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

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|                                     |                |                |                |                |                |                |
| ----------------------------------- | -------------- | -------------- | -------------- | -------------- | -------------- | -------------- |
|                                     | **12/31/2013** | **12/31/2014** | **12/31/2015** | **12/31/2016** | **12/31/2017** | **12/31/2018** |
| American Airlines Group Inc\. (AAL) | $100           | $213           | $170           | $189           | $213           | $133           |
| NYSE ARCA Airline Index (XAL)       | 100            | 149            | 125            | 159            | 167            | 130            |
| S&P 500 Index (GSPC)                | 100            | 111            | 111            | 121            | 145            | 136            |

**Purchases of Equity Securities by the Issuer and Affiliated Purchasers**

In 2018, we repurchased 16\.6 million shares of AAG common stock for $800 million at a weighted average cost per share of $48\.15\. In 2017, we repurchased 33\.9 million shares of AAG common stock for $1\.6 billion at a weighted average cost per share of $45\.68\. Since the inception of our share repurchase programs in July 2014 through December 31, 2018, we have repurchased278\.9 million shares of AAG common stock for $11\.3 billion at a weighted average cost per share of $40\.69\.

We did not make any purchases of shares of AAG common stock during the three months ended December 31, 2018\.

Share repurchases under our repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions\. Any such repurchases that may be made from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors\. We are not obligated to repurchase any specific number of shares and our repurchase of AAG common stock may be limited, suspended or discontinued at any time at our discretion and without prior notice\.

See Part I, Item 1A\. Risk Factors – “*We cannot guarantee that we will continue to repurchase our common stock or pay dividends on our common stock or that our capital deployment program will enhance long\-term stockholder value\. Our capital deployment program could increase the volatility of the price of our common stock and diminish our cash reserves*\.”

**Ownership Restrictions**

AAG’s Certificate of Incorporation and Bylaws provide that, consistent with the requirements of Subtitle VII of Title 49 of the United States Code, as amended (the Aviation Act), any persons or entities who are not a “citizen of the United States” (as defined under the Aviation Act and administrative interpretations issued by the DOT, its predecessors and successors, from time to time), including any agent, trustee or representative of such persons or entities (a non\-citizen), shall not, in the aggregate, own (beneficially or of record) and/or control more than (a) 24\.9% of the aggregate votes of all of our outstanding equity securities or (b) 49\.0% of our outstanding equity securities\. Our Certificate of Incorporation and Bylaws further specify that it is the duty of each stockholder who is a non\-citizen to register his, her or its equity securities on our foreign stock record and provide for remedies applicable to stockholders that exceed the voting and ownership caps described above\.

41


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

|                                                                                |                                                                                |                                                                                |
| --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- |
| ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS | ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS | ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS |

Securities Authorized for Issuance Under Equity Compensation Plans

|                                                            |                                                            |                                                            |                                                                                |                                                                                |  |  |  |                                                                              |                                                                              |  |  |  |                                                                                |                                                                                |
|:---------------------------------------------------------- |:---------------------------------------------------------- |:---------------------------------------------------------- | -------------------------------------------------------------------------------------------:| -------------------------------------------------------------------------------------------:|:- |:- |:- | ----------------------------------------------------------------------------:| ----------------------------------------------------------------------------:|:- |:- |:- | -------------------------------------------------------------------------------------------------------------------------------------------:| -------------------------------------------------------------------------------------------------------------------------------------------:|
|                                                            |                                                            |                                                            | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Number of securities to be issued upon exercise of outstanding options, warrants and rights |  |  |  | Weighted\-average exercise price of outstanding options, warrants and rights | Weighted\-average exercise price of outstanding options, warrants and rights |  |  |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| Plan category                                              | Plan category                                              | Plan category                                              |                                                                                (a) |                                                                                (a) |  |  |  |                                                                          (b) |                                                                          (b) |  |  |  |                                                                                (c) |                                                                                (c) |
| Equity compensation plans approved by security holders     | Equity compensation plans approved by security holders     | Equity compensation plans approved by security holders     |                                                                              1,698,035^(1)^ |                                                                              1,698,035^(1)^ |  |  |  |                                                                $60\.98^(2)^  |                                                                $60\.98^(2)^  |  |  |  |                                                                                8,627,341^(3)^ |                                                                                8,627,341^(3)^ |
| Equity compensation plans not approved by security holders | Equity compensation plans not approved by security holders | Equity compensation plans not approved by security holders |                                                                                —  |                                                                                —  |  |  |  |                                                              Not applicable  |                                                              Not applicable  |  |  |  |                                                                                —  |                                                                                —  |
| Total                                                      | Total                                                      | Total                                                      |                                                                                1,698,035  |                                                                                1,698,035  |  |  |  |                                                                      $60\.98 |                                                                      $60\.98 |  |  |  |                                                                                8,627,341 |                                                                                8,627,341 |

(1) Of these shares, 269,958 and 524,097 were subject to options then outstanding under the 2008 Plan and 2016 Plan, 83,246 were subject to outstanding restricted, performance and deferred stock unit awards granted under the 2008 Plan and 820,734 were subject to outstanding restricted, performance and deferred stock unit awards granted under the 2016 Plan\. Outstanding performance awards are reflected in the table assuming that the target level of performance will be achieved\.

