Annual Report of Southwest Airlines Co\. for year 2019

|                                                                              |                                                                             |                                                                             |
| ---------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------------- |
| **Fair value measurements using significant unobservable inputs (Level 3)**  | **Fair value measurements using significant unobservable inputs (Level 3)** | **Fair value measurements using significant unobservable inputs (Level 3)** |
| (in millions)                                                                | **Fuel derivatives**                                                        |                                                                             |
| Balance at December 31, 2017                                                 | $248                                                                        |                                                                             |
| Total losses (realized or unrealized) included in other comprehensive income | (1

)                                                                 |                                                                             |
| Purchases                                                                    | 66                                                                          | (a)                                                                         |
| Sales                                                                        | (4

)                                                                 | (a)                                                                         |
| Settlements                                                                  | (171

)                                                               |                                                                             |
| Balance at December 31, 2018                                                 | $138                                                                        |
                                                                      |

(a) The purchase and sale of fuel derivatives are recorded gross based on the structure of the derivative instrument and

 whether a contract with multiple derivatives was purchased as a single instrument or separate instruments\.

The significant unobservable input used in the fair value measurement of the Company’s derivative option contracts is implied volatility\. Holding other inputs constant, an increase (decrease) in implied volatility would result in a higher (lower) fair value measurement, respectively, for the Company’s derivative option contracts\.

The following table presents a range of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at  December 31, 2019 :

|                                                                    |                                                                    |                                                                    |                                                                    |                                                                    |
| ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ |
| **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** |
|                                                                    | **Valuation technique**                                            | **Unobservable input**                                             | **Period (by year)**                                               | **Range**                                                          |
| Fuel derivatives                                                   | Option model                                                       | Implied volatility                                                 | 2020                                                               | 13\-34%                                                            |
|                                                                    |                                                                    |                                                                    | 2021                                                               | 17\-23%                                                            |
|                                                                    |                                                                    |                                                                    | 2022                                                               | 17\-19%                                                            |
|                                                                    |                                                                    |                                                                    | Beyond 2022                                                        | 18\-19%                                                            |

The carrying amounts and estimated fair values of the Company’s long\-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at  December 31, 2019 , are presented in the table below\. The fair values of the Company’s publicly held long\-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these agreements as Level 2\. Debt under   three  of the Company’s debt agreements is not publicly held\. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable\. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items\.

|                                                     |                     |                          |                                |
| --------------------------------------------------- | ------------------- | ------------------------ | ------------------------------ |
| **(in millions)**                                   |  **Carrying value** | **Estimated fair value** | **Fair value level hierarchy** |
| 2\.65% Notes due 2020                               | $500                | $503                     | Level 2                        |
| Term Loan Agreement payable through 2020 \- 5\.223% | 134                 | 134                      | Level 3                        |
| 737 Aircraft Notes payable through 2020             | 20                  | 20                       | Level 3                        |
| 2\.75% Notes due 2022                               | 300                 | 304                      | Level 2                        |
| Pass Through Certificates due 2022 \- 6\.24%        | 197                 | 208                      | Level 2                        |
| Term Loan Agreement payable through 2026 \- 3\.03%  | 178                 | 178                      | Level 3                        |
| 3\.00% Notes due 2026                               | 300                 | 308                      | Level 2                        |
| 3\.45% Notes due 2027                               | 300                 | 317                      | Level 2                        |
| 7\.375% Debentures due 2027                         | 122                 | 150                      | Level 2                        |

102


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

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

Financing Activities

Debt and Capital Leases\.  The principal amount of debt and capital leases was  $8\.9 billion  at  December 31, 2017 \. Since December 31, 2009, we have reduced our principal amount of debt and capital leases by $9\.4 billion\.

During the March 2017 quarter, we issued $2\.0 billion in aggregate principal amount of unsecured notes, consisting of $1\.0 billion of 2\.785% Notes due 2020 and $1\.0 billion of 3\.625% Notes due 2022\. As discussed above, we used the net proceeds from this issuance to make a cash contribution to our qualified defined benefit pension plans\. During the December 2017 quarter, we issued $450 million in aggregate principal amount of 2\.600% Notes due 2020\.

Our Pacific Facilities (including the Term Loan with a principal balance of  $1\.0 billion ) mature in October 2018\. We expect to repay this obligation with cash flows from operations, cash and cash equivalents and/or new financing arrangements\.

During 2017, we received an upgrade to our credit rating from Standard & Poor's to an investment\-grade rating of BBB\-\. We now have investment\-grade ratings from all three major credit rating agencies\.

At December 31, 2017, our corporate ratings were:

|                   |                    |             |
| ----------------- | ------------------ | ----------- |
| **Rating Agency** | **Current Rating** | **Outlook** |
| Fitch             | BBB\-              | Stable      |
| Moody's           | Baa3               | Stable      |
| Standard & Poor's | BBB\-              | Stable      |

Capital Returns to Shareholders\.  Since first implementing our quarterly dividend in 2013, we have increased the dividend per share by 50% annually and paid $1\.9 billion in total dividends, including $731 million in 2017\. Through dividends and share repurchases, we have returned $9\.8 billion to shareholders since 2013, while reducing outstanding shares by approximately 18% compared to the beginning of 2013\. During 2017 alone, we repurchased and retired 33 million shares at a cost of $1\.7 billion\.

|                                            |                                    |                              |                             |                             |
| ------------------------------------------ | ---------------------------------- | ---------------------------- | --------------------------- | --------------------------- |
| **(in millions, except repurchase price)** | **Share Repurchase Authorization** | **Average Repurchase Price** | **Planned Completion Date** | **Authorization Remaining** |
| May 2014 Program                           | $2,000                             | $42\.86                      | December 31, 2016           | Completed June 2015         |
| May 2015 Program                           | $5,000                             | $45\.32                      | December 31, 2017           | Completed September 2017    |
| May 2017 Program                           | $5,000                             | $52\.13                      | December 31, 2020           | $4,675                      |

On February 9, 2018, the Board of Directors declared a $0\.3050 per share dividend for shareholders of record as of February 23, 2018\.

Fuel Hedge Restructuring\.  During 2016, we entered into transactions to defer settlement of a portion of our hedge portfolio until 2017\. These deferral transactions, excluding market movements from the date of inception, provided approximately $300 million in cash receipts during the second half of 2016 and required approximately $300 million in cash payments in 2017\.

During the June 2016 quarter, we early terminated certain of our outstanding deferral transactions and made cash payments of $170 million, including normal settlements\. As a result, during the year ended December 31, 2017, we reported  $20 million  in cash receipts and  $244 million  in cash payments associated with these transactions\. For additional information regarding these transactions, see  Note 4  to the Notes to the Consolidated Financial Statements\.

Undrawn Lines of Credit

We have  $2\.5 billion  available in undrawn revolving lines of credit\. Our credit facilities have covenants, including minimum collateral coverage ratios\. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them\. We currently have a substantial amount of unencumbered assets available to pledge as collateral\.

Covenants

 We were in compliance with the covenants in our financing agreements at  December 31, 2017 \.

 38


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

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

As of  December 31, 2019 , there was   $108 million  of unrecognized compensation cost related to RSUs\. These costs are expected to be recognized over a weighted average period of   one year \. The total fair value of RSUs vested during the years ended  December 31, 2019 ,  2018  and  2017  was   $68 million ,   $91 million  and   $123 million , respectively\.

