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

***Shareholder Return***

In 2018, we paid cash dividends of $158 million and repurchased 776,186 shares of our common stock for $50 million under the $1 billion share repurchase program authorized by our Board of Directors in August 2015\. As of December 31, 2018, the Company has repurchased approximately 6 million shares for $438 million under this program\.

Since 2007, we have repurchased 61 million shares of common stock for $1\.6 billion for an average price of approximately $27\.20 per share\. In 2018, we increased our quarterly dividend 7% from $0\.30 per share to $0\.32 per share, and, subsequent to December 31, 2018, we announced a 9% increase to $0\.35 per share for 2019\. Overall, we returned $208 million to shareholders during 2018\. We expect to continue to return capital to shareholders in 2019, primarily in the form of dividends\.

***Labor Update***

In July 2018, Alaska dispatchers, represented by TWU, ratified a merger transition agreement\. And, in the third quarter, our pilots finalized their integrated seniority list\. As a result, all Mainline groups except for aircraft technicians, are now under a single collective bargaining agreement and have an integrated seniority list\. Additionally, we are currently in negotiations with IAM, who represent our clerical, office and passenger service employees as well as our ramp and stores agents\. We are optimistic that we will reach a long\-term agreement with this work group early in 2019\.

***Other***

In April, we entered into an agreement to lease 12 airport slots at LaGuardia Airport (LGA) and eight airport slots at Reagan National Airport (DCA) to another carrier\. The lease began in October 2018 and continues through 2028\. This agreement enables us to monetize these valuable slots, and reallocate flying from Dallas Love Field (DAL) to more strategic and profitable opportunities on the West Coast\. We maintain the right to resume flying using these slots, should we choose to do so, in 2028 when the agreement expires, or if perimeter restrictions change\.

On August 10, 2018, one of our Q400 aircraft was taken without authorization by an employee from Sea\-Tac International Airport\. The aircraft crashed in a remote area south of the airport, resulting in the loss of life of the individual flying the aircraft\. There were no other fatalities and no ground structures were involved at the crash site\. The loss of the aircraft is a fully insured event with no deductibles\. Air Group's aviation insurance program is secured with a number of highly rated insurers on quota share programs\. Presenting a claim to all insurers on the programs commenced only after the aircraft wreckage was released from governmental authorities in late September 2018\. The FBI concluded their investigation in November 2018\. We are currently working with insurers to finalize our claim and expect to receive proceeds in the first half of 2019\.

***Outlook***

In 2019 and beyond, we are focused on completing our integration of Boeing and Airbus operations and realizing the full synergies from the merger\. We are investing in our people through an all\-employee workshop called Flight Path so that we can have face\-to\-face conversations between leaders and our employees and come together as one team\. We know our people are our greatest competitive advantage and that investment, along with investments in our product, will allow us to continue to be recognized in the industry as one of the best in customer satisfaction\.

In 2019, some of the more notable guest experience enhancement projects underway include adding high\-speed satellite connectivity to our entire Boeing and Airbus fleets, further upgrades to our onboard menu offerings, updating and expanding airport lounges, and working with the Port of Seattle to open a state\-of\-the\-art 20\-gate North Satellite Concourse at Sea\-Tac Airport\. We also have begun the retrofit of our Airbus fleet, which will allow us to align the product across both Mainline aircraft platforms\.

We have also announced new revenue initiatives that are competitively driven and incremental to our expected merger synergies\. In Fall 2018 we introduced a new option for our guests called the "Saver Fare," a low\-fare product which we believe will result in incremental annual revenue of approximately $100 million in 2019\. In addition, we have implemented a series of other revenue initiatives that we expect to add $50 million of revenue in 2019, such as offering exit rows for sale, introducing demand\-based pricing for our premium class seats, leveraging new technology to better manage revenue post\-sale, and eliminating fee waivers for changes made outside of 60 days\. Furthermore, we announced an increase in our checked bag fees which is also expected to add approximately $50 million of incremental revenue in 2019, bringing the expected total of new revenue initiatives to $200 million\. We believe these changes provide guests with more options and reflect the significant increase in the value of our expanded network and product\.

 33


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

![deltacra01a01a01a02a30\.jpg](http://ir.delta.com/deltacra01a01a01a02a30.jpg)

A LETTER FROM OUR CEO TO OUR SHAREHOLDERS

Dear Delta shareholder:

Delta Air Lines had a strong year on many fronts in 2017, delivering solid results for our employees, customers and owners, while also making significant investments in Delta’s future\. We generated more than $5 billion in pre\-tax income for the third consecutive year despite a number of challenges, including major weather events and a 12\-hour power outage at our Atlanta hub\. Through it all, Delta people provided our customers the very best service in the industry \- showing that they are our greatest asset\.

Our top financial priority in 2017 was to return the business to unit revenue growth\. We took a number of actions to drive this result, including capping our capacity growth at 1% for the year\. We also made investments in our product and people that are contributing to higher net promoter scores, demonstrating better customer satisfaction and a sustainable revenue premium\. We enter 2018 with the best revenue momentum in years\. Domestic demand and yields remain robust and global economies are rebounding, allowing us to resume growth in our international business\.

Limiting our capacity growth helped produce revenue momentum, but it also created heightened pressure on our unit costs\. Costs were further pressured by product investments, weather and accelerated depreciation on aircraft exiting our fleet\. These impacts combined for unsustainable unit cost growth in 2017, and we are determined to change this trajectory in 2018\. Our 2018 fleet additions are set to deliver some of the greatest efficiency gains in Delta’s history\. In addition, we have started a company\-wide project to drive productivity by better leveraging our scale and rethinking the way we do business\.

