiree Medical and Other Postretirement Benefits***

We recognize the funded status (i\.e\., the difference between the fair value of plan assets and the projected benefit obligations) of our pension and retiree medical and other postretirement benefits plans in the consolidated balance sheets with a corresponding adjustment to accumulated other comprehensive income (loss)\.

Our pension and retiree medical and other postretirement benefits costs and liabilities are calculated using various actuarial assumptions and methodologies\. We use certain assumptions including, but not limited to, the selection of the: (1) discount rate, (2) expected return on plan assets, (3) expected health care cost trend rate and (4) estimated age of pilot retirement (as discussed below)\. These assumptions as of December 31 were:

|                                                                                |          |          |
| --------------------------------------------------------------------------------------- | -------- | -------- |
|                                                                                | **2018** | **2017** |
| Pension weighted average discount rate  ^(1)^                                           | 4\.40%   | 3\.80%   |
| Retiree medical and other postretirement benefits weighted average discount rate  ^(1)^ | 4\.30%   | 3\.60%   |
| Expected rate of return on plan assets  ^(2)^                                           | 8\.00%   | 8\.00%   |
| Weighted average health care cost trend rate assumed for next year  ^(3)^ :             |          |          |
| Initial                                                                                | 3\.91%   | 4\.19%   |
| Ultimate (2026)                                                                         | 3\.45%   | 3\.76%   |
| Assumed Pilot Retirement Age                                                            | 63       | 62       |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | When establishing our discount rate to measure our obligations, we match high quality corporate bonds available in the marketplace whose cash flows approximate our projected benefit disbursements\. Lowering the discount rate by 50 basis points as of  December 31, 2018  would increase our pension and retiree medical and other postretirement benefits obligations by approximately  $1\.1 billion  and  $37 million , respectively, and increase both estimated  2019  pension expense and estimated  2019  retiree medical and other postretirement benefits expense by  $2 million  and less than  $1 million , respectively\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | The expected rate of return on plan assets is based upon an evaluation of our historical trends and experience, taking into account current and expected market conditions and our target asset allocation of  30%  U\.S\. stocks,  22%  developed international stocks,  20%  fixed income securities,  20%  alternative (private) investments and  8%  emerging market stocks\. The expected rate of return on plan assets component of our net periodic benefit cost is calculated based on the fair value of plan assets and our target asset allocation\. Lowering the expected long\-term rate of return on plan assets by 50 basis points as of  December 31, 2018  would increase estimated  2019  pension expense and retiree medical and other postretirement benefits expense by approximately  $51 million  and  $1 million , respectively\. |

74


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

|                                                                                |                                                                    |
| --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ |
|                                                                                | **Page**                                                           |
| [**ITEM 9B\. OTHER INFORMATION**](http://ir.delta.com/.#s19EA7B16D2F35E6190424AA6E5F2689E)                                                                                |
[ 91](http://ir.delta.com/.#s19EA7B16D2F35E6190424AA6E5F2689E) |
| **PART III**                                                                                |                                                                    |
| [**ITEM 10\. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE**](http://ir.delta.com/.#s7BBFF2508F11513E82D79BB20D9139DB)

[**REGISTRANT**](http://ir.delta.com/.#s7BBFF2508F11513E82D79BB20D9139DB)                       |
[ 91](http://ir.delta.com/.#s7BBFF2508F11513E82D79BB20D9139DB) |
| [**ITEM 11\. EXECUTIVE COMPENSATION**](http://ir.delta.com/.#s8D41CC200AF95D0C9AD3173432CD6547)                                                                                |
[ 91](http://ir.delta.com/.#s8D41CC200AF95D0C9AD3173432CD6547) |
| [**ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND**](http://ir.delta.com/.#sC67029F2E13355A2BE43E3DE3FFCB9D3)

[**RELATED STOCKHOLDER MATTERS**](http://ir.delta.com/.#sC67029F2E13355A2BE43E3DE3FFCB9D3) |
[ 91](http://ir.delta.com/.#sC67029F2E13355A2BE43E3DE3FFCB9D3) |
| [**ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR**](http://ir.delta.com/.#s71B0A01B608259D8A56BF64AAC3B15EA)

[**INDEPENDENCE**](http://ir.delta.com/.#s71B0A01B608259D8A56BF64AAC3B15EA)                      |
[ 91](http://ir.delta.com/.#s71B0A01B608259D8A56BF64AAC3B15EA) |
| [**ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES**](http://ir.delta.com/.#s0851BBA3ADB35B76BC3F334D22533F95)                                                                                |
[ 92](http://ir.delta.com/.#s0851BBA3ADB35B76BC3F334D22533F95) |
| **PART IV**                                                                                |                                                                    |
| [**ITEM 15\. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**](http://ir.delta.com/.#s89D3CF99E3445D04B039D7750DC3E7A5)                                                                                |
[ 92](http://ir.delta.com/.#s89D3CF99E3445D04B039D7750DC3E7A5) |
| [**ITEM 16\. FORM 10\-K SUMMARY**](http://ir.delta.com/.#sFC66898A1FFF5DD4ACE60CFAAB064FB9)                                                                                |
[ 96](http://ir.delta.com/.#sFC66898A1FFF5DD4ACE60CFAAB064FB9) |
| [SIGNATURES](http://ir.delta.com/.#s5BFC6C7ED45C56F9B68DA710869BC613)                                                                                |
[ 97](http://ir.delta.com/.#s5BFC6C7ED45C56F9B68DA710869BC613) |