16\.  Valuation and Qualifying Accounts (in millions)

|                                               |                                  |                                                           |                        |                                       |
| --------------------------------------------- | -------------------------------- | --------------------------------------------------------- | ---------------------- | ------------------------------------- |
|                                               | **Balance at Beginning of Year** | **Additions Charged to Statement of Operations Accounts** | **Deductions**         | **Balance at**

**End of Year** |
| **Allowance for obsolescence of spare parts** |                                  |                                                           |                        |                                       |
| Year ended December 31, 2019                  | $814                             | $91                                                       | $

(121

) | $784                                  |
| Year ended December 31, 2018                  | 769                              | 70                                                        | (25

)           | 814                                   |
| Year ended December 31, 2017                  | 765                              | 29                                                        | (25

)           | 769                                   |
| **Allowance for uncollectible accounts**      |                                  |                                                           |                        |                                       |
| Year ended December 31, 2019                  | $29                              | $19                                                       | $

(17

)  | $31                                   |
| Year ended December 31, 2018                  | 24                               | 42                                                        | (37

)           | 29                                    |
| Year ended December 31, 2017                  | 36                               | 43                                                        | (55

)           | 24                                    |

17\. Quarterly Financial Data (Unaudited)

Unaudited summarized financial data by quarter for  2019  and  2018  (in millions, except share and per share amounts):

|                                             |                   |                    |                   |                    |
| ------------------------------------------- | ----------------- | ------------------ | ----------------- | ------------------ |
|                                             | **First Quarter** | **Second Quarter** | **Third Quarter** | **Fourth Quarter** |
| **2019**                                    |                   |                    |                   |                    |
| Operating revenues                          | $10,584           | $11,960            | $11,911           | $11,313            |
| Operating expenses                          | 10,209            | 10,807             | 11,103            | 10,584             |
| Operating income                            | 375               | 1,153              | 808               | 729                |
| Net income                                  | 185               | 662                | 425               | 414                |
| Earnings per share:                         |                   |                    |                   |                    |
| Basic                                       | $0\.41            | $1\.49             | $0\.96            | $0\.95             |
| Diluted                                     | $0\.41            | $1\.49             | $0\.96            | $0\.95             |
| Shares used for computation (in thousands): |                   |                    |                   |                    |
| Basic                                       | 451,951           | 445,008            | 441,915           | 434,578            |
| Diluted                                     | 453,429           | 445,587            | 442,401           | 435,659            |
| **2018**                                    |                   |                    |                   |                    |
| Operating revenues                          | $10,401           | $11,643            | $11,559           | $10,938            |
| Operating expenses                          | 10,005            | 10,639             | 10,874            | 10,367             |
| Operating income                            | 396               | 1,004              | 685               | 571                |
| Net income                                  | 159               | 556                | 372               | 325                |
| Earnings per share:                         |                   |                    |                   |                    |
| Basic                                       | $0\.34            | $1\.20             | $0\.81            | $0\.71             |
| Diluted                                     | $0\.34            | $1\.20             | $0\.81            | $0\.70             |
| Shares used for computation (in thousands): |                   |                    |                   |                    |
| Basic                                       | 472,297           | 463,533            | 460,526           | 460,589            |
| Diluted                                     | 474,598           | 464,618            | 461,507           | 461,915            |

Our fourth quarter  2019  results include   $108 million  of total pre\-tax net special items that principally included   $85 million  of merger integration expenses and   $39 million  of fleet restructuring expenses, offset in part by   $42 million  of mark\-to\-market net unrealized gains associated with certain equity and other investments\.

113


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

GENERAL

The airline industry is highly competitive and subject to various uncertainties, including economic conditions, volatile fuel prices, a largely unionized work force, the need to finance large capital expenditures and the related availability of capital, government regulation—including taxes and fees, and potential aircraft incidents\. Airlines have high fixed costs, primarily for wages, aircraft fuel, aircraft ownership and facilities rents\. Because expenses of a flight do not vary significantly based on the number of passengers carried, a relatively small change in the number of passengers or in pricing has a disproportionate effect on an airline’s operating and financial results\. In other words, a minor shortfall in expected revenue levels could cause a disproportionately negative impact to our operating and financial results\. Passenger demand and ticket prices are, in large measure, influenced by the general state of the economy, current global economic and political events, and total available airline seat capacity\.

In 2019, the airline industry posted another year of profits, and increases over 2018, primarily due to lower fuel prices\. Although growth was impacted in 2019 following the grounding of the Boeing 737 MAX aircraft, airlines have continued to make significant investments in airports and new services to differentiate their customer service offering\. Thus, the level of competition is expected to continue to increase\.

FUEL

Our business and financial results are highly impacted by the price and the availability of aircraft fuel\. Aircraft fuel expense includes raw fuel expense, or the price that we generally pay at the airport, including taxes and fees, plus the effect of mark\-to\-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases\. The cost of aircraft fuel is volatile and outside of our control, and it can have a significant and immediate impact on our operating results\. Over the past five years, aircraft fuel expense ranged from 18% to 25% of operating expenses\. Fuel prices are impacted by changes in both the price of crude oil and refining costs and can vary by region in the U\.S\.

The price of crude oil on an average annual basis for the past five years has ranged from a low of $43 per barrel in 2016 to a high of $65 in 2018\. For us, a $1 per barrel change in the price of oil equates to approximately $21 million of fuel cost annually\. Said another way, a one\-cent change in our fuel price per gallon will impact our expected annual fuel cost by approximately $9 million per year\.

Refining margins, which represent the price of refining crude oil into aircraft fuel, are a smaller portion of the overall price of jet fuel, but have also contributed to the price volatility in recent years\. Over the last five years, average annual West Coast refining margin prices have fluctuated from a low of $13 per barrel in 2016 to a high of $26 per barrel in 2019\.

Generally, West Coast jet fuel prices are somewhat higher and more volatile than prices in the Gulf Coast or on the East Coast\. Our average raw fuel cost per gallon decreased 6% in 2019, after increasing 28% in 2018 and increasing 21% in 2017\.

The percentages of our aircraft fuel expense by crude oil and refining margins, as well as the percentage of our aircraft fuel expense of operating expenses, are as follows:

|                        |                        |       |       |  |  |  |       |       |  |  |  |       |       |  |  |  |           |           |  |  |  |       |       |
|:---------------------- |:---------------------- | -----:| -----:|:- |:- |:- | -----:| -----:|:- |:- |:- | -----:| -----:|:- |:- |:- | ---------:| ---------:|:- |:- |:- | -----:| -----:|
|                        |                        |  2019 |  2019 |  |  |  |  2018 |  2018 |  |  |  |  2017 |  2017 |  |  |  | 2016^(a)^ | 2016^(a)^ |  |  |  |  2015 |  2015 |
| Crude oil              | Crude oil              |  62 % |  62 % |  |  |  |  68 % |  68 % |  |  |  |  66 % |  66 % |  |  |  |      69 % |      69 % |  |  |  |  62 % |  62 % |
| Refining margins       | Refining margins       |  28 % |  28 % |  |  |  |  25 % |  25 % |  |  |  |  23 % |  23 % |  |  |  |      20 % |      20 % |  |  |  |  26 % |  26 % |
| Other^(b)^             | Other^(b)^             |  10 % |  10 % |  |  |  |   7 % |   7 % |  |  |  |  11 % |  11 % |  |  |  |      11 % |      11 % |  |  |  |  12 % |  12 % |
| Total                  | Total                  | 100 % | 100 % |  |  |  | 100 % | 100 % |  |  |  | 100 % | 100 % |  |  |  |     100 % |     100 % |  |  |  | 100 % | 100 % |
| Aircraft fuel expense  | Aircraft fuel expense  |  24 % |  24 % |  |  |  |  25 % |  25 % |  |  |  |  22 % |  22 % |  |  |  |      18 % |      18 % |  |  |  |  22 % |  22 % |

(a) Includes information for Virgin America for the period December 14, 2016 through December 31, 2016\.