In recent years, we have invested more than $2 billion in partnerships with some of the finest airlines in the world\. These strong relationships allow us to offer more choices to our customers and expand globally in a more capital efficient way\. In 2017 alone, we acquired a 10% stake in Air France\-KLM, acquired a 49% stake in Grupo Aeroméxico and announced plans for joint ventures with Korean Air and WestJet\. With these investments made, we have built the foundation to produce hundreds of millions of dollars in benefits in the coming years from serving some of the largest and fastest growing markets in the world\.

As we look to 2018 and beyond, our focus is on delivering sustainable financial results by leveraging our five key competitive differentiators:

Our People and Culture  \- Our culture is the foundation of every decision we make at Delta and the key to every other competitive advantage that we have built\. Ensuring that the incentives of our people are aligned with those of our customers and shareholders is vital to our success, which is why we are proud to offer our people one of the most generous profit\-sharing programs of any company\. Since we started our profit sharing program in 2007, it has paid out more than $6 billion, including at least $1 billion for each of the past four years\. Our culture is also one of giving back to the communities we serve \- in 2017 we contributed over $40 million as part of our annual commitment to give 1 percent of net income to key charitable organizations\.

Our Industry\-Leading Operational Reliability  \- We are constantly focused on ways to run a better, more reliable, customer\-focused airline\. We have made significant investments in our business and currently run the best operation in the global industry \- in 2017 we ran 242 days without cancelling any mainline flights, including 90 days with no system cancellations on the entire Delta platform \- a 10% increase from 2016\. These results led to Delta’s recognition by  FlightGlobal  as the most on\-time global airline \- the first time a U\.S\. airline has earned this award\.

Our Network  \- Our domestic network combines a focus on the most desirable markets with a balanced footprint between East and West coasts, and is optimally structured to capture premium revenue\. Delta holds approximately 60% share in our four interior hubs (Atlanta, Minneapolis, Detroit and Salt Lake City), allowing us to take advantage of scale economies\. We have also streamlined our international network with a focus on major and developing markets around the world through global partnerships\. We are achieving many of the benefits of cross\-border cooperation for our customers and our owners, with strong alliances in Europe, Latin America, Asia, Australia and Canada\.


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

**AMERICAN AIRLINES GROUP INC\.**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**(In millions)**

|                                                            |                             |                             |                             |
| ---------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                            | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                            | **2018**                    | **2017**                    | **2016**                    |
| **Net income**                                             | $1,412                      | $1,282                      | $2,584                      |
| **Other comprehensive income (loss), net of tax:**         |                             |                             |                             |
| Pension, retiree medical and other postretirement benefits | (117)                       | (70)                        | (358)                       |
| Investments                                                | (3)                         | (1)                         | 7                           |
| **Total other comprehensive loss, net of tax**             | (120)                       | (71)                        | (351)                       |
| **Total comprehensive income**                             | $1,292                      | $1,211                      | $2,233                      |

See accompanying notes to consolidated financial statements\.

82


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

Income Taxes

We account for deferred income taxes under the liability method\. We recognize deferred tax assets and liabilities based on the tax effects of temporary differences between the financial statement and tax basis of assets and liabilities, as measured by current enacted tax rates\. Deferred tax assets and liabilities are net by jurisdiction and are recorded as noncurrent on the balance sheet\.

We have elected to recognize earnings of foreign affiliates that are determined to be global intangible low tax income in the period it arises and do not recognize deferred taxes for basis differences that may reverse in future years\.

A valuation allowance is recorded to reduce deferred tax assets when necessary\. We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets\. We establish valuation allowances if it is not likely we will realize our deferred income tax assets\. In making this determination, we consider all available positive and negative evidence and make certain assumptions\. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results and tax planning strategies\.

Fuel Card Obligation

We have a purchasing card with American Express for the purpose of buying jet fuel and crude oil\. The card currently carries a maximum credit limit of $1\.1 billion and must be paid monthly\. At December 31, 2019 and 2018, we had $736 million and $1\.1 billion outstanding on this purchasing card, respectively, and the activity was classified as a financing activity in our Consolidated Statements of Cash Flows\.

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 related to our fleet in 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 $288 million, $267 million and $273 million for the years ended December 31, 2019, 2018 and 2017, respectively\.

Commissions

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

62


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

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

|          |                                                                                |
| -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.6(a) | [Letter Agreements, dated August 24, 2011, relating to Supplemental Agreement 13 (Filed as Exhibit 10\.2 to Delta's Quarterly Report on Form 10\-Q for the quarter ended September 30, 2011)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000144530511003058/dal9302011ex102.htm) |

|          |                                                                                |
| -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.6(b) | [Letter Agreements, dated December 16, 2015, relating to Supplemental Agreement 17 (Filed as Exhibit 10\.7(b) to Delta’s Annual Report on Form 10\-K for the year ended December 31, 2015)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000002790416000018/dal12312015ex107b.htm) |

|          |                                                                                |
| -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.7(a) | [Aircraft General Terms Agreement, dated October 21, 1997, between Boeing and Delta (Filed as Exhibit 10\.6 to Delta's Quarterly Report on Form 10\-Q for the quarter ended December 31, 1997)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/0001047469-98-035570.txt) |