(2) This number does not reflect the 903,980 shares that were subject to outstanding stock unit awards granted under the 2008 and 2016 Plans\.

(3) Of the aggregate number of shares that remained available for future issuance, no shares were available under the 2008 Plan, 4,245,573 shares were available under the 2016 Plan and 4,381,768 shares were available under the ESPP\. Subject to certain express limits of the 2016 Plan, shares available for award purposes under the 2016 Plan generally may be used for any type of award authorized under that plan including options, stock appreciation rights, and other forms of awards granted or denominated in shares of our common stock including, without limitation, stock bonuses, restricted stock, restricted stock units and performance shares\. Full\-value shares issued under the 2016 Plan are counted against the share limit as 1\.7 shares for every one share issued\. This table does not give effect to that rule\.

Other information required by this item is set forth under the heading “Beneficial Ownership of Securities” in our 2020 Proxy Statement and is incorporated by reference\.

|                                                                                |                                                                                |                                                                                |
| ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- |
| ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |

The information required by this item is incorporated herein by reference from our 2020 Proxy Statement\.

|                                                  |                                                  |                                                  |
| ------------------------------------------------ | ------------------------------------------------ | ------------------------------------------------ |
| ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES | ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES | ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES |

The information required by this item is incorporated herein by reference from our 2020 Proxy Statement\.

PART IV

|                    |                    |                    |
| ------------------ | ------------------ | ------------------ |
| ITEM 15\. EXHIBITS | ITEM 15\. EXHIBITS | ITEM 15\. EXHIBITS |

The following documents are filed as part of this report:

1\. Exhibits:  See Exhibit Index\.

88


Annual Report of Southwest Airlines Co\. for year 2017

use of the Southwest Airlines’ brand and access to Rapid Reward Member lists; advertising elements; and the Company’s resource team)\. The Company records passenger revenue related to air transportation and certificates for discounted companion travel when the transportation is delivered\. The other elements are recognized as Other \- net revenue when earned\.

The Company followed the transition approach of ASU No\. 2009\-13, which required that the Company adjust the existing deferred revenue balance, classified within Air traffic liability, to reflect the value, on a relative selling price basis, of any undelivered element remaining at the date of contract modification\. The relative selling price of the undelivered element (air transportation) was lower than the rate at which it had been deferred under the residual method, and the Company recorded a one\-time, non\-cash adjustment to decrease frequent flyer deferred revenue and increase revenue through the recording of a Special revenue adjustment of $172 million in 2015\. The estimated impacts on revenue and earnings associated with the Agreement and the resulting required change in accounting methodology recognized subsequent to the effective date of July 1, 2015, are as follows:

|                                             |                                  |                                  |                                  |
| ------------------------------------------- | -------------------------------- | -------------------------------- | -------------------------------- |
| **(in millions, except per share amounts)** | **Year ended December 31, 2017** | **Year ended December 31, 2016** | **Year ended December 31, 2015** |
| Passenger revenue                           | $(364)                           | $(250)                           | $(89)                            |
| Special revenue adjustment                  | —                                | —                                | 172                              |
| Other revenue                               | 908                              | 794                              | 344                              |
| Operating revenues                          | $544                             | $544                             | $427                             |
| Net income                                  | $496                             | $293                             | $227                             |
| Net income per basic share                  | $0\.82                           | $0\.47                           | $0\.34                           |
| Net income per diluted share                | $0\.82                           | $0\.46                           | $0\.34                           |

For all points sold to business partners that are expected to expire unused, the Company recognizes spoilage in accordance with the redemption method\. The Company’s consolidated liability associated with the sale of frequent flyer points, was approximately $1\.6 billion and $1\.4 billion as of December 31, 2017, and 2016, respectively, which is classified within Air traffic liability\. The Company continues to evaluate spoilage annually in October, but these analyses have not resulted in material adjustments in 2015, 2016, or 2017\.

***Advertising***

Advertising costs are charged to expense as incurred\. Advertising and promotions expense for the years ended December 31, 2017, 2016, and 2015 was $224 million, $232 million, and $218 million, respectively, and is included as a component of Other operating expense in the accompanying Consolidated Statement of Income\.

***Share\-based Employee Compensation***

The Company has share\-based compensation plans covering certain Employees, including a plan that also covers the Company’s Board of Directors\. The Company accounts for share\-based compensation based on its grant date fair value\. See Note 9 for further information\.