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

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

**13\. Supplemental Cash Flow Information**

Supplemental disclosure of cash flow information and non\-cash investing and financing activities are as follows (in millions):

|                                               |                             |                             |                             |
| --------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                               | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                               | **2018**                    | **2017**                    | **2016**                    |
| Non\-cash investing and financing activities: |                             |                             |                             |
| Equity investment                             | $—                          | $120                        | $—                          |
| Settlement of bankruptcy obligations          | —                           | 15                          | 3                           |
| Supplemental information:                     |                             |                             |                             |
| Interest paid, net                            | 1,091                       | 1,040                       | 964                         |
| Income taxes paid                             | 18                          | 20                          | 16                          |

**14\. Operating Segments and Related Disclosures**

We are managed as a single business unit that provides air transportation for passengers and cargo\. This allows us to benefit from an integrated revenue pricing and route network that includes American and our wholly\-owned and third\-party regional carriers that fly under capacity purchase agreements operating as American Eagle\. The flight equipment of all these carriers is combined to form one fleet that is deployed through a single route scheduling system\. Financial information and annual operational plans and forecasts are prepared and reviewed by the chief operating decision maker at the consolidated level\. When making operational decisions, the chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but is indifferent to the results of the individual wholly\-owned regional carriers\. The objective in making operational decisions is to maximize consolidated financial results, not the individual results of American or American Eagle\.

 See Note 1(k) for our passenger revenues by geographic region\. Our tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated\.

**15\. Share\-based Compensation**

The 2013 AAG Incentive Award Plan (the 2013 Plan) provides that awards may be in the form of an option, restricted stock award, restricted stock unit award, performance award, dividend equivalent award, deferred stock award, deferred stock unit award, stock payment award or stock appreciation right\. The 2013 Plan initially authorized the grant of awards for the issuance of up to 40 million shares\. Any shares underlying awards granted under the 2013 Plan, or any pre\-existing US Airways Group plan, that are forfeited, terminate or are settled in cash (in whole or in part) without the delivery of shares will again be available for grant\.

Our salaries, wages and benefits expense for the years ended December 31, 2018, 2017 and 2016 included $88 million, $90 million and $102 million, respectively, of share\-based compensation costs\.

During 2018, 2017 and 2016, we withheld approximately 0\.8 million, 1\.1 million and 1\.4 million shares of AAG common stock, respectively, and paid approximately $37 million, $51 million and $56 million, respectively, in satisfaction of certain tax withholding obligations associated with employee equity awards\.

***Restricted Stock Unit Awards (RSUs)***

We have granted RSUs with service conditions (time vested primarily over three years) and performance conditions\. The grant\-date fair value of RSUs is equal to the market price of the underlying shares of AAG common stock on the date of grant\. For time vested awards, the expense is recognized on a straight\-line basis over the vesting period for the entire award\. For awards with performance conditions, the expense is recognized based on the expected achievement at each reporting period\. Stock\-settled RSUs are classified as equity awards as the vesting results in the issuance of shares of AAG common stock\.

125


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

I n July 2018, the FASB issued ASU No\. 2018\-11, "Targeted Improvements \- Leases (Topic 842)\." This update provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years presented\. If elected, an entity would recognize a cumulative\-effect adjustment to the opening balance of retained earnings in the year of adoption\. We adopted the new standard as of January 1, 2018 during the December quarter using the transition method that provides for a cumulative\-effect adjustment to retained earnings upon adoption and have recast our 2018 quarterly results\.  The Consolidated Financial Statements for the fiscal year ended December 31, 2018 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with our historical accounting policy\.

Statement of Cash Flows\.  In 2016, the FASB issued ASU Nos\. 2016\-15 and 2016\-18 related to the classification of certain cash receipts and cash payments, and the presentation of restricted cash within an entity's cash flows statement, respectively\. We adopted these standards effective January 1, 2018\.

Financial Instruments\.  In 2016, the FASB issued ASU No\. 2016\-01, "Financial Instruments—Overall (Subtopic 825\-10)\." This standard makes several changes, including the elimination of the available\-for\-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income\. In February 2018, the FASB issued ASU No\. 2018\-03, "Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825\-10)" to clarify certain aspects of ASU No\. 2016\-01\. We adopted these standards effective January 1, 2018\.

Prior to the adoption of this standard, our investments in GOL Linhas Aéreas Inteligentes, the parent company of VRG Linhas Aéreas (operating as GOL), and China Eastern were accounted for as available\-for\-sale with changes in fair value recognized in other comprehensive income\. At the time of adoption, we reclassified an unrealized gain of $162 million related to these investments from AOCI to retained earnings\.

Our investment in Air France\-KLM was accounted for at cost during 2017 as our investment agreement restricts the sale or transfer of these shares for five years\. Upon adopting ASU Nos\. 2016\-01 and 2018\-03, we recognized a  $148 million  gain in unrealized gain/(loss) on investments in our income statement related to the value of Air France\-KLM's stock compared to our investment basis at December 31, 2017\. Consistent with our investments in GOL and China Eastern, this investment is now accounted for at fair value with changes in fair value recognized in net income\.

Retirement Benefits\.  In 2017, the FASB issued ASU No\. 2017\-07, "Compensation—Retirement Benefits (Topic 715)\." This standard requires an entity to report the service cost component in the same line item as other compensation costs\. The other components of net (benefit) cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations\. We adopted this standard effective January 1, 2018\.  The components of the net (benefit) cost are shown in  Note 10  of the Notes to the Consolidated Financial Statements\.

 47


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

Although less significant, the new retirement benefits accounting standard is also effective January 1, 2018\. Under this new standard, all components of net periodic benefit cost will be presented in Nonoperating income (expense), except service cost, which will remain in Wages and benefits\. This change has an impact on CASM\.