|          |                                                                                |
| -------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.7(b) | [Letter Agreement, dated August 24, 2011, relating to Revisions to Aircraft General Terms Agreement dated October 21, 1997 and Supplemental Agreement 13 (Filed as Exhibit 10\.3(b) to Delta's Quarterly Report on Form 10\-Q for the quarter ended September 30, 2011)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000144530511003058/dal9302011ex103b.htm) |

|          |                                                                                |
| -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.7(c) | [Letter Agreement, dated December 16, 2015, relating to Revisions to Aircraft General Terms Agreement dated October 21, 1997 and Supplemental Agreement 17 (Filed as Exhibit 10\.8(c) to Delta’s Annual Report on Form 10\-K for the year ended December 31, 2015)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000002790416000018/dal12312015ex108c.htm) |

|          |                                                                                |
| -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| 10\.8(a) | [Airbus A330\-900neo Aircraft and A350\-900 Aircraft Purchase Agreement dated as of November 24, 2014 between Airbus S\.A\.S and Delta Air Lines, Inc\. (Filed as Exhibit 10\.9 to Delta's Annual Report on Form 10\-K for the year ended December 31, 2014)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000002790415000003/dal12312014ex109.htm) |

|          |                                                                                |
| -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.8(b) | [Amendment No\. 3, dated May 10, 2017, to Airbus A330 Aircraft and A350\-900 Aircraft Purchase Agreement dated as of November 24, 2014 between Airbus S\.A\.S\. and Delta Air Lines, Inc\. (“Amendment No\. 3”) (Filed as Exhibit 10\.2(a) to Delta's Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000002790417000013/dal6302017ex102a.htm) |

|          |                                                                                |
| -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| 10\.8(c) | [Letter Agreements, dated May 10, 2017, relating to Amendment No\. 3 (Filed as Exhibit 10\.2(b) to Delta's Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000002790417000013/dal6302017ex102b.htm) |

|          |                                                                                |
| -------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.9(a) | [Airbus A321 Aircraft and A330 Aircraft Purchase Agreement dated as of September 3, 2013 between Airbus S\.A\.S and Delta Air Lines, Inc\., as amended through April 29, 2016 (Filed as Exhibit 10\.1 to Delta's Quarterly Report on Form 10\-Q for the quarter ended June 30, 2016)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000002790416000026/dal6302016ex101.htm) |

|          |                                                                                |
| -------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.9(b) | [Amendment No\. 9, dated May 10, 2017, to Airbus A321 Aircraft and A330 Aircraft Purchase Agreement dated as of September 3, 2013 between Airbus S\.A\.S\. and Delta Air Lines, Inc\. (“Amendment No\. 9”) (Filed as Exhibit 10\.1(a) to Delta's Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000002790417000013/dal6302017ex101a.htm) |

|          |                                                                                |
| -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| 10\.9(c) | [Letter Agreements, dated May 10, 2017, relating to Amendment No\. 9 (Filed as Exhibit 10\.1(b) to Delta's Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017)\.\*/\*\*](http://www.sec.gov/Archives/edgar/data/27904/000002790417000013/dal6302017ex101b.htm) |

|        |                                                                                |
| ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.10 | [Airbus A321neo Aircraft Purchase Agreement dated as of December 15, 2017 between Airbus S\.A\.S and Delta Air Lines, Inc\.\*\*](http://ir.delta.com/dal12312017ex1010.htm) |

|        |                                                                                |
| ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| 10\.11 | [Delta Air Lines, Inc\. Performance Compensation Plan (Filed as Exhibit 10\.2 to Delta's Quarterly Report on Form 10\-Q for the quarter ended June 30, 2016)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000002790416000026/dal6302016ex102.htm) |

|        |                                                                                |
| ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.12 | [Delta Air Lines, Inc\. Officer and Director Severance Plan, as amended and restated as of June 1, 2016 (Filed as Exhibit 10\.3 to Delta's Quarterly Report on Form 10\-Q for the quarter ended June 30, 2016)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000002790416000026/dal6302016ex103.htm) |

|        |                                                                                |
| ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.13 | [Description of Certain Benefits of Members of the Board of Directors and Executive Officers (Filed as Exhibit 10\.11 to Delta's Annual Report on Form 10\- K for the year ended December 31, 2016)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000002790417000004/dal12312016ex1011.htm) |

10\.14(a) [Delta Air Lines, Inc\. 2015 Long Term Incentive Program (Filed as Exhibit 10\.16 to Delta's Annual Report on Form 10\- K for the year ended December 31, 2014)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000002790415000003/dal12312014ex1016.htm)

10\.14(b) [First Amendment to the Delta Air Lines, Inc\. 2015 Long Term Incentive Program\.](http://ir.delta.com/dal12312017ex1014b.htm)

10\.14(c) [Model Award Agreement for the Delta Air Lines, Inc\. 2015 Long Term Incentive Program (Filed as Exhibit 10\.2 to Delta's Quarterly Report on Form 10\-Q for the quarter ended March 31, 2015)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000002790415000006/dal3312015ex102.htm)

 94


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

Financial Condition and Liquidity

We expect to meet our cash needs for the next 12 months with cash flows from operations, cash and cash equivalents, restricted cash equivalents and financing arrangements\. As of December 31, 2019, we had $6\.0 billion in unrestricted liquidity, consisting of $2\.9 billion in cash and cash equivalents and $3\.1 billion in undrawn revolving credit facilities\. During 2019, we used existing cash and cash generated from operations to fund capital expenditures of $4\.9 billion, and return $3\.0 billion to shareholders\.