***Financial Derivative Instruments***

The Company accounts for financial derivative instruments at fair value and applies hedge accounting rules where appropriate\. The Company utilizes various derivative instruments, including jet fuel, crude oil, unleaded gasoline, and heating oil\-based derivatives, to attempt to reduce the risk of its exposure to jet fuel price increases\. These instruments consist primarily of purchased call options, collar structures, call spreads, put spreads, and fixed price swap agreements, and upon proper qualification are accounted for as cash\-flow hedges\. The Company also has interest rate swap agreements to convert a portion of its fixed\-rate debt to floating rates and has swap agreements that convert certain

79


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

Consolidated statements of operations for the twelve months ended December 31, 2017 and December 31, 2016 (in millions):

|                                         |                                           |                                           |                                           |                                           |                                           |                                           |                                           |                                           |
| --------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----------------------------------------- |
|                                         | **Twelve Months Ended December 31, 2017** | **Twelve Months Ended December 31, 2017** | **Twelve Months Ended December 31, 2017** | **Twelve Months Ended December 31, 2017** | **Twelve Months Ended December 31, 2016** | **Twelve Months Ended December 31, 2016** | **Twelve Months Ended December 31, 2016** | **Twelve Months Ended December 31, 2016** |
|                                         |                                           | **Adjustments**                           | **Adjustments**                           |                                           |                                           | **Adjustments**                           | **Adjustments**                           |                                           |
|                                         | **As Reported**                           | **Revenue Recognition**                   | **Retirement Benefits**                   | **As Adjusted**                           | **As Reported**                           | **Revenue Recognition**                   | **Retirement Benefits**                   | **As Adjusted**                           |
| **Operating Revenues**                  |                                           |                                           |                                           |                                           |                                           |                                           |                                           |                                           |
| Passenger revenue ^(a)^                 | $6,818                                    | $483                                      | $—                                        | $7,301                                    | $5,006                                    | $386                                      | $—                                        | $5,392                                    |
| Mileage Plan other revenue ^(a)^        | 482                                       | (64)                                      | —                                         | 418                                       | 429                                       | (59)                                      | —                                         | 370                                       |
| Cargo and other ^(a)^                   | 633                                       | (458)                                     | —                                         | 175                                       | 496                                       | (333)                                     | —                                         | 163                                       |
| **Total Operating Revenues**            | 7,933                                     | (39)                                      | —                                         | 7,894                                     | 5,931                                     | (6)                                       | —                                         | 5,925                                     |
| **Operating Expenses**                  |                                           |                                           |                                           |                                           |                                           |                                           |                                           |                                           |
| Wages and benefits                      | 1,924                                     | —                                         | 7                                         | 1,931                                     | 1,382                                     | —                                         | 12                                        | 1,394                                     |
| Selling expense ^(b)^                   | 357                                       | 11                                        | —                                         | 368                                       | 225                                       | 23                                        | —                                         | 248                                       |
| Special items—merger\-related costs     | 118                                       | (2)                                       | —                                         | 116                                       | 117                                       | —                                         | —                                         | 117                                       |
| All other operating expenses            | 4,271                                     | —                                         | —                                         | 4,271                                     | 2,860                                     | —                                         | —                                         | 2,860                                     |
| **Total Operating Expenses**            | 6,670                                     | 9                                         | 7                                         | 6,686                                     | 4,584                                     | 23                                        | 12                                        | 4,619                                     |
| **Operating Income**                    | 1,263                                     | (48)                                      | (7)                                       | 1,208                                     | 1,347                                     | (29)                                      | (12)                                      | 1,306                                     |
| **Nonoperating Income (Expense)**       |                                           |                                           |                                           |                                           |                                           |                                           |                                           |                                           |
| Other—net                               | (4)                                       | —                                         | 7                                         | 3                                         | 1                                         | —                                         | 12                                        | 13                                        |
| All other nonoperating income (expense) | (52)                                      | —                                         | —                                         | (52)                                      | (3)                                       | —                                         | —                                         | (3)                                       |
|                                         | (56)                                      | —                                         | 7                                         | (49)                                      | (2)                                       | —                                         | 12                                        | 10                                        |
| Income (loss) before income tax         | 1,207                                     | (48)                                      | —                                         | 1,159                                     | 1,345                                     | (29)                                      | —                                         | 1,316                                     |
| Income tax expense (benefit)            | 173                                       | 26                                        | —                                         | 199                                       | 531                                       | (12)                                      | —                                         | 519                                       |
| **Net Income (Loss)**                   | $1,034                                    | $(74)                                     | $—                                        | $960                                      | $814                                      | $(17)                                     | $—                                        | $797                                      |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | Application of Topic 606 resulted in a shift in certain ancillary revenues to Passenger revenue from Other Revenues\. Additionally, the standard shifted the timing of the recognition of certain ancillary revenues from the time of sale to the time of travel\.  |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | Application of Topic 606 resulted in an increase to Selling expense as our methodology changed the timing of recognition of certain of our booking fees\. |

 68


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

In our cash and marketable securities portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal\. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines\. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy\.

The table below presents the major indicators of financial condition and liquidity:

|                                                                                |                       |                       |            |
| -------------------------------------------------------------------------------------------------------- | --------------------- | --------------------- | ---------- |
| ***(in millions, except per share and debt\-to\-capital amounts)***                                      | **December 31, 2017** | **December 31, 2016** | **Change** |
| Cash and marketable securities                                                                           | **$1,621**            | $1,580                | $41        |
| Cash, marketable securities and unused lines of credit as a percentage of trailing twelve months revenue | **25%**               | 31%                   | (6) pts    |
| Long\-term debt, net of current portion                                                                  | **2,262**             | 2,645                 | (383)      |
| Shareholders’ equity                                                                                | **3,721**             | 2,931                 | 790        |
| Long\-term debt\-to\-capital including net present value of aircraft operating lease payments ^(a)^      | **51%**               | 59%                   | (8) pts    |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | Calculated using the present value of remaining aircraft lease payments for aircraft that are in our operating fleet as of the balance sheet date\. |

The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements\.