Management believes it is useful to compare forecasted results with the restated results under the new standards, as noted in the impacted areas below\. The implementation of the new standards will impact common industry metrics such as PRASM, RASM, and CASM excluding fuel and special items\. We will provide restated metrics in a separate filing\.

 38


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

***Operating Leases***

The Company leases aircraft, airport and terminal facilities, office space and other equipment under operating leases\. Airport and terminal facility leases are variable based on volumes and expensed as incurred\. Some of these lease agreements contain rent escalation clauses or rent holidays\. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight\-line basis over the terms of the leases in the consolidated statements of operations\.

***Leased Aircraft Return Costs***

Cash payments associated with returning leased aircraft are accrued when it is probable that a cash payment will be made and that amount is reasonably estimable, usually no sooner than after the last scheduled maintenance event prior to lease return\. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination\.

As leased aircraft are returned, any payments are charged against the established accrual\. The accrual is part of other current and long\-term liabilities and was not material as of December 31, 2018 and December 31, 2017\. The expense is included in Aircraft maintenance in the consolidated statements of operations\.

***Advertising Expenses***

The Company's advertising expenses include advertising and promotional costs\. Advertising production costs are expensed as incurred\. Advertising expense was $79 million, $91 million and $61 million during the years ended December 31, 2018, 2017 and 2016\.

***Derivative Financial Instruments***

The Company's operations are significantly impacted by changes in aircraft fuel prices and interest rates\. In an effort to manage exposure to these risks, the Company periodically enters into fuel and interest rate derivative instruments\. These derivative instruments are recognized at fair value on the balance sheet and changes in the fair value are recognized in AOCL or in the consolidated statements of operations, depending on the nature of the instrument\.

The Company does not apply hedge accounting to its derivative fuel hedge contracts nor does it hold or issue them for trading purposes\. For cash flow hedges related to interest rate swaps, the effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item\. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in interest expense\.

***Fair Value Measurements***

Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date\. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value\. There are three levels of inputs that may be used to measure fair value:

*Level 1* \- Quoted prices in active markets for identical assets or liabilities\.

*Level 2* \- Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities\.

*Level 3* \- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities\.

The Company has elected not to use the fair value option provided in the accounting standards for non\-financial instruments\. Accordingly, those assets and liabilities are carried at amortized cost\. For financial instruments, the assets and liabilities are carried at fair value, which is determined based on the market approach or income approach, depending upon the level of inputs used\.

 64


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

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

*Mileage credits sold to co\-branded credit cards and other partners*

We sell mileage credits to participating airline partners and non\-airline business partners including our co\-branded credit card partners, under contracts with terms extending generally for one to nine years\. Consideration received from the sale of mileage credits is variable and payment terms typically are within 30 days subsequent to the month of mileage sale\. Sales of mileage credits to non\-airline business partners are comprised of two components, transportation and marketing\. We allocate the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered\.

Our most significant partner agreements are our co\-branded credit card agreements with Citi and Barclaycard US that we entered into in 2016\. We identified the following revenue elements in these co\-branded credit card agreements: the transportation component; and the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component)\. Accordingly, we recognize the marketing component in other revenue in the period of the mileage sale following the sales\-based royalty method\.

The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above\. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided\.

For the portion of our outstanding mileage credits that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining mileage credits are redeemed\. Our estimates are based on analysis of historical redemptions\.

**Cargo Revenue**

Cargo revenue is recognized when we provide the transportation\.

**Other Revenue**

Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage sales to co\-branded credit card and other partners and other marketing related payments\. For the years ended December 31, 2018, 2017 and 2016, loyalty revenue included in other revenue was $2\.4 billion, $2\.1 billion and $1\.9 billion, respectively\. The accounting and recognition for the loyalty program marketing services are discussed above in “*Loyalty Revenue*\.” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation\-related services\.

*Contract Balances*

Our significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non\-air travel awards, reported as loyalty program liability on our consolidated balance sheet and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on our consolidated balance sheet\.

|                           |                       |                       |
| ------------------------- | --------------------- | --------------------- |
|                           | **December 31, 2018** | **December 31, 2017** |
|                           | **(in millions)**     | **(in millions)**     |
| Loyalty program liability | $8,539                | $8,822                |
| Air traffic liability     | 4,339                 | 4,042                 |
| Total                     | $12,878               | $12,864               |

94


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

Aircraft

Including aircraft operated by our regional carriers, we lease   376  aircraft, of which   50  are under finance leases and   326  are operating leases\. Our aircraft leases generally have long durations with remaining terms of  one  month to   13  years\. Aircraft finance leases continue to be reported on our balance sheet, while operating leases were added to the balance sheet in 2018 with the adoption of the new standard\.

In addition, we have regional aircraft leases that are embedded within our capacity purchase agreements and included in the right\-of\-use ("ROU") asset and lease liability\. We allocated the consideration in each capacity purchase agreement to the lease and nonlease components based on their relative standalone value\. Lease components of these agreements consist of   172  aircraft as of December 31, 2018 and nonlease components primarily consist of flight operations, in\-flight and maintenance services\. We determined our best estimate of the standalone value of the individual components by considering observable information including rates paid by our wholly owned subsidiary, Endeavor Air, Inc\., and rates published by independent valuation firms\. See  Note 11 , "Commitments and Contingencies," for additional information about our capacity purchase agreements\.