Sources of Liquidity

Operating Activities

Cash flows from operating activities continue to provide our primary source of liquidity\. We generated cash flows from operations of $8\.4 billion in 2019 and $7\.0 billion in 2018\. We also expect to continue generating cash flows from operations in 2020\.

Our operating cash flows are impacted by the following factors:

Seasonality of Advance Ticket Sales \. We sell tickets for air travel in advance of the customer's travel date\. When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in air traffic liability\. The air traffic liability increases during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months\.

Fuel \. Fuel expense represented approximately 21% of our total operating expenses for 2019\. The market price for jet fuel is volatile, which can impact the comparability of our periodic cash flows from operations\.

Pension Contributions\.  We sponsor defined benefit pension plans for eligible employees and retirees\. These plans are closed to new entrants and are frozen for future benefit accruals\. Our funding obligations for these plans are governed by the Employee Retirement Income Security Act, as modified by the Pension Protection Act of 2006\. We had no minimum funding requirements in 2019\. However, during 2019, we voluntarily contributed $1 billion to these plans\. We contributed $500 million to these plans during 2018\. We have no minimum funding requirements in 2020, but we plan to voluntarily contribute approximately $500 million to these plans\.

Profit Sharing\.  Our broad\-based employee profit sharing program provides that, for each year in which we have an annual pre\-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees\. In determining the amount of profit sharing, the program defines profit as pre\-tax profit adjusted for profit sharing and certain other items\.

We pay profit sharing annually in February\. We paid $1\.3 billion in 2019 and $1\.1 billion in 2018 to our employees in recognition of their contributions toward meeting our financial goals\. During the year ended December 31, 2019, we recorded $1\.6 billion in profit sharing expense based on 2019 pre\-tax profit, which we will pay to employees in February 2020\.

Effective October 1, 2017, we aligned our profit sharing plans under a single formula\. Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2\.5 billion of annual profit and 20% of annual profit above $2\.5 billion\. Prior to that time, the profit sharing program for pilots used this formula but in the first nine months of 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit and, if we exceeded our prior\-year results, the program paid 20% of the year\-over\-year increase in profit to eligible employees\.

37


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

**AMERICAN AIRLINES, INC\.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY**

**(In millions)**

|                                                                                |                             |                                                       |                                                                           |                                                       |           |
| ----------------------------------------------------------------------------------------------------- | --------------------------- | ----------------------------------------------------- | ------------------------------------------------------------------------- | ----------------------------------------------------- | --------- |
|                                                                                | **Common**

**Stock** | **Additional**

**Paid\-in**

**Capital** | **Accumulated**

**Other**

**Comprehensive**

**Loss** | **Retained**

**Earnings**

**(Deficit)** | **Total** |
| **Balance at December 31, 2015**                                                                      | $—                          | $16,521                                               | $(4,831)                                                                  | $(1,992)                                              | $9,698    |
| Net income                                                                                | —                           | —                                                     | —                                                                         | 2,689                                                 | 2,689     |
| Other comprehensive loss                                                                              | —                           | —                                                     | (351)                                                                     | —                                                     | (351)     |
| Share\-based compensation expense                                                                     | —                           | 100                                                   | —                                                                         | —                                                     | 100       |
| Impact of adoption of Accounting Standards Update (ASU) 2016\-09 related to share\-based compensation | —                           | —                                                     | —                                                                         | 418                                                   | 418       |
| Impact of adoption of ASU 2014\-09 related to revenue recognition (See Note 1(b))                     | —                           | —                                                     | —                                                                         | (3,977)                                               | (3,977)   |
| Intercompany equity transfer                                                                          | —                           | 3                                                     | —                                                                         | —                                                     | 3         |
| **Balance at December 31, 2016**                                                                      | —                           | 16,624                                                | (5,182)                                                                   | (2,862)                                               | 8,580     |
| Net income                                                                                | —                           | —                                                     | —                                                                         | 1,285                                                 | 1,285     |
| Other comprehensive loss                                                                              | —                           | —                                                     | (69)                                                                      | —                                                     | (69)      |
| Share\-based compensation expense                                                                     | —                           | 90                                                    | —                                                                         | —                                                     | 90        |
| Intercompany equity transfer                                                                          | —                           | 2                                                     | —                                                                         | —                                                     | 2         |
| **Balance at December 31, 2017**                                                                      | —                           | 16,716                                                | (5,251)                                                                   | (1,577)                                               | 9,888     |
| Net income                                                                                | —                           | —                                                     | —                                                                         | 1,658                                                 | 1,658     |
| Other comprehensive loss                                                                              | —                           | —                                                     | (119)                                                                     | —                                                     | (119)     |
| Share\-based compensation expense                                                                     | —                           | 86                                                    | —                                                                         | —                                                     | 86        |
| Impact of adoption of ASU 2016\-01 related to financial instruments (See Note 1(b))                   | —                           | —                                                     | —                                                                         | 60                                                    | 60        |
| Impact of adoption of ASU 2016\-02 related to leases (See Note 1(b))                                  | —                           | —                                                     | —                                                                         | 197                                                   | 197       |
| **Balance at December 31, 2018**                                                                      | $—                          | $16,802                                               | $(5,370)                                                                  | $338                                                  | $11,770   |

See accompanying notes to consolidated financial statements\.

134


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

NOTE 11\. SPECIAL ITEMS

In 2019, the Company recognized special items of $44 million for merger\-related costs associated with its acquisition of Virgin America\. Costs classified as merger\-related are directly attributable to merger activities\.