**ANALYSIS OF OUR CASH FLOWS**

***Cash Provided by Operating Activities***

Net cash provided by operating activities was $1\.6 billion in 2017 compared to $1\.4 billion in 2016\. The increase of $204 million is primarily due to an increase in our net income\.

In 2016, we generated $1\.4 billion in operating cash flows compared to $1\.6 billion in 2015\. The decrease of $200 million was due to a decline in operating results primarily driven by an increase in non\-fuel operating expenses—including $117 million million in merger\-related costs associated with the acquisition of Virgin America—partially offset by higher revenues and lower fuel costs\.

We typically generate positive cash flows from operations, and expect to use that cash flow to buy aircraft and capital equipment, to make debt payments, and to return capital to shareholders\. During 2016, we paused our share repurchase program as we prepared for the acquisition of Virgin America\. We resumed our share repurchase program in the second quarter of 2017\.

***Cash Used in Investing Activities***

Cash used in investing activities was $1\.1 billion during 2017, compared to $2\.6 billion in 2016\. In 2016, cash from investing activities included approximately $2 billion of cash paid for the acquisition of Virgin America, which drove a decrease in cash used for investing activities in 2017 when compared to the prior year\. Our capital expenditures were $1 billion, or $348 millionhigher than in 2016 primarily as a result of the purchase of more aircraft in the current year\. During 2017 we took delivery of 14 B737\-900ERs and 10 E715 aircraft\. This compares to the delivery of 19 B737\-900ERs in the prior year\. Our future expected capital expenditures are summarized in the Contractual Obligations and Commitments section\.

Cash used in investing activities was $2\.6 billion during 2016, compared to $930 million in 2015\. We used $2 billion to acquire Virgin America, representing $2\.6 billion consideration paid, offset by $645 million of cash acquired\. Our capital expenditures were $678 million in 2016, $153 million lower than in 2015\.

 52


Annual Report of Southwest Airlines Co\. for year 2017

**Item 9\.** ***Changes in and Disagreements With Accountants on Accounting and Financial Disclosure***

None\.

**Item 9A\.** ***Controls and Procedures***

*Evaluation of Disclosure Controls and Procedures\.* The Company maintains disclosure controls and procedures (as defined in Rule 13a\-15(e) of the Securities Exchange Act (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms\. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure\. Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2017\. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017, at the reasonable assurance level\.

*Management’s Annual Report on Internal Control over Financial Reporting\.* Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a\-15(f) of the Exchange Act)\. The Company’s internal control over financial reporting is a process, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States\.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements\. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives\.

Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017\. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control \- Integrated Framework (2013 Framework)\. Based on this evaluation, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2017, the Company’s internal control over financial reporting was effective\.

Ernst & Young, LLP, the independent registered public accounting firm who audited the Company’s Consolidated Financial Statements included in this Form 10\-K, has issued a report on the Company’s internal control over financial reporting, which is included herein\.

*Changes in Internal Control over Financial Reporting\.* There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a\-15(f) of the Exchange Act) during the quarter ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting\.

113


Annual Report of Southwest Airlines Co\. for year 2019

exceptions, all segments associated with the reservation will be canceled, and (i) with respect to a "Wanna Get Away" fare, unused funds will be forfeited; and (ii) with respect to an "Anytime" or "Business Select" fare, unused funds will be held as travel credit for future travel by the Customer on Southwest\.

Ancillary Services

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

EarlyBird Check\-In provides Customers with automatic check\-in and an assigned boarding position before general boarding positions become available, thereby improving Customers' seat selection options (priority boarding privileges are already a benefit of being an "A\-List" tier member under the Company's Rapid Rewards Loyalty Program)\. The Company has implemented a variable pricing model for EarlyBird Check\-In based on the length of the flight and the historical popularity of EarlyBird Check\-In on the route\.

When available, Southwest sells Upgraded Boarding at the airport, which allows a Customer to pay for an open priority boarding position in the first 15 positions in its "A" boarding group\.

Southwest’s Pet Policy provides Customers an opportunity to travel with a small cat or dog in the aircraft cabin on domestic flights\. Southwest also has an unaccompanied minor travel policy to address the administrative costs and the extra care necessary to safely transport these Customers\.

Inflight Entertainment Portal and WiFi Service

Southwest offers inflight entertainment and connectivity service on WiFi\-enabled aircraft on the majority of its fleet\. Southwest's suite of complimentary offerings onboard its inflight entertainment portal offers free movies, free messaging, free music, free games, and free live and on\-demand television while onboard WiFi\-enabled aircraft\. The inflight entertainment service allows Customers to enjoy gate\-to\-gate entertainment directly on their personal wireless devices\.