With the adoption, we evaluated whether leased aircraft asset groups within our fleet are impaired under the new standard\. The regional fleet flown by our wholly\-owned subsidiary, Endeavor, is primarily under operating leases\. Within Endeavor’s CRJ\-200 fleet, we had   43  aircraft that were parked on a temporary basis as of our January 1, 2018 adoption date, but were not identified as permanently retired as the aircraft may be utilized to address network needs in the future\. We determined that the CRJ\-200 fleet operated by Endeavor was impaired due to insufficient future cash flows projected for the fleet\. The fair value of the CRJ\-200 fleet based on market lease rates was less than the contractual lease rates and, therefore, we recorded a transition adjustment that reduced equity by   $284 million  (net of tax)\. The transition adjustment reflects the difference in fair value compared to the basis of the ROU asset and reduced post\-adoption lease expense by   $75 million  for 2018\.

Airport Facilities

Our facility leases are primarily for space at approximately   300  airports around the world that we serve\. These leases are classified as operating leases and reflect our use of airport terminals, office space, cargo warehouses and maintenance facilities\. We generally lease this space from government agencies that control the use of the airport\. The remaining lease terms vary from one month to   32  years\. At the majority of the U\.S\. airports, the lease rates depend on airport operating costs or use of the facilities and are reset at least annually\. Because of the variable nature of the rates, these leases are not recorded on our balance sheet as a ROU asset and lease liability\.

Some airport facilities have fixed payment schedules, the most significant of which are New York\-LaGuardia and New York\-JFK\. For those airport leases, we have recorded a ROU asset and lease liability representing the fixed component of the lease payment\. See  Note 9 , "Airport Redevelopment," for more information on our significant airport redevelopment projects\.

Other Ground Property and Equipment

We lease certain IT assets (including servers, mainframes, etc\.), ground support equipment (including tugs, tractors, fuel trucks and de\-icers), and various other equipment\. The remaining lease terms range from  one  month to  eight  years\. Certain leased IT assets are embedded within various service agreements\. The lease components included in those agreements are included in the ROU asset and lease liability, and the amounts are not significant\.

 78


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

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

under the Plan\. As of  December 31, 2019 , the Disputed Claims Reserve held approximately   7 million  shares of AAG common stock\.

Private Party Antitrust Action Related to Passenger Capacity\.  We, along with Delta Air Lines, Inc\., Southwest Airlines Co\., United Airlines, Inc\. and, in the case of litigation filed in Canada, Air Canada, were named as defendants in approximately   100  putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity\. The U\.S\. lawsuits were consolidated in the Federal District Court for the District of Columbia (the DC Court)\. On June 15, 2018, we reached a settlement agreement with the plaintiffs in the amount of   $45 million  to resolve all class claims in the U\.S\. lawsuits\. That settlement was approved by the DC Court on May 13, 2019\. Three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia\. We believe these appeals are without merit and intend to vigorously defend against them\.

Private Party Antitrust Action Related to the Merger \. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al\., v\. AMR Corporation, et al\., was filed in the Bankruptcy Court\. The complaint named as defendants US Airways Group, US Airways, AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture\. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger\. On August 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross\-motion for summary judgment\. The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019\. The parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019, and we are awaiting the Bankruptcy Court's decision\. We believe this lawsuit is without merit and intend to vigorously defend against the allegations\.

Pension Benefits Action\.  On December 11, 2018, a lawsuit captioned Torres, et al\. v\. American Airlines, Inc\., The Employee Benefits Committee and John/Jane Does 1\-5, was filed in the United States District Court for the Northern District of Texas\. The plaintiffs in this lawsuit purport to represent a class consisting of all participants in and beneficiaries under any of the four American defined benefit pension plans who elected to receive an optional form of benefit other than a lump sum distribution of a participant’s vested benefit\. Under ERISA, participants covered by defined benefit plans accrue retirement benefits in the form of a single life annuity payable upon retirement on a monthly basis until the employee’s death, and may elect certain alternative forms of benefit payments\. Plaintiffs contend that the mortality tables used by American for purposes of calculations related to these alternative forms of benefits are outdated and that more recent mortality tables would have provided more generous benefits and should have been used to make those calculations\. The court has denied our motion to dismiss the complaint\. We believe this lawsuit is without merit and intend to vigorously defend against the allegations\.

General \. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time\. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control\. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material\.

(f) Guarantees and Indemnifications

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

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

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

110


Annual Report of Southwest Airlines Co\. for year 2017

The Company’s fuel and interest rate derivative instruments consist of over\-the\-counter contracts, which are not traded on a public exchange\. Fuel derivative instruments include swaps, as well as different types of option contracts, whereas interest rate derivatives consist solely of swap agreements\. See Note 10 for further information on the Company’s derivative instruments and hedging activities\. The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets\. Therefore, the Company has categorized these swap contracts as Level 2\. The Company’s Treasury Department, which reports to the Chief Financial Officer, determines the value of option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts\. The option pricing model used by the Company is an industry standard model for valuing options and is the same model used by the broker/dealer community (i\.e\., the Company’s counterparties)\. The inputs to this option pricing model are the option strike price, underlying price, risk free rate of interest, time to expiration, and volatility\. Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3\. Volatility information is obtained from external sources, but is analyzed by the Company for reasonableness and compared to similar information received from other external sources\. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled\. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values\. To validate the reasonableness of the Company’s option pricing model, on a monthly basis, the Company compares its option valuations to third party valuations\. If any significant differences were to be noted, they would be researched in order to determine the reason\. However, historically, no significant differences have been noted\. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds\.