In 2018, the Company recognized $87 million in merger\-related costs\. The Company incurred a one\-time settlement fee of $20 million for the termination of an existing maintenance services agreement and subsequently entered into a new services agreement that provides more flexibility for the timing and scope of engine work\. Additionally, the Company incurred $25 million for one\-time bonuses paid to employees as a result of tax reform\. These charges were recognized as special charges and are included in the Special items \- other line on our consolidated statements of operations\.

In 2017, the Company recognized $116 million in merger\-related costs\. The Company also recognized a special tax benefit of $237 million due to the remeasurement of net deferred tax liabilities as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, partially offset by certain state tax law enactments\.

The Company has recognized $364 million in merger\-related costs since the acquisition of Virgin America in December 2016\.

The following breaks down merger\-related costs incurred in 2019, 2018 and 2017 (in millions):

|                                      |                                      |                                      |      |  |  |  |      |  |  |  |       |
|:------------------------------------ |:------------------------------------ |:------------------------------------ | ----:|:- |:- |:- | ----:|:- |:- |:- | -----:|
|                                      |                                      |                                      | 2019 |  |  |  | 2018 |  |  |  |  2017 |
| Consulting and professional services | Consulting and professional services | Consulting and professional services | $ 18 |  |  |  | $ 45 |  |  |  |  $ 52 |
| Employee\-related costs^(a)^         | Employee\-related costs^(a)^         | Employee\-related costs^(a)^         |   15 |  |  |  |   13 |  |  |  |    41 |
| Legal and accounting fees            | Legal and accounting fees            | Legal and accounting fees            |    1 |  |  |  |    1 |  |  |  |     3 |
| Other merger\-related costs^(b)^     | Other merger\-related costs^(b)^     | Other merger\-related costs^(b)^     |   10 |  |  |  |   28 |  |  |  |    20 |
| Total Merger\-related Costs          | Total Merger\-related Costs          | Total Merger\-related Costs          | $ 44 |  |  |  | $ 87 |  |  |  | $ 116 |

(a) Employee\-related costs consist primarily of vacation balance true\-ups, severance, retention bonuses, and training and skill development\.

(b) Other merger\-related costs consist primarily of costs for marketing and advertising, IT, employee appreciation and company sponsored events, moving expenses, supplies, and other immaterial expenses\.

NOTE 12\. STOCK\-BASED COMPENSATION PLANS

The Company has various equity incentive plans under which it may grant stock awards to directors, officers and employees\. The Company also has an employee stock purchase plan\.

The table below summarizes the components of total stock\-based compensation (in millions):

|                                                  |                                                  |                                                  |      |  |  |  |      |  |  |  |      |
|:------------------------------------------------ |:------------------------------------------------ |:------------------------------------------------ | ----:|:- |:- |:- | ----:|:- |:- |:- | ----:|
|                                                  |                                                  |                                                  | 2019 |  |  |  | 2018 |  |  |  | 2017 |
| Stock options                                    | Stock options                                    | Stock options                                    |  $ 3 |  |  |  |  $ 3 |  |  |  |  $ 3 |
| Stock awards                                     | Stock awards                                     | Stock awards                                     |   21 |  |  |  |   23 |  |  |  |   24 |
| Deferred stock awards                            | Deferred stock awards                            | Deferred stock awards                            |    1 |  |  |  |    1 |  |  |  |    1 |
| Employee stock purchase plan                     | Employee stock purchase plan                     | Employee stock purchase plan                     |   11 |  |  |  |    9 |  |  |  |    6 |
| Stock\-based compensation                        | Stock\-based compensation                        | Stock\-based compensation                        | $ 36 |  |  |  | $ 36 |  |  |  | $ 34 |
| Tax benefit related to stock\-based compensation | Tax benefit related to stock\-based compensation | Tax benefit related to stock\-based compensation |  $ 9 |  |  |  |  $ 9 |  |  |  | $ 13 |

Unrecognized stock\-based compensation for non\-vested options and awards and the weighted\-average period the expense will be recognized (in millions):

|                                        |                                        |                                        |        |  |  |  |                                |                                |
|:-------------------------------------- |:-------------------------------------- |:-------------------------------------- | ------:|:- |:- |:- | ------------------------------:| ------------------------------:|
|                                        |                                        |                                        | Amount |  |  |  | Weighted\-Average
Period  | Weighted\-Average
Period  |
| Stock options                          | Stock options                          | Stock options                          |    $ 4 |  |  |  |                           1\.3 |                           1\.3 |
| Stock awards                           | Stock awards                           | Stock awards                           |     20 |  |  |  |                           1\.5 |                           1\.5 |
| Unrecognized stock\-based compensation | Unrecognized stock\-based compensation | Unrecognized stock\-based compensation |   $ 24 |  |  |  |                           1\.5 |                           1\.5 |

The Company is authorized to issue 17 million shares of common stock under these plans, of which 8,627,341 shares remain available for future grants of either options or stock awards as of December 31, 2019\.