The free inflight entertainment offerings include approximately 45 free movies\-on\-demand per month and free app messaging via iMessage or WhatsApp\. The television product consists of over 15 live channels and up to 75 on\-demand recorded episodes from popular television series\. In addition, the onboard entertainment portal offers free digital music and live streaming radio service to Customers within the onboard entertainment portal\.

Customers can also purchase satellite internet service while on WiFi\-enabled aircraft\. Customers do not have to purchase WiFi to access the free inflight entertainment options including free movies, free messaging, free television, free music, free games, weather, destination guides, a flight tracker, and connecting flight information\.

Rapid Rewards Loyalty Program

Southwest's Rapid Rewards loyalty program enables program members ("Members") to earn points for every dollar spent on Southwest base fares\. The amount of points earned under the program is based on the fare and fare class purchased, with higher fare products (e\.g\., Business Select) earning more points than lower fare products (e\.g\., Wanna Get Away)\. Each fare class is associated with a points earning multiplier, and points for flights are calculated by multiplying the fare for the flight by the fare class multiplier\. Likewise, the amount of points required to be redeemed for a flight is based on the fare purchased\. Under the program, (i) Members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates; and (ii) points do not expire\.

Under the program, Members continue to accumulate points until the time they decide to redeem them\. As a result, the program provides Members significant flexibility and options for earning and redeeming rewards\. For example, Members can earn more points (and/or achieve tiered status such as A\-List and Companion Pass faster) by purchasing higher fare tickets\. Members also have significant flexibility in redeeming points, such as the opportunity to book in advance to take advantage of a lower fare ticket (including many fare sales) and redeem fewer points or by being able to redeem more points and book at the last minute if seats are still available for sale\. In addition to redeeming points for Southwest flights, Members are also able to redeem their points for items such as international flights on other airlines, cruises, hotel stays, rental cars, gift cards, event tickets, and more\. Members can also earn points through qualifying purchases with Rapid Rewards Partners (which include, for example, car rental agencies, hotels, and restaurants), as well as by using Southwest's co\-branded Chase ^®^  Visa credit card\. In addition to earning points for

7


Annual Report of Southwest Airlines Co\. for year 2019

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Southwest Airlines Co\.

Opinion on Internal Control over Financial Reporting

We have audited Southwest Airlines Co\.’s internal control over financial reporting as of  December 31, 2019 , based on criteria established in Internal Control\-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), (the COSO criteria)\. In our opinion, Southwest Airlines Co\. (the Company) maintained, in all material respects, effective internal control over financial reporting as of  December 31, 2019 , based on the COSO criteria\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Southwest Airlines Co\. as of  December 31, 2019  and  2018 , the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended  December 31, 2019 , and the related notes (collectively referred to as the “financial statements”) of the Company and our report dated  February 3, 2020  expressed an unqualified opinion thereon\.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Annual Report on Internal Control Over Financial Reporting”\. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit\. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U\.S\. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB\.

We conducted our audit in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects\.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances\. We believe that our audit provides a reasonable basis for our opinion\.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles\. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements\.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements\. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become

112


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

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

The 6\.125%, 5\.50% and 4\.625% senior notes are senior unsecured obligations of AAG\. The senior notes are fully and unconditionally guaranteed by American\. The indentures for the senior notes contain covenants and events of default generally customary for similar financings\. In addition, if we experience specific kinds of changes of control, we must offer to repurchase the senior notes at a price of 101% of the principal amount plus accrued and unpaid interest, if any, to (but not including) the repurchase date\. Upon the occurrence of certain events of default, the senior notes may be accelerated and become due and payable\.

***Guarantees***

As of December 31, 2017, AAG had issued guarantees covering approximately $810 million of American’s special facility revenue bonds (and interest thereon) and $8\.5 billion of American’s secured debt (and interest thereon), including the Credit Facilities and certain EETC financings\.

***Collateral\-Related Covenants***

Certain of our debt financing agreements contain loan to value (LTV) ratio covenants and require us to annually appraise the related collateral\. Pursuant to such agreements, if the LTV ratio exceeds a specified threshold, we are required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash collateral), or pay down such financing, in whole or in part\.

Specifically, we are required to meet certain collateral coverage tests on an annual basis for four credit facilities, as described below:

|                                                        |                                                                                |                                                                                |                                                                       |                                                                                |
| ------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|                                                        | **2013 Credit Facilities**                                                                                | **2014 Credit Facilities**                                                                                | **April 2016**

**Credit Facilities**                          | **December 2016**

**Credit Facilities**                                                                                |
| Frequency of Appraisals

of Appraised Collateral | Annual                                                                                | Annual                                                                                | Annual                                                                | Annual                                                                                |
| LTV Requirement                                        | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV)                                                                                | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV)                                                                                | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV) | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV)                                                                                |
| LTV as of Last Measurement Date                        | 33\.9%                                                                                | 23\.1%                                                                                | 42\.7%                                                                | 59\.0%                                                                                |
| Collateral Description                                 | Generally, certain slots, route authorities, and airport gate leasehold rights used by American to operate all services between the U\.S\. and South America | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U\.S\. and London Heathrow | Generally, certain  spare parts                                       | Generally, certain Ronald Reagan Washington National Airport (DCA) slots, certain La Guardia Airport (LGA) slots, certain simulators and certain leasehold rights |

At December 31, 2017, we were in compliance with the applicable collateral coverage tests as of the most recent measurement dates\.