Included in Other available\-for\-sale securities are the Company's investments associated with its deferred compensation plans, which consist of mutual funds that are publicly traded and for which market prices are readily available\. These plans are non\-qualified deferred compensation plans designed to hold contributions in excess of limits established by the Internal Revenue Code of 1986, as amended\. The distribution timing and payment amounts under these plans are made based on the participant's distribution election and plan balance\. Assets related to the funded portions of the deferred compensation plans are held in a rabbi trust, and the Company remains liable to these participants for the unfunded portion of the plans\. The Company records changes in the fair value of the assets in the Company's earnings\.

100


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

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                    |                                                                    |                                                                    |          |  |  |  |          |  |  |  |          |
|:------------------------------------------------------------------ |:------------------------------------------------------------------ |:------------------------------------------------------------------ | --------:|:- |:- |:- | --------:|:- |:- |:- | --------:|
| Year Ended December 31  *(in millions, except per\-share amounts)* | Year Ended December 31  *(in millions, except per\-share amounts)* | Year Ended December 31  *(in millions, except per\-share amounts)* |     2019 |  |  |  |     2018 |  |  |  |     2017 |
| Operating Revenues                                                 | Operating Revenues                                                 | Operating Revenues                                                 |          |  |  |  |          |  |  |  |          |
| Passenger revenue                                                  | Passenger revenue                                                  | Passenger revenue                                                  |  $ 8,095 |  |  |  |  $ 7,631 |  |  |  |  $ 7,301 |
| Mileage Plan other revenue                                         | Mileage Plan other revenue                                         | Mileage Plan other revenue                                         |      465 |  |  |  |      434 |  |  |  |      418 |
| Cargo and other                                                    | Cargo and other                                                    | Cargo and other                                                    |      221 |  |  |  |      199 |  |  |  |      175 |
| Total Operating Revenues                                           | Total Operating Revenues                                           | Total Operating Revenues                                           |    8,781 |  |  |  |    8,264 |  |  |  |    7,894 |
| Operating Expenses                                                 | Operating Expenses                                                 | Operating Expenses                                                 |          |  |  |  |          |  |  |  |          |
| Wages and benefits                                                 | Wages and benefits                                                 | Wages and benefits                                                 |    2,370 |  |  |  |    2,190 |  |  |  |    1,931 |
| Variable incentive pay                                             | Variable incentive pay                                             | Variable incentive pay                                             |      163 |  |  |  |      147 |  |  |  |      135 |
| Aircraft fuel, including hedging gains and losses                  | Aircraft fuel, including hedging gains and losses                  | Aircraft fuel, including hedging gains and losses                  |    1,878 |  |  |  |    1,936 |  |  |  |    1,447 |
| Aircraft maintenance                                               | Aircraft maintenance                                               | Aircraft maintenance                                               |      437 |  |  |  |      435 |  |  |  |      391 |
| Aircraft rent                                                      | Aircraft rent                                                      | Aircraft rent                                                      |      331 |  |  |  |      315 |  |  |  |      274 |
| Landing fees and other rentals                                     | Landing fees and other rentals                                     | Landing fees and other rentals                                     |      531 |  |  |  |      499 |  |  |  |      460 |
| Contracted services                                                | Contracted services                                                | Contracted services                                                |      289 |  |  |  |      306 |  |  |  |      314 |
| Selling expense                                                    | Selling expense                                                    | Selling expense                                                    |      313 |  |  |  |      326 |  |  |  |      368 |
| Depreciation and amortization                                      | Depreciation and amortization                                      | Depreciation and amortization                                      |      423 |  |  |  |      398 |  |  |  |      372 |
| Food and beverage service                                          | Food and beverage service                                          | Food and beverage service                                          |      214 |  |  |  |      211 |  |  |  |      195 |
| Third\-party regional carrier expense                              | Third\-party regional carrier expense                              | Third\-party regional carrier expense                              |      166 |  |  |  |      154 |  |  |  |      121 |
| Other                                                              | Other                                                              | Other                                                              |      559 |  |  |  |      572 |  |  |  |      562 |
| Special items \- merger\-related costs                             | Special items \- merger\-related costs                             | Special items \- merger\-related costs                             |       44 |  |  |  |       87 |  |  |  |      116 |
| Special items \- other                                             | Special items \- other                                             | Special items \- other                                             |        — |  |  |  |       45 |  |  |  |        — |
| Total Operating Expenses                                           | Total Operating Expenses                                           | Total Operating Expenses                                           |    7,718 |  |  |  |    7,621 |  |  |  |    6,686 |
| Operating Income                                                   | Operating Income                                                   | Operating Income                                                   |    1,063 |  |  |  |      643 |  |  |  |    1,208 |
| Non\-operating Income (Expense)                                    | Non\-operating Income (Expense)                                    | Non\-operating Income (Expense)                                    |          |  |  |  |          |  |  |  |          |
| Interest income                                                    | Interest income                                                    | Interest income                                                    |       42 |  |  |  |       38 |  |  |  |       34 |
| Interest expense                                                   | Interest expense                                                   | Interest expense                                                   |     (78) |  |  |  |     (91) |  |  |  |    (103) |
| Interest capitalized                                               | Interest capitalized                                               | Interest capitalized                                               |       15 |  |  |  |       18 |  |  |  |       17 |
| Other \- net                                                       | Other \- net                                                       | Other \- net                                                       |     (26) |  |  |  |     (23) |  |  |  |        3 |
|                                                                    |                                                                    |                                                                    |     (47) |  |  |  |     (58) |  |  |  |     (49) |
| Income Before Income Tax                                           | Income Before Income Tax                                           | Income Before Income Tax                                           |    1,016 |  |  |  |      585 |  |  |  |    1,159 |
| Income tax expense                                                 | Income tax expense                                                 | Income tax expense                                                 |      247 |  |  |  |      148 |  |  |  |      436 |
| Special income tax benefit                                         | Special income tax benefit                                         | Special income tax benefit                                         |        — |  |  |  |        — |  |  |  |    (237) |
| Total Income Tax Expense                                           | Total Income Tax Expense                                           | Total Income Tax Expense                                           |    $ 247 |  |  |  |    $ 148 |  |  |  |    $ 199 |
| Net Income                                                         | Net Income                                                         | Net Income                                                         |    $ 769 |  |  |  |    $ 437 |  |  |  |    $ 960 |
| Basic Earnings Per Share                                           | Basic Earnings Per Share                                           | Basic Earnings Per Share                                           |  $ 6\.24 |  |  |  |  $ 3\.55 |  |  |  |  $ 7\.79 |
| Diluted Earnings Per Share                                         | Diluted Earnings Per Share                                         | Diluted Earnings Per Share                                         |  $ 6\.19 |  |  |  |  $ 3\.52 |  |  |  |  $ 7\.75 |
| Shares used for computation:                                       | Shares used for computation:                                       | Shares used for computation:                                       |          |  |  |  |          |  |  |  |          |
| Basic                                                              | Basic                                                              | Basic                                                              | 123\.279 |  |  |  | 123\.230 |  |  |  | 123\.211 |
| Diluted                                                            | Diluted                                                            | Diluted                                                            | 124\.289 |  |  |  | 123\.975 |  |  |  | 123\.854 |