79


Annual Report of Southwest Airlines Co\. for year 2018

The consolidated periodic postretirement benefit cost for the years ended December 31, 2018, 2017, and 2016, included the following:

|                                          |          |          |          |
| ---------------------------------------- | -------- | -------- | -------- |
| **(in millions)**                        | **2018** | **2017** | **2016** |
| Service cost                             | $18      | $18      | $13      |
| Interest cost                            | 9        | 11       | 9        |
| Amortization of prior service cost       | 3        | 3        | 3        |
| Net periodic postretirement benefit cost | $30      | $32      | $25      |

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 31,2018, 2017, and 2016:

|                                        |          |          |          |
| -------------------------------------- | -------- | -------- | -------- |
|                                        | **2018** | **2017** | **2016** |
| Weighted\-average discount rate        | 4\.35%   | 3\.65%   | 4\.25%   |
| Assumed healthcare cost trend rate (a) | 7\.13%   | 7\.08%   | 7\.08%   |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | The assumed healthcare cost trend rate is assumed to be  7\.13%  for  2019 , 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 increased during 2018 due to market conditions\. The assumed healthcare trend rate is also reviewed at least annually and is determined based upon both historical experience with the Company’s healthcare benefits paid and expectations of how those trends may or may not change in future years\.

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

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes\. The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017\. The Act reduces the U\.S\. federal corporate tax rate from the previous rate of 35 percent to 21 percent, required companies to pay a one\-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings\. At December 31, 2017, the Company calculated the accounting for the tax effects of enactment of the Act as written, and recorded the effects on the existing deferred tax balances\. The components of deferred tax assets and liabilities at December 31, 2018 and 2017, are as follows:

112


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

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

hub system also allows us to add service to a new destination from a large number of cities using only one or a limited number of aircraft\. As discussed under *Alliances* below, United is a member of Star Alliance, the world’s largest alliance network\.

Financial information on the Company’s operating revenues by geographic region, as reported to the U\.S\. Department of Transportation (the “DOT”), can be found in Note 15 to the financial statements included in Part II, Item 8 of this report\.

***Regional\.*** The Company has contractual relationships with various regional carriers to provide regional aircraft service branded as United Express\. These regional operations are an extension of the Company’s mainline network\. This regional service complements our operations by carrying traffic that connects to our mainline service and allows flights to smaller cities that cannot be provided economically with mainline aircraft\. Republic Airlines (“Republic”), Champlain Enterprises, LLC d/b/a CommutAir (“CommutAir”), ExpressJet Airlines (“ExpressJet”), GoJet Airlines (“GoJet”), Mesa Airlines (“Mesa”), SkyWest Airlines (“SkyWest”), Air Wisconsin Airlines (“Air Wisconsin”), and Trans States Airlines (“Trans States”) are all regional carriers that operate with capacity contracted to United under capacity purchase agreements (“CPAs”)\. Under these CPAs, the Company pays the regional carriers contractually agreed fees (carrier costs) for operating these flights plus a variable reimbursement (incentive payment for operational performance) based on agreed performance metrics, subject to annual inflation adjustments\. The fees for carrier costs are based on specific rates for various operating expenses of the regional carriers, such as crew expenses, maintenance and aircraft ownership, some of which are multiplied by specific operating statistics (e\.g\., block hours, departures), while others are fixed monthly amounts\. Under these CPAs, the Company is responsible for all fuel costs incurred, as well as landing fees and other costs, which are either passed through by the regional carrier to the Company without any markup or directly incurred by the Company\. In return, the regional carriers operate this capacity exclusively for United, on schedules determined by the Company\. The Company also determines pricing and revenue management, assumes the inventory and distribution risk for the available seats and permits mileage accrual and redemption for regional flights through its MileagePlus^®^ loyalty program\.

***Alliances\.*** United is a member of Star Alliance, a global integrated airline network and the largest and most comprehensive airline alliance in the world\. As of January 1, 2018, Star Alliance carriers served 1,300 airports in 191 countries with 18,400 daily departures\. Star Alliance members, in addition to United, are Adria Airways, Aegean Airlines, Air Canada, Air China, Air India, Air New Zealand, All Nippon Airways (“ANA”), Asiana Airlines, Austrian Airlines, Avianca, Avianca Brasil, Brussels Airlines, Copa Airlines, Croatia Airlines, EGYPTAIR, Ethiopian Airlines, EVA Air, LOT Polish Airlines, Lufthansa, SAS Scandinavian Airlines, Shenzhen Airlines, Singapore Airlines, South African Airways, SWISS, TAP Air Portugal, THAI Airways International and Turkish Airlines\. In May 2017, Star Alliance added Shanghai\-based Juneyao Airlines as an additional connecting partner\.

United has a variety of bilateral commercial alliance agreements and obligations with Star Alliance members, addressing, among other things, reciprocal earning and redemption of frequent flyer miles, access to airport lounges and, with certain Star Alliancemembers, codesharing of flight operations (whereby one carrier’s selected flights can be marketed under the brand name of another carrier)\. In addition to the alliance agreements with Star Alliance members, United currently maintains independent marketing alliance agreements with other air carriers, including Aeromar, Aer Lingus, Air Dolomiti, Azul, Cape Air, Eurowings, Great Lakes Airlines, Hawaiian Airlines, and Silver Airways\. In addition to the marketing alliance agreements with air partners, United also offers a train\-to\-plane codeshare and frequent flyer alliance with Amtrak from Newark on select city pairs in the northeastern United States\.

United also participates in three passenger joint ventures, one with Air Canada and the Lufthansa Group (which includes Lufthansa and its affiliates Austrian Airlines, Brussels Airlines, Eurowings and SWISS) covering transatlantic routes, one with ANA covering certain transpacific routes and one with Air New Zealand covering certain routes between the United States and New Zealand\. These passenger joint ventures enable the participating carriers to integrate the services they provide in the respective regions, capturing revenue synergies and delivering highly competitive flight schedules, fares and services\. United has also implemented cargo joint

4


Annual Report of Southwest Airlines Co\. for year 2017

floating\-rate debt to a fixed\-rate\. These interest rate hedges are appropriately designated as either fair value hedges or as cash flow hedges\.