101


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

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

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

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

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

|                                                                                |                                                                                |                                                                              |                                                                                |                                                     |
| -------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- |
|                                                                                | **Fair Value Measurements as of December 31, 2016**                                                   | **Fair Value Measurements as of December 31, 2016**                          | **Fair Value Measurements as of December 31, 2016**                            | **Fair Value Measurements as of December 31, 2016** |
| **Asset Category**                                                                           | **Quoted Prices in**

**Active Markets**

**for Identical Assets**

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

**Observable**

**Inputs**

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

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Cash and cash equivalents                                                                    | $573                                                                                | $—                                                                           | $—                                                                             | $573                                                |
| Equity securities:                                                                           |                                                                                |                                                                              |                                                                                |                                                     |
| International markets  ^(a) (b)^                                                             | 3,232                                                                                | —                                                                            | —                                                                              | 3,232                                               |
| Large\-cap companies  ^(b)^                                                                  | 2,253                                                                                | —                                                                            | —                                                                              | 2,253                                               |
| Mid\-cap companies  ^(b)^                                                                    | 371                                                                                | —                                                                            | —                                                                              | 371                                                 |
| Small\-cap companies  ^(b)^                                                                  | 6                                                                                | —                                                                            | —                                                                              | 6                                                   |
| Fixed income:                                                                                |                                                                                |                                                                              |                                                                                |                                                     |
| Corporate bonds  ^(c)^                                                                       | —                                                                                | 2,337                                                                        | —                                                                              | 2,337                                               |
| Government securities  ^(d)^                                                                 | —                                                                                | 150                                                                          | —                                                                              | 150                                                 |
| U\.S\. municipal securities                                                                  | —                                                                                | 37                                                                           | —                                                                              | 37                                                  |
| Alternative instruments:                                                                     |                                                                                |                                                                              |                                                                                |                                                     |
| Private equity partnerships  ^(e)^                                                           | —                                                                                | —                                                                            | 21                                                                             | 21                                                  |
| Private equity partnerships measured at net asset value  ^(e) (g)^                           | —                                                                                | —                                                                            | —                                                                              | 703                                                 |
| Common/collective trusts  ^(f)^                                                              | —                                                                                | 32                                                                           | —                                                                              | 32                                                  |
| Common/collective trusts and 103\-12 Investment Trust measured at net asset value  ^(f) (g)^ | —                                                                                | —                                                                            | —                                                                              | 227                                                 |
| Insurance group annuity contracts                                                            | —                                                                                | —                                                                            | 2                                                                              | 2                                                   |
| Dividend and interest receivable                                                             | 40                                                                                | —                                                                            | —                                                                              | 40                                                  |
| Due to/from brokers for sale of securities – net                                             | (9)                                                                                | —                                                                            | —                                                                              | (9)                                                 |
| Other liabilities – net                                                                      | (7)                                                                                | —                                                                            | —                                                                              | (7)                                                 |
| Total                                                                                | $6,459                                                                                | $2,556                                                                       | $23                                                                            | $9,968                                              |

|      |                                                                                |
| ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^a)^ | Holdings are diversified as follows:  15%  United Kingdom,  12%  Japan,  10%  France,  7%  Switzerland,  6%  Netherlands,  17%  other emerging markets and the remaining  33%  with no concentration greater than 5% in any one country\. |

|      |                                                                              |
| ---- | ---------------------------------------------------------------------------- |
| ^b)^ | There are no significant concentrations of holdings by company or industry\. |

157


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

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

**9\. Commitments, Contingencies and Guarantees**

***(a) Aircraft and Engine Purchase Commitments***

Under all of American’s aircraft and engine purchase agreements, its total future commitments as of December 31, 2017 are expected to be as follows (approximately, in millions):

|                                                              |          |          |          |          |          |                         |           |
| ------------------------------------------------------------ | -------- | -------- | -------- | -------- | -------- | ----------------------- | --------- |
|                                                              | **2018** | **2019** | **2020** | **2021** | **2022** | **2023 and Thereafter** | **Total** |
| Payments for aircraft commitments and certain engines  ^(1)^ | $1,826   | $2,730   | $2,730   | $2,858   | $2,138   | $1,482                  | $13,764   |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | These amounts are net of purchase deposits currently held by the manufacturers and include all commitments for regional aircraft\. American has granted a security interest in its purchase deposits with Boeing\. American’s purchase deposits held by all manufacturers totaled  $1\.2 billion  as of  December 31, 2017 \. |

***(b) Operating Leases and Other***

American leases certain aircraft, engines and ground equipment, in addition to the majority of its ground facilities and terminal space\. As of December 31, 2017, American had 410 aircraft under operating leases, with remaining terms ranging from three months to approximately 12 years\. Airports are utilized for flight operations under lease arrangements with the municipalities or agencies owning or controlling such airports\. Substantially all leases provide that the lessee must pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property\. Some leases also include renewal and purchase options\.