(b) Other includes gains and losses on settled fuel hedges, unrealized mark\-to\-market fuel hedge gains or losses, taxes and other into\-plane costs\.

We use crude oil call options as hedges against our exposure to the volatility of jet fuel prices\. Call options effectively cap our price for crude oil, limiting our exposure to increasing fuel prices for about half of our planned fuel consumption\. With call options, we are hedged against spikes in crude oil prices, and during a period of declines in crude oil prices, we only forfeit cash previously paid for hedge premiums\. We begin hedging approximately 18 months in advance of consumption\.

10


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

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

***Impacts to*** ***2017*** ***Results***

The effects of the adoption of the New Revenue Standard and New Retirement Standard to our consolidated statement of operations for the twelve months ended December 31, 2017 were as follows (in millions):

|                                       |                 |                             |                                         |                                   |                             |               |
| ------------------------------------- | --------------- | --------------------------- | --------------------------------------- | --------------------------------- | --------------------------- | ------------- |
|                                       |                 | **New Revenue Standard**    | **New Revenue Standard**                | **New Revenue Standard**          | **New Retirement Standard** |               |
| **Year Ended  <br>December 31, 2017** | **As Reported** | **Deferred Revenue Method** | **Ancillary Revenue Reclassifications** | **Gross Versus Net Presentation** | **Reclassifications**       | **As Recast** |
| Operating revenues:                   |                 |                             |                                         |                                   |                             |               |
|  Passenger                            | $36,133         | $311                        | $2,648                                  | $39                               | $—                          | $39,131       |
|  Cargo                                | 800             | —                           | 42                                      | 48                                | —                           | 890           |
|  Other                                | 5,274           | —                           | (2,690)                                 | 17                                | —                           | 2,601         |
|  Total operating revenues             | 42,207          | 311                         | —                                       | 104                               | —                           | 42,622        |
|  Total operating expenses             | 38,149          | —                           | —                                       | 104                               | 138                         | 38,391        |
| Operating income                      | 4,058           | 311                         | —                                       | —                                 | (138)                       | 4,231         |
| Total nonoperating expense, net       | (974)           | —                           | —                                       | —                                 | 138                         | (836)         |
| Income before income taxes            | 3,084           | 311                         | —                                       | —                                 | —                           | 3,395         |
| Income tax provision  ^(1)^           | 1,165           | 948                         | —                                       | —                                 | —                           | 2,113         |
| Net income                            | $1,919          | $(637)                      | $—                                      | $—                                | $—                          | $1,282        |
| Diluted earnings per common share     | $3\.90          |                             |                                         |                                   |                             | $2\.61        |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | The adjustment to the 2017 income tax provision includes an  $823 million  special charge to reduce our deferred tax asset associated with loyalty program liabilities as a result of H\.R\. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act), enacted in December 2017 that reduced the federal corporate income tax rate from  35%  to  21% \. |

The effects of the adoption of the New Revenue Standard to our December 31, 2017 consolidated balance sheet were as follows (in millions):

|                                      |                 |                          |               |
| ------------------------------------ | --------------- | ------------------------ | ------------- |
|                                      | **As Reported** | **New Revenue Standard** | **As Recast** |
| Deferred tax asset                   | $427            | $1,389                   | $1,816        |
| Air traffic liability                | 3,978           | 64                       | 4,042         |
| Current loyalty program liability    | 2,791           | 330                      | 3,121         |
| Noncurrent loyalty program liability | —               | 5,701                    | 5,701         |
| Total stockholders’ equity (deficit) | 3,926           | (4,706)                  | (780)         |

88


Annual Report of Southwest Airlines Co\. for year 2019

material, adverse effect on the Company's business, operating results, and financial condition\. The Company could also be materially adversely affected if the pricing or operational attributes of its aircraft were to become less competitive\.

Further, even upon a rescission of the FAA order to ground the MAX aircraft, the Company will continue to be reliant on Boeing to provide necessary resources and support to return the MAX to service\. Boeing has recommended that pilots receive special flight simulator training before operating the MAX aircraft, although the FAA is ultimately responsible for establishing the training requirements for operating the MAX\. Special simulator training would further delay the MAX return to service\. In addition, following the MAX return to service, the Company could face significant operational challenges in efficiently taking delivery of a large number of MAX aircraft from Boeing and reintroducing the MAX aircraft into the Company's network in a controlled and steady manner\.

The airline industry is particularly sensitive to changes in economic conditions; in the event of unfavorable economic conditions or economic uncertainty, the Company's results of operations could be negatively affected, which could require the Company to adjust its business strategies\.

The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions\. Historically, unfavorable U\.S\. economic conditions have driven changes in travel patterns and have resulted in reduced spending for both leisure and business travel\. For some consumers, leisure travel is a discretionary expense, and short\-haul travelers, in particular, have the option to replace air travel with surface travel\. Businesses are able to forego air travel by using communication alternatives such as videoconferencing and the Internet or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat\. Unfavorable economic conditions, when low fares are often used to stimulate traffic, have also historically hampered the ability of airlines to raise fares to counteract any increases in fuel, labor, and other costs\. Although the U\.S\. economy has experienced modest growth over the course of the past several years, any continuing or future U\.S\. or global economic uncertainty could negatively affect the Company's results of operations and could cause the Company to adjust its business strategies\. Further, because expenses of a flight do not vary significantly with the number of passengers carried, a relatively small change in the number of passengers can have a disproportionate effect on an airline’s operating and financial results\. Therefore, any general reduction in airline passenger traffic could adversely affect the Company's results of operations\.

The Company's business can be significantly impacted by high and/or volatile fuel prices, and the Company's operations are subject to disruption in the event of any delayed supply of fuel; therefore, the Company's strategic plans and future profitability are likely to be impacted by the Company's ability to effectively address fuel price increases and fuel price volatility and availability\.

Airlines are inherently dependent upon energy to operate, and jet fuel and oil represented approximately 22 percent of the Company's operating expenses for 2019\. As discussed above under "Business \- Cost Structure," the cost of fuel can be extremely volatile and unpredictable, and even a small change in market fuel prices can significantly affect profitability\. Furthermore, volatility in fuel prices can be due to many external factors that are beyond the Company's control\. For example, fuel prices can be impacted by political, environmental, and economic factors, such as (i) dependency on foreign imports of crude oil and the potential for hostilities or other conflicts in oil producing areas; (ii) disruptions in domestic refining or pipeline capacity due to weather, natural disasters, or other factors; (iii) worldwide demand for fuel, particularly in developing countries, which can result in inflated energy prices; (iv) changes in U\.S\. governmental policies on fuel production, transportation, taxes, and marketing; and (v) changes in currency exchange rates\.