Since the majority of the Company’s financial derivative instruments are not traded on a market exchange, the Company estimates their fair values\. Depending on the type of instrument, the values are determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets\. Also, since there is not a reliable forward market for jet fuel, the Company must estimate the future prices of jet fuel in order to measure the effectiveness of the hedging instruments in offsetting changes to those prices\. Forward jet fuel prices are estimated through utilization of a statistical\-based regression equation with data from market forward prices of like commodities\. This equation is then adjusted for certain items, such as transportation costs, that are stated in the Company’s fuel purchasing contracts with its vendors\.

For the effective portion of settled fuel hedges, the Company records the associated gains or losses as a component of Fuel and oil expense in the Consolidated Statement of Income\. For amounts representing ineffectiveness, as defined, or changes in fair value of derivative instruments for which hedge accounting is not applied, the Company records any gains or losses as a component of Other (gains) losses, net, in the Consolidated Statement of Income\. Amounts that are paid or received in connection with the purchase or sale of financial derivative instruments (i\.e\., premium costs of option contracts) are classified as a component of Other (gains) losses, net, in the Consolidated Statement of Income in the period in which the instrument settles or expires\. All cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the Consolidated Statement of Cash Flows, within Changes in certain assets and liabilities\. See Note 10 for further information on hedge accounting and financial derivative instruments\.

The Company classifies its cash collateral provided to or held from counterparties in a "net" presentation on the Consolidated Balance Sheet against the fair value of the derivative positions with those counterparties\. See Note 10 for further information\.

***Software Capitalization***

The Company capitalizes certain internal and external costs related to the acquisition and development of internal use software during the application development stages of projects\. The Company amortizes these costs using the straight\-line method over the estimated useful life of the software, which is typically five to fifteen years\. Costs incurred during the preliminary project or the post\-implementation/operation stages of the project are expensed as incurred\. Capitalized computer software, included as a component of Ground property and equipment in the accompanying Consolidated Balance Sheet, net of accumulated depreciation, was $654 million and $544 million at December 31, 2017, and 2016, respectively\. Computer software depreciation expense was $168 million, $111 million, and $106 million for the years ended December 31, 2017, 2016, and 2015, respectively, and is included as a component of Depreciation and amortization expense in the accompanying Consolidated Statement of Income\. The Company evaluates internal use software for impairment on a quarterly basis; if it is determined the value of an asset was not recoverable or it qualifies for impairment, a charge would be recorded to write down the software to the lower of its carrying value or fair value\. The Company had no significant impairments during 2017, 2016, or 2015\.

***Income Taxes***

The Company accounts for deferred income taxes utilizing an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effect of temporary differences between the financial statements and the tax basis of assets and liabilities, as measured by current enacted tax rates\. The Company also evaluates the need for a valuation allowance to reduce deferred tax assets to estimated recoverable amounts\.

The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income before income taxes\. Penalties are recorded in Other (gains) losses, net, and interest paid or received is recorded in Interest expense or Interest income, respectively, in the Consolidated Statement of

80


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

We deploy aircraft in ways that we believe will best optimize our revenues and profitability and reduce the impacts of seasonality\.

The percentage of our capacity by region is as follows:

|                       |                       |                       |       |       |  |  |  |       |       |  |  |  |       |       |  |  |  |           |           |  |  |  |       |       |
|:--------------------- |:--------------------- |:--------------------- | -----:| -----:|:- |:- |:- | -----:| -----:|:- |:- |:- | -----:| -----:|:- |:- |:- | ---------:| ---------:|:- |:- |:- | -----:| -----:|
|                       |                       |                       |  2019 |  2019 |  |  |  |  2018 |  2018 |  |  |  |  2017 |  2017 |  |  |  | 2016^(a)^ | 2016^(a)^ |  |  |  |  2015 |  2015 |
| West Coast^(b)^       | West Coast^(b)^       | West Coast^(b)^       |  28 % |  28 % |  |  |  |  27 % |  27 % |  |  |  |  28 % |  28 % |  |  |  |      34 % |      34 % |  |  |  |  36 % |  36 % |
| Transcon/midcon       | Transcon/midcon       | Transcon/midcon       |  44 % |  44 % |  |  |  |  44 % |  44 % |  |  |  |  43 % |  43 % |  |  |  |      29 % |      29 % |  |  |  |  24 % |  24 % |
| Hawaii and Costa Rica | Hawaii and Costa Rica | Hawaii and Costa Rica |  14 % |  14 % |  |  |  |  14 % |  14 % |  |  |  |  13 % |  13 % |  |  |  |      17 % |      17 % |  |  |  |  18 % |  18 % |
| Alaska                | Alaska                | Alaska                |  10 % |  10 % |  |  |  |  10 % |  10 % |  |  |  |  10 % |  10 % |  |  |  |      14 % |      14 % |  |  |  |  15 % |  15 % |
| Mexico                | Mexico                | Mexico                |   3 % |   3 % |  |  |  |   4 % |   4 % |  |  |  |   5 % |   5 % |  |  |  |       5 % |       5 % |  |  |  |   6 % |   6 % |
| Canada                | Canada                | Canada                |   1 % |   1 % |  |  |  |   1 % |   1 % |  |  |  |   1 % |   1 % |  |  |  |       1 % |       1 % |  |  |  |   1 % |   1 % |
| Total                 | Total                 | Total                 | 100 % | 100 % |  |  |  | 100 % | 100 % |  |  |  | 100 % | 100 % |  |  |  |     100 % |     100 % |  |  |  | 100 % | 100 % |

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

(b) Category represents flying within the West Coast\. Departures from the West Coast to other regions are captured in other categories\.