See accompanying notes to consolidated financial statements\.

52


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

**PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS**

|                                            |                                                 |                                             |                                                                                |                                                                                |
| ------------------------------------------ | ----------------------------------------------- | ------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- |
|                                            | **Total Number of**

**Shares Purchased** | **Average Price**

**Paid per Share** | **Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs** | **Maximum remaining**

**dollar value of shares**

**that can be purchased**

**under the plan**

**(in millions)** |
| October 1, 2017 \- October 31, 2017  ^(a)^ | 369,182                                         | $67\.72                                     | 369,182                                                                                |                                                                                |
| November 1, 2017 \- November 30, 2017      | —                                               | —                                           | —                                                                                |                                                                                |
| December 1, 2017 \- December 31, 2017      | —                                               | —                                           | —                                                                                |                                                                                |
| Total                                      | 369,182                                         | $67\.72                                     | 369,182                                                                                | $612                                                                                |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------- |
| ^(a)^ | Purchased pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015\. |

 29


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

Passenger revenue  increase d  $1\.3 billion , or  3\.3% , in  2019  from  2018  due to continued strength in passenger demand resulting in an increase in RPMs and a year\-over\-year increase in passenger load factor\. Domestic PRASM increased in 2019 as compared to 2018\. Latin America PRASM was the best performing international region in  2019 , followed by Pacific PRASM, while Atlantic PRASM declined principally due to lower transfer payments related to American’s joint business arrangement and foreign currency effects\.

Cargo revenue  decrease d  $150 million , or  14\.8 %, in  2019  from  2018  primarily due to a decrease in cargo ton miles reflecting declines in international freight volumes, principally as a result of international schedule reductions\.

Other operating revenue increased  $47 million , or  1\.7 % in  2019  from  2018  primarily due to higher revenue associated with American’s airport clubs and loyalty program\.

Total operating revenues in  2019  increase d  $1\.2 billion , or  2\.8 %, from  2018  driven principally by a  3\.3%  increase in passenger revenue as described above\.

Operating Expenses

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

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

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

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

**Increase**

**(Decrease)** |
|                                       | **2019**                                     | **2018**                                     | **Increase**

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

**Increase**

**(Decrease)** |
|                                       | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Aircraft fuel and related taxes       | $7,526                                       | $8,053                                       | $(527)                                       | (6\.5)                                                |
| Salaries, wages and benefits          | 12,600                                       | 12,240                                       | 360                                          | 2\.9                                                  |
| Maintenance, materials and repairs    | 2,380                                        | 2,050                                        | 330                                          | 16\.1                                                 |
| Other rent and landing fees           | 2,055                                        | 1,900                                        | 155                                          | 8\.2                                                  |
| Aircraft rent                         | 1,326                                        | 1,264                                        | 62                                           | 4\.9                                                  |
| Selling expenses                      | 1,602                                        | 1,520                                        | 82                                           | 5\.4                                                  |
| Depreciation and amortization         | 1,982                                        | 1,839                                        | 143                                          | 7\.7                                                  |
| Mainline operating special items, net | 635                                          | 787                                          | (152)                                        | (19\.4)                                               |
| Other                                 | 5,090                                        | 5,090                                        | —                                            | —                                                     |
| Regional expenses:                    |                                              |                                              |                                              |                                                       |
| Aircraft fuel and related taxes       | 1,869                                        | 1,843                                        | 26                                           | 1\.4                                                  |
| Other                                 | 5,649                                        | 5,221                                        | 428                                          | 8\.2                                                  |
| Total operating expenses              | $42,714                                      | $41,807                                      | $907                                         | 2\.2                                                  |

Total operating expenses  increase d  $907 million , or  2\.2% , in  2019  from  2018 \.