The Company's ability to effectively address fuel price increases could be limited by factors such as its historical low\-fare reputation, the portion of its Customer base that purchases travel for leisure purposes, the competitive nature of  the airline industry generally, and the risk that higher fares will drive a decrease in demand\. The Company attempts to manage its risk associated with volatile jet fuel prices by utilizing over\-the\-counter fuel derivative instruments to hedge a portion of its future jet fuel purchases\. However, energy prices can fluctuate significantly in a relatively short amount of time\. Because the Company uses a variety of different derivative instruments at different price points, the Company is subject to the risk that the fuel derivatives it uses will not provide adequate protection against significant increases in fuel prices and in some cases could in fact result in hedging losses, and the Company effectively paying higher than market prices for fuel, thus creating additional volatility in the Company's earnings\. The Company is also

21


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

***Selling Expenses***

Selling expenses increased by $132 million, or 59%, compared to 2016\. On a Combined Comparative basis, selling expenses increased$9 million, or 3%, mostly due to increased promotional and advertising activities, as well as new sponsorships which became effective in the current year\.

Under the new revenue recognition standard, our 2017 recast selling expense will increase by approximately $13 million\. We expect selling expense to decrease in 2018 on a recast basis, due primarily to a decrease in advertising spend forecasted as well as decreased Mileage Plan partner airline expense due to the termination of certain partnerships with other airlines\.

***Depreciation and Amortization***

Depreciation and amortization expenses increased by $9 million, or 2%, compared to 2016\. On a Combined Comparative basis, depreciation and amortization expense decreased$28 million, or 7%, primarily due to a change in the estimated useful lives of certain B737 operating aircraft and related parts from 20 years to 25 years, which was effective October 1, 2016, partially offset by the addition of 14 B737\-900ERs and 10 E175s to our fleet since December 31, 2016\.

We expect depreciation and amortization expense to increase in line with capacity growth in 2018 compared to 2017, primarily due to scheduled B737\-900ER and E175 aircraft deliveries in 2018\.

***Food and Beverage Service***

Food and beverage service expense increased by $69 million, or 55%, compared to 2016\. On a Combined Comparative basis, food and beverage service expenses increased$20 million, or 11%, due to the increased number of passengers, premium class offerings and enhancements to our onboard menu offerings to provide higher quality food and beverage products\.

We expect food and beverage expenses to increase in line with capacity growth in 2018 compared to 2017, primarily due to an expected increase in number of passengers as we continue to grow our network and higher product costs\.

***Third\-party regional carrier expense***

Third\-party regional carrier expense, which represents payments made to SkyWest and PenAir under our CPA agreements, increased$26 million, or 27%, in 2017 compared to 2016\. The increase is primarily due to the addition of eight E175 aircraft operated by SkyWest in the current year\.

We expect third\-party regional carrier expense to increase in 2018 as we add E175 aircraft to be operated by SkyWest and continue to expand our regional network\.

***Other Operating Expenses***

Other operating expenses increased$200 million, or 55%, compared to 2016\. On a Combined Comparative basis, other operating expenses increased$114 million, or 25%, primarily due to higher costs associated with crew costs such as hotels and per diems, training, higher IT costs, an increase in scrapped parts inventory, and higher property taxes\.

We expect other operating expenses to increase consistent with capacity growth in 2018 driven primarily by increased personnel costs such as meals and hotels\.

***Special Items—Merger\-Related Costs and Other***

We recorded special items of $118 million for merger\-related costs associated with our acquisition of Virgin America in 2017, compared to $117 million in 2016, which reflects the results of Virgin America from December 14, 2016 through December 31, 2016, and $138 million on a Combined Comparative basis in 2016\. Costs incurred in 2017 consisted primarily of severance and retention costs, and IT integration costs\. We expect to continue to incur merger\-related costs through 2019\.

***Consolidated Nonoperating Income (Expense)***

During 2017 we recorded nonoperating expense of $53 million, compared to nonoperating expense of $4 million in 2016\. On a Combined Comparative basis, nonoperating expense increased by $30 million, primarily due to interest expense incurred in the current year on the debt issued in 2016 to finance the acquisition of Virgin America\.

 45


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

Investing Activities

Capital Expenditures\.  Our capital expenditures were  $5\.2 billion  in  2018 , $3\.9 billion in  2017  and $3\.4 billion in  2016 \. Our capital expenditures during 2018 were primarily related to the purchase of aircraft, (including A321\-200, B\-737\-900ER, A350\-900, A220\-100 and CRJ\-900 aircraft), advanced deposit payments on future aircraft order commitments and modifications to our domestic fleet\. Our capital expenditures during 2017 and 2016 were primarily for the purchase of aircraft and modifications to upgrade aircraft interiors that enhance our product offering\.

As part of a multi\-year initiative, we are investing in aircraft intended to provide more premium products, improved customer experience and better operating economics\. We have committed to future aircraft purchases that will require significant capital investment and have obtained, but are under no obligation to use, long\-term financing commitments for a substantial portion of the purchase price of a significant number of these aircraft\. We expect that we will invest approximately $4\.7 billion in 2019 primarily for (1) aircraft, including deliveries of A321\-200s, B\-737\-900ERs, A220\-100s, A330\-900neos, A350\-900s and CRJ\-900s, along with advance deposit payments for these and our new A321\-200neos and A220\-300s as well as (2) aircraft modifications, primarily related to cabin enhancements to improve the customer experience\. We expect that the 2019 investments will be funded primarily through cash flows from operations\.

Equity Investments\.  During 2017, we completed a $622 million tender offer and settled derivative contracts for $173 million to obtain additional capital stock of Grupo Aeroméxico\. During 2017, we also acquired shares of Air France\-KLM for $450 million\. See  Note 4  of the Notes to the Consolidated Financial Statements for more information on our equity investments\.

Los Angeles International Airport ("LAX") Construction\.  During 2016, we executed a modified lease agreement with Los Angeles World Airports ("LAWA"), which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX by 2023\. Based on the lease agreement, we are designing and managing the construction of the initial investment of  $350 million  to renovate gate areas, support space and other amenities for passengers, to upgrade the baggage handling systems in the terminals and to facilitate the relocation of those airlines located in Terminals 2 and 3 to Terminals 5 and 6 and Tom Bradley International Terminal ("TBIT")\. The relocation was completed during 2017\. We are also designing and managing the construction of an expansion of the project, which is expected to cost an additional  $1\.5 billion , of which  $1\.3 billion  has been approved by LAWA\. The expanded project will include (1) redevelopment of Terminal 3 and enhancement of Terminal 2, (2) rebuilding the ticketing and arrival halls and security checkpoint, (3) construction of infrastructure for the planned airport people mover, (4) ramp improvements and (5) construction of a secure connector to the north side of TBIT\.

A substantial majority of the project costs will be funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using an  $800 million  revolving credit facility provided by a group of lenders\. The credit facility was executed during 2017 and we have guaranteed the obligations of the RAIC under the credit facility\. Loans made under the credit facility will be repaid with the proceeds from LAWA’s purchase of completed project assets\. Using funding provided by cash flows from operations and/or the credit facility, we spent approximately  $208 million  on this project during  2018  and expect to spend approximately $240 million during 2019\.