As of December 31, 2017, obligations under noncancellable operating leases for future minimum lease payments are as follows (approximately, in millions):

|                               |          |          |          |          |          |                         |           |
| ----------------------------- | -------- | -------- | -------- | -------- | -------- | ----------------------- | --------- |
|                               | **2018** | **2019** | **2020** | **2021** | **2022** | **2023 and Thereafter** | **Total** |
| Future minimum lease payments | $2,178   | $1,966   | $1,776   | $1,331   | $1,155   | $3,253                  | $11,659   |

Mainline and regional rent expense, excluding landing fees, was $2\.8 billion in 2017 and $2\.7 billion in each of 2016and 2015\.

Additionally, American has purchase commitments related to jet fuel, facility construction projects and information technology support as follows (approximately): $2\.0 billion in 2018, $1\.4 billion in 2019, $890 million in 2020 and $950 million in 2021\.

***(c) Capacity Purchase Agreements with Third\-Party Regional Carriers***

American has capacity purchase agreements with third\-party regional carriers\. The capacity purchase agreements provide that all revenues, including passenger, in\-flight, ancillary, mail and freight revenues, go to American\. In return, American agrees 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 American reimburses 100% of certain variable costs, such as airport landing fees and passenger liability insurance\. American controls marketing, scheduling, ticketing, pricing and seat inventories\.

As of December 31, 2017, American’s capacity purchase agreements with third\-party regional carriers had expiration dates ranging from 2018 to 2027, with rights of American to extend the respective terms of certain agreements\. See Part I, Item 2\. Properties for unaudited information on the aircraft operated by third\-party regional carriers under such capacity purchase agreements\.

161


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

In the event that CORSIA does not come into force as expected, American and other airlines could become subject to an unpredictable and inconsistent array of national or regional emissions restrictions, creating a patchwork of complex regulatory requirements that will often affect global competitors differently and frequently offer no meaningful aviation environmental improvements\. For example, a directive adopted in 2008 by the EU currently covers CO ~2~  emissions from flights operating within the mostly European countries participating in the EU Emissions Trading System (ETS)\. The EU ETS does not apply to CO ~2~  emissions from the vast majority of American flights serving EU countries because, in 2012, the EU agreed to suspend the application of its rules to international flights to pursue, instead, a global effort solely through ICAO\. The EU has extended the suspension of its rules to international flights through the end of 2023, contingent on the successful implementation of CORSIA\.

We have taken a number of actions that mitigate our GHG emissions and conserve fuel such as:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | retiring older, less fuel\-efficient aircraft and replacing them with new, more fuel\-efficient aircraft, resulting in the youngest mainline fleet of any U\.S\. network carrier; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------- |
| • | reducing fuel consumption through operational initiatives such as single\-engine taxi and engine washing; |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------- |
| • | working with the FAA and vendors to facilitate efficient airspace procedures, which also reduces aircraft emissions; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | updating our fleet with lightweight interiors including seats and furnishings and replacing existing cargo containers with lighter weight versions;  |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | replacing older, inefficient ground support equipment with new, more fuel\-efficient ground support equipment, including alternative\-fuel and electric powered equipment; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------- |
| • | purchasing renewable electricity to reduce indirect emissions associated with the production of the power we consume; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | seeking certification of certain of our buildings to the U\.S\. Green Building Council’s Leadership in Energy and Environmental Design (LEED) standard; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------- |
| • | entering into discussions with potential vendors to explore potential production pathways for sustainable alternative aircraft fuel; and |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------ |
| • | collaborating with airports and other stakeholders to accelerate the introduction of sustainable or lower carbon fuels\. |

For further information, see our annual Corporate Responsibility Report, available on our website at  www\.aa\.com/CRR \. None of the information or contents of our website is incorporated into this Annual Report on Form 10\-K\.

Impact of Regulatory Requirements on Our Business

Regulatory requirements, including but not limited to those discussed above, affect operations and increase operating costs for the airline industry, including our airline subsidiaries, and future regulatory developments may continue to do the same in the future\. See Part I, Item 1A\. Risk Factors – “ Evolving data security and privacy requirements could increase our costs, and any significant data security incident could disrupt our operations, harm our reputation, expose us to legal risks and otherwise materially adversely affect our business, results of operations and financial condition,” “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,” “Our business is subject to extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages,” “The airline industry is heavily taxed, ”  “We are subject to many forms of environmental and noise regulation and may incur substantial costs as a result,”  and  “We are subject to risks associated with climate change, including increased regulation of our CO ~2~  emissions and the potential increased impacts of severe weather events on our operations and infrastructure”  for additional information\.