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

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Mainline aircraft fuel and related taxes  decrease d  6\.5 % in  2019  as compared to  2018  primarily due to a  7\.1 %  decrease  in the average price per gallon of fuel including related taxes to  $2\.05  in  2019  from  $2\.21  in  2018 \.  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Maintenance, materials and repairs increased  16\.1 % in  2019  as compared to  2018  primarily due to a contract change that resulted in certain flight equipment transitioning to a flight hour based contract (referred to as power by the hour) whereby expense is incurred and recognized based on actual hours flown\. Previously, this flight equipment was covered by a time and materials based contract whereby expense is incurred and recognized as maintenance is performed\. An increase in the volume of airframe and engine overhauls performed under time and material based contracts as well as an increase in the volume of component part repairs also drove higher maintenance expenses in 2019\. |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Other rent and landing fees  increase d  8\.2 % in  2019  as compared to  2018  primarily due to an expansion at DFW that became fully operational in May 2019 and rate increases at certain hub airports\. |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Depreciation and amortization  increase d  7\.7 % in  2019  as compared to  2018  due in part to airport and other facility improvements and the harmonization of interior configurations across the mainline fleet\. Depreciation associated with aircraft acquired as part of American’s fleet renewal program also contributed to the increase\.  |

57


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

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

*Note:* The stock price performance shown in the graph above should not be considered indicative of potential future stock price performance\. The foregoing performance graph is being furnished as part of this report solely in accordance with the requirement under Rule 14a\-3(b)(9) to furnish our stockholders with such information, and therefore, shall not be deemed to be filed or incorporated by reference into any filings by the Company under the Securities Act or the Exchange Act\.

The following table presents repurchases of UAL common stock made in the fourth quarter of 2017:

|               |                                                       |                                              |                                                                                |                                                                                |
|:------------- | -----------------------------------------------------:| --------------------------------------------:| ------------------------------------------------------------------------------------------------------------:| ----------------------------------------------------------------------------------------------------------------------------------:|
| **Period**    | **Total number of
shares
purchased (a)(b)** | **Average price
paid per share (b)(c)** | **Total number of
shares purchased
as part of publicly
announced plans
or programs (a)** | **Approximate dollar value
of shares that may yet be
purchased under the
plans or programs (in
millions) (a)** |
| October 2017  |                                            2,852,917  |                                     $59\.59  |                                                                                2,852,917  |                                                                                $383  |
| November 2017 |                                            5,342,435  |                                      58\.93  |                                                                                5,342,435  |                                                                                68  |
| December 2017 |                                            1,084,498  |                                      63\.06  |                                                                                1,084,498  |                                                                                3,000  |
| Total         |                                            9,279,850  |                                              |                                                                                9,279,850  |                                                                                |

(a) In 2017, UAL repurchased approximately 28 million shares of UAL common stock for $1\.8 billion, completing its July 2016 repurchase authorization\. In December 2017, UAL’s Board of Directors authorized a new $3\.0 billion share repurchase program to acquire UAL’s common stock\. As of December 31, 2017, the Company had approximately $3\.0 billion remaining to purchase shares under its share repurchase program\. UAL may repurchase shares through the open market, privately negotiated transactions, block trades or accelerated share repurchase transactions from time to time in accordance with applicable securities laws\.

(b) The table does not include shares withheld from employees to satisfy certain tax obligations due upon the vesting of restricted stock units\. The United Continental Holdings, Inc\. 2017 Incentive Compensation Plan and the United Continental Holdings, Inc\. 2008 Incentive Compensation Plan, provide for the withholding of shares to satisfy tax obligations due upon the vesting of restricted stock units\. However, the plans do not specify a maximum number of shares that may be withheld for this purpose\. A total of 1,446 shares were withheld under the plans in the fourth quarter of 2017 at an average price of $64\.46 per share\. These shares of common stock withheld to satisfy tax withholding obligations may be deemed to be “issuer purchases” of shares that are required to be disclosed pursuant to this Item\.

(c) Average price paid per share is calculated on a settlement basis and excludes commission\.

25


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

Substantially all of our regional carrier arrangements are in the form of capacity purchase agreements\. The capacity purchase agreements provide that all revenues, including passenger, in\-flight, ancillary, mail and freight revenues, go to us\. We control marketing, scheduling, ticketing, pricing and seat inventories\. In return, we agree to pay predetermined fees to these airlines for operating an agreed\-upon number of aircraft, without regard to the number of passengers on board\. In addition, these agreements provide that we either reimburse or pay 100% of certain variable costs, such as airport landing fees, fuel and passenger liability insurance\.

Cargo

Our cargo division provides a wide range of freight and mail services, with facilities and interline connections available across the globe\.

Distribution and Marketing Agreements

Passengers can purchase tickets for travel on American through several distribution channels, including our website ( www\.aa\.com ), our mobile app, our reservations centers and third\-party distribution channels, including those provided by or through global distribution systems (e\.g\., Amadeus, Sabre and Travelport), conventional travel agents, travel management companies and online travel agents (e\.g\., Expedia ,  including its booking sites Orbitz and Travelocity, and Booking Holdings, including its booking sites Kayak and Priceline)\. To remain competitive, we will need to manage our distribution costs and rights effectively, increase our distribution flexibility and improve the functionality of our proprietary and third\-party distribution channels, while maintaining an industry\-competitive cost structure\. For more discussion, see Part I, Item 1A\. Risk Factors – “ We rely on third\-party distribution channels and must manage effectively the costs, rights and functionality of these channels \.”

In general, beyond nonstop city pairs, carriers that have the greatest ability to seamlessly connect passengers to and from markets have a competitive advantage\. In some cases, however, foreign governments limit U\.S\. air carriers’ rights to transport passengers beyond designated gateway cities in foreign countries\. In order to improve access to domestic and foreign markets, we have arrangements with other airlines including through the  one world alliance, other cooperation agreements, joint business agreements (JBAs), and marketing relationships, as further discussed below\.