New York\-LaGuardia Redevelopment\.  As part of the terminal redevelopment project at LaGuardia Airport, we are partnering with the Port Authority of New York and New Jersey ("Port Authority") to replace Terminals C and D with a new state\-of\-the\-art terminal facility consisting of  37  gates across  4  concourses connected to a central headhouse\. The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and  30 percent  more concessions space than the existing terminals\. The facility will also offer direct access between the parking garage and terminal and improved roadways and drop\-off/pick\-up areas\. The design of the new terminal will integrate sustainable technologies and improvements in energy efficiency\. Construction will be phased to limit passenger inconvenience and is expected to be completed by 2026\.

In connection with the redevelopment, during 2017, we entered into an amended and restated terminal lease with the Port Authority with a term through 2050\. Pursuant to the lease agreement we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off\-premises supporting facilities, (2) receive a Port Authority contribution of  $600 million  to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers\. We currently expect our net project cost to be approximately  $3\.3 billion  with Delta bearing the risks of project construction, including any potential cost over\-runs\. Using funding provided by cash flows from operations and/or financing arrangements, we spent approximately  $304 million  on this project during  2018  and expect to spend approximately $530 million during 2019\.

 39


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

Airport to strengthen the pathway to commercially viable sustainable aviation fuel, and through a partnership with Neste continues to assess the increased use of biofuels as an alternative fuel to reduce carbon dioxide emissions\. In addition, Alaska Airlines and Horizon Air continue to utilize electric equipment at airports when we have the infrastructure to support it\.

Overall, the total Alaska mainline Greenhouse Gas emissions and intensity trend has decreased since 2009 and future goals have been set to continue reducing emissions intensity\. More broadly, we know that being responsible for our impact is a critical part of delivering value for all those who depend on us – employees, communities, guests, and owners – over the long term\. To that end, we focused on addressing the breadth of our most significant environmental impact across emissions and waste, as well as important social impacts\. Alaska Airlines leads the industry in inflight recycling and has reduced waste to landfill by over 15,000 tons over the past decade\. In 2018 we were the first US airlines to remove plastic straws and stir sticks from our aircraft and in 2019, we launched a campaign called \#FillBeforeYouFly to engage our employees and guests in reducing plastic waste\. For more details on Alaska’s emission reductions programs as well as status on other key environmental initiatives, see Alaska’s annual Sustainability Reports and environmental performance metrics on our website,

www\.flysustainably\.com/reports\. The information contained on our sustainability website is not a part of this annual report on Form 10\-K\.

Although we do not currently anticipate that specific environmental regulation will have a material effect on our financial condition, results of operations or cash flows, new regulations or compliance issues that we do not currently anticipate could have the potential to harm our financial condition, results of operations or cash flows in future periods\.

INSURANCE

We carry insurance of types customary in the airline industry and in amounts deemed adequate to protect our interests and property and to comply both with federal regulations and certain credit and lease agreements\. The insurance policies principally provide coverage for Airline Hull, Spares and Comprehensive Legal Liability, War and Allied Perils, and Workers’ Compensation\. In addition, we currently carry a Cyber Insurance policy in the event of security breaches from malicious parties\.

We believe that our emphasis on safety and our state\-of\-the\-art flight deck safety technology help to control the cost of our insurance\.

WHERE YOU CAN FIND MORE INFORMATION

Our filings with the Securities and Exchange Commission, including our annual report on Form 10\-K, quarterly reports on Form 10\-Q, current reports on Form 8\-K and amendments to those reports are available on our website at  www\.alaskaair\.com,  free of charge, as soon as reasonably practicable after the electronic filing of these reports with the Securities and Exchange Commission\. The information contained on our website is not a part of this annual report on Form 10\-K\.

GLOSSARY OF TERMS

Aircraft Utilization  \- block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length  \- represents the average miles flown per aircraft departure

ASMs  \- available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM  \- operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex  \- operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non\-fuel operating costs since fuel is largely out of our control

Debt\-to\-capitalization ratio  \- represents adjusted debt (long\-term debt plus capitalized operating lease liabilities) divided by total equity plus adjusted debt

Diluted Earnings per Share  \- represents earnings per share (EPS) using fully diluted shares outstanding

Diluted Shares  \- represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

18


Annual Report of Southwest Airlines Co\. for year 2019

The consolidated periodic postretirement benefit cost for the years ended  December 31, 2019 ,  2018 , and  2017 , included the following:

|                                          |             |          |          |
| ---------------------------------------- | ----------- | -------- | -------- |
| **(in millions)**                        | **2019**    | **2018** | **2017** |
| Service cost                             | $17         | $18      | $18      |
| Interest cost                            | 10          | 9        | 11       |
| Amortization of prior service cost       | 1           | 3        | 3        |
| Amortization of net gain                 | (2

) | —        | —        |
| Net periodic postretirement benefit cost | $26         | $30      | $32      |

Service cost is recognized within Salaries, wages, and benefits expense, and all other costs are recognized in Other (gains) losses, net in the Consolidated Statement of Income\. Unrecognized prior service cost is expensed using a straight\-line amortization of the cost over the average future service of Employees expected to receive benefits under the plans\. Actuarial gains are amortized utilizing the minimum amortization method\. The following actuarial assumptions were used to account for the Company’s postretirement benefit plans at  December 31,  2019 ,  2018 , and  2017 :

|                                        |          |          |          |
| -------------------------------------- | -------- | -------- | -------- |
|                                        | **2019** | **2018** | **2017** |
| Weighted\-average discount rate        | 3\.30%   | 4\.35%   | 3\.65%   |
| Assumed healthcare cost trend rate (a) | 7\.13%   | 7\.13%   | 7\.08%   |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | The assumed healthcare cost trend rate is expected to be   6\.79%  for  2020 , then decline gradually to   5\.19%  by  2027  and remain level thereafter\. |

The selection of a discount rate is made annually and is selected by the Company based upon comparison of the expected future cash flows associated with the Company’s future payments under its consolidated postretirement obligations to a yield curve created using high quality bonds that closely match those expected future cash flows\. This rate decreased during  2019  due to market conditions\. The assumed healthcare trend rate is also reviewed at least annually and is determined based upon both historical experience with the Company’s healthcare benefits paid and expectations of how those trends may or may not change in future years\.

105


Annual Report of Southwest Airlines Co\. for year 2017

|                                         |                       |                                                                                |                                                               |                                                           |
| --------------------------------------- | --------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------------------- | --------------------------------------------------------- |
|                                         |                       | **Fair value measurements at reporting date using:**                           | **Fair value measurements at reporting date using:**          | **Fair value measurements at reporting date using:**      |
|                                         |                       | **Quoted prices in**