14


Annual Report of Southwest Airlines Co\. for year 2017

|                                                                                |
| ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| [Supplemental Agreement No\. 11 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2000](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/sa111810redacted.txt) , including [Letter Agreement 6\-1162\-RLL\-932R1](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/rll932r1redlined.txt)  and [Table of Contents](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/tableofcontents11.txt)  (File No\. 1\-7259)); [Supplemental Agreement No\. 12 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2000](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/sa121810redacted.txt) , including [Purchase Agreement Amendments](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/pasa12redacted.txt)  (File No\. 1\-7259)); [Supplemental Agreement No\. 13 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2000](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/sa13redacted.txt) , including [Purchase Agreement Amendments](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/pasa13.txt) , [Letter Agreement No\. 6\-1162\-RLL\-932R2](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/rll932r2.txt) , [Letter Agreement No\. 6\-1162\-RLL\-933R9](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/rll933r9redacted.txt) , [Letter Agreement No\. 6\-1162\-RLL\-934R1](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/rll934r2redlined.txt) , [Letter Agreement No\. 6\-1162\-RLL\-941R1](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/rll941r2redlined.txt) , [Letter Agreement No\. 6\-1162\-KJJ\-054](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/kjj054busmatters.txt) , [Letter Agreement No\. 6\-1162\-KJJ\-055](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/kjj055strucmatters.txt) , [Letter Agreement No\. 6\-1162\-KJJ\-056](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/kjj056noiseemission.txt) , [Letter Agreement No\. 6\-1162\-KJJ\-057](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/kjj057productdev.txt) , [Letter Agreement No\. 6\-1162\-KJJ\-058](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/kjj058submatters.txt) , and [Price Adjustment](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/exhibitd1.txt)  (File No\. 1\-7259)); [Supplemental Agreement No\. 14 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2000](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/sa141810redacted.txt) , including [Purchase Agreement Amendments](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/pa1810sa14redacted.txt) , [Letter Agreement No\. 6\-1162\-RLL\-934R2](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/rll934r3redlined.txt) , and [Letter Agreement No\. 6\-1162\-KJJ\-150](http://www.sec.gov/Archives/edgar/data/92380/000009238000500006/kjj150fccmode.txt)  (File No\. 1\-7259)); [Supplemental Agreements Nos\. 15, 16, 17, 18, and 19 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2001 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000095013401508530/d91871ex10-1.txt) ; [Supplemental Agreements Nos\. 20, 21, 22, 23, and 24 (incorporated by reference to Exhibit 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2002 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238002000019/ex10_3.txt) ; [Supplemental Agreements Nos\. 25, 26, 27, 28, and 29 (incorporated by reference to Exhibit 10\.8 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2003 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238003000013/ex10_8.txt) ; [Supplemental Agreements Nos\. 30, 31, 32, and 33 (incorporated by reference to Exhibit 10\.1 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2003 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000095013404000842/d11818exv10w1.txt) ;[ Supplemental Agreements Nos\. 34, 35, 36, 37, and 38 (incorporated by reference to Exhibit 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2004 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238004000016/ex10-3.txt) ; [Supplemental Agreements Nos\. 39 and 40 (incorporated by reference to Exhibit 10\.6 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2004 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238004000028/ex10-6.txt) ; [Supplemental Agreement No\. 41 (incorporated by reference to Exhibit 10\.1 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2004 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000095013405002093/d21965exv10w1.htm) ; [Supplemental Agreements Nos\. 42, 43, and 44 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2005 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238005000006/ex10-1.txt) ; [Supplemental Agreement No\. 45 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2005 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238005000012/ex10-1.txt) ; [Supplemental Agreements Nos\. 46 and 47 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2006 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000095013406007697/d35241exv10w1.htm) ; [Supplemental Agreement No\. 48 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2006 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238006000009/exhibit_10-1.htm) ; [Supplemental Agreements Nos\. 49 and 50 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2006 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238006000020/ex10-1.htm) ; [Supplemental Agreement No\. 51 (incorporated by reference to Exhibit 10\.1 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2006 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000095013407001724/d42975exv10w1.htm) ; [Supplemental Agreement No\. 52 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2007 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238007000014/ex10-1.htm) ; [Supplemental Agreement No\. 53 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2007 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238007000024/ex10_1.htm) ; [Supplemental Agreement No\. 54 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2007 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238007000034/ex10_1.htm) ;[ Supplemental Agreement No\. 55 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2007 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238007000034/ex10_2.htm) ; [Supplemental Agreement No\. 56 (incorporated by reference to Exhibit 10\.1 to Southwest’s Annual Report on Form 10\-K for the year ended December 31, 2007 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000095013408001572/d53331exv10w1.htm) ; [Supplemental Agreement No\. 57 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2008 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238008000009/ex10_1.htm) ; [Supplemental Agreement No\. 58 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2008 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238008000009/ex10_2.htm) ; [Supplemental Agreement No\. 59 (incorporated by reference to Exhibit 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2008 (File No\. 1\-7259)); ](http://www.sec.gov/Archives/edgar/data/92380/000009238008000009/ex10_3.htm)[Supplemental Agreement No\. 60 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2008 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238008000014/ex10_1.htm) ; [Supplemental Agreement No\. 61 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2008 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238008000018/ex10_1.htm) ; [Supplemental Agreement No\. 62 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2009 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238009000016/ex10_1.htm) ; [Supplemental Agreement No\. 63 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2009 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238009000016/ex10_2.htm) ; [Supplemental Agreement No\. 64 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2010 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238010000032/ex10_1.htm) ;<br><br>  <br><br>  <br> |

118