Member of oneworld Alliance

American is a founding member of the  one world alliance, which currently includes British Airways, Cathay Pacific Airways, Finnair, Iberia, Japan Airlines, LATAM Airlines Group, Malaysia Airlines, Qantas Airways, Qatar Airways, Royal Jordanian, S7 Airlines and SriLankan Airlines\. The  one world alliance links the networks of the member carriers and their respective affiliates to enhance customer service and smooth connections to the destinations served by the alliance, including linking the carriers’ loyalty programs and access to the carriers’ airport lounge facilities\. Royal Air Maroc is expected to join the  one world alliance in 2020\. LATAM Airlines Group (LATAM) is in the process of withdrawing from the  one world alliance, which is anticipated to be completed in the first half of 2020\.

Cooperation and Joint Business Agreements

American has established a transatlantic JBA with British Airways, Iberia and Finnair, a transpacific JBA with Japan Airlines and a JBA relating to Australia and New Zealand with Qantas Airways, each of which has been granted antitrust immunity\. Joint business agreements enable the carriers party to the relevant agreement to cooperate on flights between particular destinations and allow pooling and sharing of certain revenues and costs, enhanced loyalty program reciprocity and cooperation in other areas\. American and its joint business partners received regulatory approval to enter into these JBAs and cooperation agreements\. Joint business agreements have become a common approach among major carriers to address key regulatory restrictions typically applicable to international airline service, including limitations on the foreign ownership of airlines and national laws prohibiting foreign airlines from carrying passengers beyond specific gateway cities\. Our competitors, including Delta Air Lines and United Airlines, are party to similar arrangements\.

The business relationship under the transatlantic JBA benefits from a grant of antitrust immunity from the U\.S\. Department of Transportation (DOT) and was reviewed by the European Commission (EC) in July 2010\. In connection with this review, we provided certain commitments to the EC regarding, among other things, the availability of take\-off and landing slots at London Heathrow (LHR) or London Gatwick (LGW) airports\. The commitments accepted by the EC are binding for 10 years\. In October 2018, in anticipation of the exit of the United Kingdom from the European Union (EU), commonly referred to as Brexit, and the expiry of the EC commitments in July 2020, the United Kingdom Competition and Markets Authority (CMA) opened an investigation into the transatlantic JBA\. We continue to fully cooperate with the CMA\. An application for antitrust immunity is also pending with the DOT to add Aer Lingus, which is owned by the parent company of British Airways and Iberia, to the transatlantic JBA\.

6


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

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

The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility provide that American may from time to time borrow, repay and reborrow loans thereunder\. The 2013 Revolving Facility and 2014 Revolving Facility have the ability to issue letters of credit thereunder in an aggregate amount outstanding at any time up to   $100 million  and   $200 million , respectively\. The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility are each subject to an undrawn annual fee of   0\.63% \. As of  December 31, 2019 , there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility, 2014 Revolving Facility or April 2016 Revolving Facility\. The December 2016 Credit Facilities provide for a revolving credit facility that may be established thereunder in the future\.

Subject to certain limitations and exceptions, the Credit Facilities are secured by collateral, including certain spare parts, slots, route authorities, simulators and leasehold rights\. American has the ability to make future modifications to the collateral pledged, subject to certain restrictions\. American’s obligations under the Credit Facilities are guaranteed by AAG\. American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans as further described below in  “Collateral\-Related Covenants\.”

The Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness\. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become due and payable immediately\. In addition, if a “change of control” occurs, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the Credit Facilities and terminate the 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility and any revolving credit facility established under the December 2016 Credit Facilities\. The Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the Credit Facilities) of not less than   $2\.0 billion  and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions\.

In December 2019, due to uncertainty surrounding the timing of the Boeing 737 MAX aircraft return to service, American entered into an additional short\-term revolving line of credit to provide us with incremental borrowing capacity of up to   $400 million \. We have no present intention to borrow any amounts under this facility, which matures in September 2020 with an optional extension to December 2020\.

(b) EETCs

2019\-1 Aircraft EETCs

In August 2019, American created three pass\-through trusts which issued approximately   $1\.1 billion  aggregate face amount of Series 2019\-1 Class AA, Class A and Class B EETCs (the 2019\-1 Aircraft EETCs) in connection with the financing of   35  aircraft previously delivered or to be delivered to American through September 2020 (the 2019\-1 Aircraft)\. As of  December 31, 2019 , approximately   $804 million  of the proceeds had been used to purchase equipment notes issued by American in connection with financing   28  aircraft under the 2019\-1 Aircraft EETCs, of which   $608 million  was used to repay existing indebtedness\. Interest and principal payments on equipment notes issued in connection with the 2019\-1 Aircraft EETCs are payable semi\-annually in February and August of each year, with interest payments scheduled to begin in February 2020 and with principal payments scheduled to begin (i) in the case of equipment notes with respect to any 2019\-1 Aircraft owned by American at the time of issuance of the 2019\-1 Aircraft EETCs, in February 2020 and (ii) in the case of equipment notes with respect to the Embraer E175 aircraft and the Airbus A321neo aircraft scheduled to be delivered after the issuance of the 2019\-1 Aircraft EETCs, in August 2020 and August 2021, respectively\. The remaining proceeds of approximately   $293 million  as of  December 31, 2019  were being held in escrow with a depositary for the benefit of the holders of the 2019\-1 Aircraft EETCs until such time as American issues additional equipment notes with respect to the remaining 2019\-1 Aircraft to the pass\-through trusts, which will purchase such additional equipment notes with the escrowed funds\. These escrowed funds are not guaranteed by American and are not reported as debt on its condensed consolidated balance sheet because the proceeds held by the depositary for the benefit of the holders of the 2019\-1 Aircraft EETCs are not American’s assets\.

89