**active markets**

**for identical assets** | **Significant**

**other observable**

**inputs** | **Significant**

**unobservable**

**inputs** |
| **Description**                         | **December 31, 2016** | **(Level 1)**                                                                  | **(Level 2)**                                                 | **(Level 3)**                                             |
| **Assets**                              | (in millions)         | (in millions)                                                                  | (in millions)                                                 | (in millions)                                             |
| Cash equivalents                        |                       |                                                                                |                                                               |                                                           |
| Cash equivalents (a)                    | $1,344                | $1,344                                                                         | $—                                                            | $—                                                        |
| Commercial paper                        | 325                   | —                                                                              | 325                                                           | —                                                         |
| Certificates of deposit                 | 11                    | —                                                                              | 11                                                            | —                                                         |
| Short\-term investments:                |                       |                                                                                |                                                               |                                                           |
| Treasury bills                          | 1,345                 | 1,345                                                                          | —                                                             | —                                                         |
| Certificates of deposit                 | 280                   | —                                                                              | 280                                                           | —                                                         |
| Fuel derivatives:                       |                       |                                                                                |                                                               |                                                           |
| Swap contracts (c)                      | 42                    | —                                                                              | 42                                                            | —                                                         |
| Option contracts (b)                    | 239                   | —                                                                              | —                                                             | 239                                                       |
| Option contracts (c)                    | 163                   | —                                                                              | —                                                             | 163                                                       |
| Other available\-for\-sale securities   | 83                    | 83                                                                             | —                                                             | —                                                         |
| **Total assets**                        | $3,832                | $2,772                                                                         | $658                                                          | $402                                                      |
| **Liabilities**                         |                       |                                                                                |                                                               |                                                           |
| Fuel derivatives:                       |                       |                                                                                |                                                               |                                                           |
| Swap contracts (c)                      | $(110)                | $—                                                                             | $(110)                                                        | $—                                                        |
| Option contracts (b)                    | (96)                  | —                                                                              | —                                                             | (96)                                                      |
| Option contracts (c)                    | (564)                 | —                                                                              | —                                                             | (564)                                                     |
| Interest rate derivatives (see Note 10) | (35)                  | —                                                                              | (35)                                                          | —                                                         |
| **Total liabilities**                   | $(805)                | $—                                                                             | $(145)                                                        | $(660)                                                    |

(a) Cash equivalents are primarily composed of money market investments\.

(b) In the Consolidated Balance Sheet amounts are presented as a net asset\. See Note 10\.

(c) In the Consolidated Balance Sheet amounts are presented as a net liability\. See Note 10\.

The Company had no transfers of assets or liabilities between any of the above levels during the years ended December 31, 2017 or 2016\. The Company did not have any assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2017 or 2016\. The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for 2017 and 2016:

102


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

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

Contract Balances

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

|                           |                   |                   |
| ------------------------- | ----------------- | ----------------- |
|                           | **December 31,**  | **December 31,**  |
|                           | **2019**          | **2018**          |
|                           | **(in millions)** | **(in millions)** |
| Loyalty program liability | $8,615            | $8,539            |
| Air traffic liability     | 4,808             | 4,339             |
| Total                     | $13,423           | $12,878           |

The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co\-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue)\.Changes in loyalty program liability are as follows (in millions):

|                                     |                 |
| ----------------------------------- | --------------- |
| Balance at December 31, 2018        | $8,539          |
| Deferral of revenue                 | 3,438           |
| Recognition of revenue  ^(1)^       | (3,362

) |
| Balance at December 31, 2019  ^(2)^ | $8,615          |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Principally relates to revenue recognized from the redemption of mileage credits for both air and non\-air travel awards\. Mileage credits are combined in one homogenous pool and are not separately identifiable\. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every   18 months \. As of  December 31, 2019 , American’s current loyalty program liability was   $3\.2 billion  and represents American’s current estimate of revenue expected to be recognized in the next 12 months based on historical trends, with the balance reflected in long\-term loyalty program liability expected to be recognized as revenue in periods thereafter\. |

The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel\. The balance in American’s air traffic liability also fluctuates with seasonal travel patterns\. The contract duration of passenger tickets is   one year \. Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months\. For  2019 ,   $3\.3 billion  of revenue was recognized in passenger revenue that was included in American’s air traffic liability at  December 31, 2018 \.

With respect to contract receivables, reflected as accounts receivable, net on the accompanying consolidated balance sheets, these primarily include receivables for tickets sold to individual passengers through the use of major credit cards\. These receivables are short\-term, mostly settled within   seven days  after sale\. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts\.

(l) Maintenance, Materials and Repairs

Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists\.

(m) Selling Expenses

Selling expenses include credit card fees, commissions, computerized reservations systems fees and advertising\. Selling expenses associated with passenger revenue are expensed when the transportation or service is provided\. Advertising costs are expensed as incurred\. Advertising expense was   $129 million ,   $128 million  and   $135 million  for the years ended  December 31, 2019 ,  2018  and  2017 , respectively\.

128


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

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

**Number** | **Description**                                                                                |
| 10\.41                        | [Amendment No\. 9, dated as of September 23, 2015, to the A320 Family Aircraft Purchase Agreement, dated as of July 20, 2011, between American Airlines, Inc\. and Airbus S\.A\.S\. (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515351246/d14219dex103.htm) \*                                                                                |
| 10\.42                        | [Amendment No\. 10, dated as of July 16, 2018, to the A320 Family Aircraft Purchase Agreement, dated as of July 20, 2011, between American Airlines, Inc\. and Airbus S\.A\.S\. (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2018 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000039/ex10210qq318.htm) \*                                                                                |
| 10\.43                        | [Purchase Agreement No\. 03735, dated as of February 1, 2013, between American Airlines, Inc\., and The Boeing Company (incorporated by reference to Exhibit 10\.7 to AMR’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620113000040/d516424dex107.htm) \*                                                                                |
| 10\.44                        | [Supplemental Agreement No\. 1, dated as of April 15, 2013, to Purchase Agreement No\. 03735 between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.1 to AMR’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620113000067/d567093dex101.htm) \*                                                                                |
| 10\.45                        | [Supplemental Agreement No\. 2, dated as of March 6, 2015, to Purchase Agreement No\. 03735 between American Airlines, Inc\. and The Boeing Company, dated as of February 1, 2013\. Relating to Boeing Model 737 MAX Aircraft, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515145178/d900175dex101.htm) \* |
| 10\.46                        | [Supplemental Agreement No\. 3, dated as of May 22, 2015, to Purchase Agreement No\. 03735 between American Airlines, Inc\. and The Boeing Company, dated as of February 1, 2013\. Relating to Boeing Model 737 MAX Aircraft, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515261937/d945812dex103.htm) \*   |
| 10\.47                        | [Letter Agreement, dated as of January 14, 2016, to Purchase Agreement No\. 03735 between American Airlines, Inc\. and The Boeing Company, dated as of February 1, 2013\. Relating to Boeing Model 737 MAX Aircraft, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516551225/d164093dex102.htm) \*           |
| 10\.48                        | [Supplemental Agreement No\. 4, dated as of June 6, 2016, to Purchase Agreement No\. 03735 dated as of February 1, 2016, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516654354/d204187dex103.htm) \*                                                                                |
| 10\.49                        | [Supplemental Agreement No\. 5, dated as of August 8, 2016, to Purchase Agreement No\. 03735 dated as of February 1, 2013, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516742263/d247546dex102.htm) \*                                                                                |
| 10\.50                        | [Supplemental Agreement No\. 6, dated as of November 15, 2016, to Purchase Agreement No\. 03735 dated as of February 1, 2013, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.33 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517051216/d286458dex1033.htm) \*                                                                                |
| 10\.51                        | [Supplemental Agreement No\. 7, dated as of March 2, 2017, to Purchase Agreement No\. 03735 dated as of February 1, 2013, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex101.htm) \*                                                                                |
| 10\.52                        | [Supplemental Agreement No\. 8, dated as of December 7, 2017, to Purchase Agreement No\. 03735 dated as of February 1, 2013, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.45 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000009/ex104510k2017.htm) \*                                                                                |
| 10\.53                        | [Supplemental Agreement No\. 9, dated as of April 6, 2018, to Purchase Agreement No\. 03735 dated as of February 1, 2013, by and between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2018 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000027/ex10210qq218.htm) \*                                                                                |
| 10\.54                        | [Consent Agreement, dated as of October 5, 2015, between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), American Airlines, Inc\. and Airbus S\.A\.S\. (incorporated by reference to Exhibit 10\.98 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516474605/d78287dex1098.htm) \*                                                                                |
| 10\.55                        | [Supplemental Executive Retirement Program for Officers of American Airlines, Inc\., as amended and restated as of January 1, 2005 (incorporated by reference to Exhibit 10\.127 to AMR’s Annual Report on Form 10\-K for the year ended December 31, 2008 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620109000009/ex10127.htm) †                                                                                |
| 10\.56                        | [Trust Agreement Under Supplemental Retirement Program for Officers of American Airlines, Inc\., as amended and restated as of June 1, 2007 (incorporated by reference to Exhibit 10\.128 to AMR’s Annual Report on Form 10\-K for the year ended December 31, 2008 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620109000009/ex10128.htm) †                                                                                |

196


Annual Report of Southwest Airlines Co\. for year 2019

Aggregated information regarding the Company’s RSUs and PBRSUs is summarized below:

|                                         |                                |                                |                                                                |
| --------------------------------------- | ------------------------------ | ------------------------------ | -------------------------------------------------------------- |
|                                         | **All Restricted Stock Units** | **All Restricted Stock Units** | **All Restricted Stock Units**                                 |
|                                         | **Units (000)**                |                                | **Wtd\. Average**

**Fair Value**

**(per share)** |
| Outstanding December 31, 2016           | 1,439                          |                                | $36\.52                                                        |
| Granted                                 | 717                            | (a)                            | 52\.73                                                         |
| Vested                                  | (806

)                  |                                | 30\.23                                                         |
| Surrendered                             | (56

)                   |                                | 43\.86                                                         |
| Outstanding December 31, 2017           | 1,294                          |                                | 45\.32                                                         |
| Granted                                 | 782                            | (b)                            | 60\.80                                                         |
| Vested                                  | (670

)                  |                                | 45\.11                                                         |
| Surrendered                             | (64

)                   |                                | 47\.05                                                         |
| Outstanding December 31, 2018, Unvested | 1,342                          |                                | 52\.56                                                         |
| Granted                                 | 994                            | (c)                            | 57\.49                                                         |
| Vested                                  | (744

)                  |                                | 42\.42                                                         |
| Surrendered                             | (47

)                   |                                | 57\.72                                                         |
| Outstanding December 31, 2019, Unvested | 1,545                          |                                | 57\.65                                                         |

(a) Includes   235 thousand  PBRSUs

(b) Includes   308 thousand  PBRSUs

(c) Includes   387 thousand  PBRSUs

In addition, the Company granted approximately   31 thousand  shares of unrestricted stock at a weighted average grant price of   $52\.01  in  2019 , approximately   28 thousand  shares at a weighted average grant price of   $53\.01  in  2018 , and approximately   26 thousand  shares at a weighted average grant price of   $57\.04  in  2017 , to members of its Board of Directors\.

A remaining balance of up to   20 million  shares of the Company’s common stock may be issued pursuant to grants under the 2007 Equity Plan\.

Employee Stock Purchase Plan

Under the Amended and Restated 1991 Employee Stock Purchase Plan ("ESPP"), which has been approved by Shareholders, the Company is authorized to issue up to a remaining balance of   7 million  shares of the Company’s common stock to Employees of the Company\. These shares may be issued at a price equal to   90 percent  of the market value at the end of each monthly purchase period\. Common stock purchases are paid for through periodic payroll deductions\.

The following table provides information about the Company’s ESPP activity during  2019 ,  2018 , and  2017 :

|                                  |                                  |                                  |                                  |
| -------------------------------- | -------------------------------- | -------------------------------- | -------------------------------- |
| **Employee Stock Purchase Plan** | **Employee Stock Purchase Plan** | **Employee Stock Purchase Plan** | **Employee Stock Purchase Plan** |
|                                  |                                  |                                  | (a)                              |
|                                  | **Total number**                 |                                  | **Weighted\-average**            |
|                                  | **of shares**                    | **Average**                      | **fair value of each**           |
|                                  | **purchased**                    | **price paid**                   | **purchase right**               |
| **Year ended**                   | (in thousands)                   | **per share**                    | **under the ESPP**               |
| December 31, 2017                | 544                              | $50\.13                          | $5\.57                           |
| December 31, 2018                | 661                              | $50\.73                          | $5\.64                           |
| December 31, 2019                | 821                              | $47\.60                          | $5\.29                           |

(a) The weighted\-average fair value of each purchase right under the ESPP granted is equal to a   ten  percent discount from the market value of the Common Stock at the end of each monthly purchase period\.

91


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

AAG’s and American’s independent registered public accounting firm has issued an attestation report on the effectiveness of AAG’s and American’s internal control over financial reporting\. That report has been included herein\.

171


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

Retirement of Repurchased Shares

We immediately retire shares repurchased pursuant to our share repurchase program\. We allocate the share purchase price in excess of par value between additional paid\-in capital and retained earnings\.

Manufacturers' Credits

We periodically receive credits in connection with the acquisition of aircraft and engines\. These credits are deferred until the aircraft and engines are delivered, and then applied as a reduction to the cost of the related equipment\.

Maintenance Costs

We record maintenance costs to aircraft maintenance materials and outside repairs\. Maintenance costs are expensed as incurred, except for costs incurred under power\-by\-the\-hour contracts, which are expensed based on actual hours flown\. Power\-by\-the\-hour contracts transfer certain risk to third\-party service providers and fix the amount we pay per flight hour to the service provider in exchange for maintenance and repairs under a predefined maintenance program\. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining estimated useful life of the asset or the remaining lease term, whichever is shorter\.

Advertising Costs

We expense advertising costs in passenger commissions and other selling expenses in the year the advertising first takes place\. Advertising expense was   $267 million ,   $273 million  and   $267 million  for the years ended  December 31, 2018 ,  2017  and  2016 , respectively\.

Commissions

Passenger sales commissions are recognized in operating expense when the related revenue is recognized\.

 64


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

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

Deferred Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes\. The following table shows significant components of our deferred tax assets and liabilities:

|                                             |                  |                  |
| ------------------------------------------- | ---------------- | ---------------- |
|                                             | **December 31,** | **December 31,** |
| **(in millions)**                           | **2017**         | **2016**         |
| **Deferred tax assets:**                    |                  |                  |
| Net operating loss carryforwards            | $1,440           | $2,485           |
| Pension, postretirement and other benefits  | 2,545            | 5,259            |
| Alternative minimum tax credit carryforward | 379              | 379              |
| Deferred revenue                            | 1,024            | 1,544            |
| Other                                       | 746              | 1,075            |
| Valuation allowance                         | (19

)     | (40

)     |
| Total deferred tax assets                   | $6,115           | $10,702          |
| **Deferred tax liabilities:**               |                  |                  |
| Depreciation                                | $3,936           | $5,701           |
| Intangible assets                           | 1,070            | 1,691            |
| Other                                       | 174              | 246              |
| Total deferred tax liabilities              | $5,180           | $7,638           |
| Net deferred tax assets                     | $935             | $3,064           |

At  December 31, 2017 , we had   $379 million  of federal alternative minimum tax credit carryforwards\. As a result of the Tax Cuts and Jobs Act of 2017, this credit becomes refundable to us if not used by 2021\. We have   $5\.1 billion  of federal pre\-tax net operating loss carryforwards, which will not begin to expire until  2027 \.

Income Tax Allocation

We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations (the "Income Tax Allocation")\. At the end of 2017, the Tax Cut and Jobs Act of 2017 reduced the statutory tax rate in the U\.S\. from  35%  to  21% \. GAAP requires that the tax expense related to tax law changes be recognized in current earnings, even when a portion of the related deferred tax asset originated through amounts recognized in AOCI\. As a result,   $700 million  of income tax expense remains in AOCI, primarily related to pension obligations, and will not be recognized in net income until the pension obligations are fully extinguished, which will not occur for approximately   25  years\.

Other

The amount of, and changes to, our uncertain tax positions were not material in any of the years presented\. We are currently under audit by the IRS for the 2017, 2016 and 2015 tax years\.

 83


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

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

regulation or policy for any of the Company's international routes, such as Open Skies, could have a material adverse impact on the Company's financial condition and operating results and could result in the impairment of material amounts of related tangible and intangible assets\. In addition, competition from revenue\-sharing JBAs and other alliance arrangements by and among other airlines could impair the value of the Company's business and assets on the Open Skies routes\. The Company's plans to enter into or expand U\.S\. antitrust immunized alliances and JBAs on various international routes are subject to receipt of approvals from applicable U\.S\. federal authorities and obtaining other applicable foreign government clearances or satisfying the necessary applicable regulatory requirements\. There can be no assurance that such approvals and clearances will be granted or will continue in effect upon further regulatory review or that changes in regulatory requirements or standards can be satisfied\.

See Part I, Item 1\. Business—Industry Regulation, of this report for additional information on government regulation impacting the Company\.

We are subject to many forms of environmental regulation and liability and risks associated with climate change, and may incur substantial costs as a result\.

Many aspects of the Company's operations are subject to increasingly stringent federal, state, local and international laws protecting the environment, including those relating to emissions to the air, water discharges, safe drinking water and the use and management of hazardous materials and wastes\. Compliance with existing and future environmental laws and regulations can require significant expenditures and violations can lead to significant fines and penalties\. In addition, from time to time we are identified as a responsible party for environmental investigation and remediation costs under applicable environmental laws due to the disposal of hazardous substances generated by our operations\. We could also be subject to environmental liability claims from various parties, including airport authorities, related to our operations at our owned or leased premises or the off\-site disposal of waste generated at our facilities\.

We may incur substantial costs as a result of changes in weather patterns due to climate change\. Increases in the frequency, severity or duration of severe weather events such as thunderstorms, hurricanes, flooding, typhoons, tornados and other severe weather events could result in increases in delays and cancellations, turbulence\-related injuries and fuel consumption to avoid such weather, any of which could result in significant loss of revenue and higher costs\.

To mitigate climate change risks, CORSIA has been developed by ICAO, a UN specialized agency\. CORSIA is intended to create a single global market\-based measure to achieve carbon\-neutral growth for international aviation after 2020 through airline purchases of carbon offset credits\. Certain CORSIA program details remain to be developed and could potentially be affected by political developments in participating countries or the results of the pilot phase of the program, and thus the impact of CORSIA cannot be fully predicted\. However, CORSIA is expected to result in increased operating costs for airlines that operate internationally, including the Company\.

In addition to CORSIA, the EPA has begun preliminary work to adopt its own aircraft engine GHG emission standards, which were expected to be aligned with recent ICAO carbon dioxide emission standards\. The timing of any U\.S\. EPA aircraft engine GHG emission standards is currently unknown, but some jurisdictions in which United operates have adopted or are considering GHG emission reduction initiatives, which could impact various aspects of the Company's business\. The precise nature of future requirements and their applicability to the Company are difficult to predict, but the financial impact to the Company and the aviation industry would likely be adverse and could be significant\.

See Part I, Item 1\. Business—Industry Regulation—Environmental Regulation, of this report for additional information on environmental regulation impacting the Company\.

The United Kingdom's withdrawal from the EU may adversely impact our operations in the United Kingdom and elsewhere\.

In June 2016, United Kingdom ("UK") voters approved an advisory referendum for the UK to exit the EU\. The UK parliament voted in favor of allowing the government to commence negotiations to determine the future terms of the UK's relationship with the EU, including the terms of trade between the UK and the EU and other nations\. On January 31, 2020, the UK withdrew from the EU, and started a transition period that will potentially run through December 31, 2020\. The nature and terms of the UK's relationship with the EU after the transition period remain uncertain\.

In connection with a UK exit from the EU, we could face new challenges in our operations, such as instability in global financial and foreign exchange markets\. This instability could result in market volatility, including in the value of the British pound and European euro, additional travel restrictions on passengers traveling between the UK and other EU countries, changes to the legal status of EU\-resident employees, legal uncertainty and divergent national laws and regulations\. At this time, we cannot predict the impact that the UK's exit from the EU will have on our business generally and our UK and

20


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

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

Other Financial and Statistical Data (Unaudited)

|                                                |                             |                             |                             |                             |                             |
| ---------------------------------------------- | --------------------------- | --------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
| **Consolidated** **^(1)^**                     | **2017**                    | **2016**                    | **2015**                    | **2014**                    | **2013**                    |
| Revenue passenger miles (in millions)          | 217,712                     | 213,098                     | 209,625                     | 202,925                     | 194,988                     |
| Available seat miles (in millions)             | 254,325                     | 251,867                     | 246,764                     | 239,676                     | 232,740                     |
| Passenger mile yield                           | 15\.99¢                     | 15\.85¢                     | 16\.59¢                     | 17\.22¢                     | 16\.89¢                     |
| Passenger revenue per available seat mile      | 13\.69¢                     | 13\.41¢                     | 14\.10¢                     | 14\.58¢                     | 14\.15¢                     |
| Total revenue per available seat mile          | 16\.22¢                     | 15\.74¢                     | 16\.50¢                     | 16\.84¢                     | 16\.23¢                     |
| Operating cost per available seat mile         | 13\.81¢                     | 12\.98¢                     | 13\.33¢                     | 15\.92¢                     | 14\.77¢                     |
| Passenger load factor                          | 85\.6%                      | 84\.6%                      | 84\.9%                      | 84\.7%                      | 83\.8%                      |
| Fuel gallons consumed (in millions)            | 4,032                       | 4,016                       | 3,988                       | 3,893                       | 3,828                       |
| Average price per fuel gallon ^(2)^            | $1\.68                      | $1\.49                      | $1\.90                      | $3\.47                      | $3\.00                      |
| Full\-time equivalent employees, end of period | 86,564                      | 83,756                      | 82,949                      | 79,655                      | 77,755                      |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Includes the operations of our regional carriers under capacity purchase agreements\. Full\-time equivalent employees exclude employees of regional carriers that we do not own\. |

|       |                                                                           |
| ----- | ------------------------------------------------------------------------- |
| ^(2)^ | Includes the impact of fuel hedge activity and refinery segment results\. |

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