MAINLINE

Our Mainline operations include Boeing 737 (B737) and Airbus A320 family (A319, A320, and A321neo) jet service offered by Alaska\. We offer extensive passenger service from the western U\.S\. throughout the contiguous United States, Alaska, Hawaii, Canada, Mexico, and Costa Rica\. Our largest concentrations of departures are in Seattle, Portland, and the Bay Area\. We also offer cargo service throughout our network and have three dedicated cargo aircraft that operate primarily to and within the state of Alaska\.

In 2019, we carried 36 million revenue passengers in our Mainline operations\. At December 31, 2019, our Mainline operating fleet consisted of 166 Boeing 737 jet aircraft and 71 Airbus A320 family jet aircraft compared to 162 B737 aircraft and 71 Airbus aircraft as of December 31, 2018\.

The percentage of Mainline passenger capacity by region and average stage length is presented below:

|                              |                              |                              |        |        |  |  |        |        |  |  |  |        |        |  |  |  |           |           |  |  |  |        |        |
|:---------------------------- |:---------------------------- |:---------------------------- | ------:| ------:| -:| -:| ------:| ------:|:- |:- |:- | ------:| ------:|:- |:- |:- | ---------:| ---------:|:- |:- |:- | ------:| ------:|
|                              |                              |                              |   2019 |   2019 |  |  |   2018 |   2018 |  |  |  |   2017 |   2017 |  |  |  | 2016^(a)^ | 2016^(a)^ |  |  |  |   2015 |   2015 |
| West Coast^(b)^              | West Coast^(b)^              | West Coast^(b)^              |   23 % |   23 % |  |  |   23 % |   23 % |  |  |  |   24 % |   24 % |  |  |  |      30 % |      30 % |  |  |  |   31 % |   31 % |
| Transcon/midcon              | Transcon/midcon              | Transcon/midcon              |   46 % |   46 % |  |  |   46 % |   46 % |  |  |  |   45 % |   45 % |  |  |  |      30 % |      30 % |  |  |  |   27 % |   27 % |
| Hawaii and Costa Rica        | Hawaii and Costa Rica        | Hawaii and Costa Rica        |   16 % |   16 % |  |  |   15 % |   15 % |  |  |  |   15 % |   15 % |  |  |  |      19 % |      19 % |  |  |  |   20 % |   20 % |
| Alaska                       | Alaska                       | Alaska                       |   11 % |   11 % |  |  |   11 % |   11 % |  |  |  |   11 % |   11 % |  |  |  |      15 % |      15 % |  |  |  |   16 % |   16 % |
| Mexico                       | Mexico                       | Mexico                       |    4 % |    4 % |  |  |    5 % |    5 % |  |  |  |    5 % |    5 % |  |  |  |       6 % |       6 % |  |  |  |    6 % |    6 % |
| Total                        | Total                        | Total                        |  100 % |  100 % |  |  |  100 % |  100 % |  |  |  |  100 % |  100 % |  |  |  |     100 % |     100 % |  |  |  |  100 % |  100 % |
| Average Stage Length (miles) | Average Stage Length (miles) | Average Stage Length (miles) | 1,299  | 1,299  |  |  | 1,298  | 1,298  |  |  |  | 1,301  | 1,301  |  |  |  |    1,225  |    1,225  |  |  |  | 1,195  | 1,195  |

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

(b) Category represents flying within the West Coast\. Departures from the West Coast to other regions are captured in other categories\.

REGIONAL

Our Regional operations consist primarily of flights operated by Horizon and SkyWest\. In 2019, our Regional operations carried approximately 11 million revenue passengers, primarily in the states of Washington, Oregon, Idaho and California\. Horizon is the largest regional airline in the Pacific Northwest and carries approximately 70% of Air Group's regional revenue passengers\.

Based on 2019 Horizon passenger enplanements on regional aircraft, our most significant concentration of regional activity was in Seattle and Portland\. At December 31, 2019, Horizon’s operating fleet consisted of 30 E175 jet aircraft and 33 Bombardier Q400 turboprop aircraft\. The regional fleet operated by SkyWest consisted of 32 E175 aircraft\.

7


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

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

***(f) Operating Property and Equipment***

Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or the lease term, whichever is less, using the straight\-line method\. Residual values for aircraft, engines and related rotable parts are generally 5% to 10% of original cost\. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated or amortized over the estimated useful life of the asset or the lease term, whichever is less\. The estimated useful lives for the principal property and equipment classifications are as follows:

|                                                     |                           |
| --------------------------------------------------- | ------------------------- |
| **Principal Property and Equipment Classification** | **Estimated Useful Life** |
| Aircraft, engines and related rotable parts         | 20 – 30 years             |
| Buildings and improvements                          | 5 – 30 years              |
| Furniture, fixtures and other equipment             | 3 – 10 years              |
| Capitalized software                                | 5 – 10 years              |

We assess impairment on operating property and equipment when events and circumstances indicate that the assets may be impaired\. An asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the carrying amount of the assets and the net book value of the assets exceeds their estimated fair value\. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets\. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell\.

Total depreciation and amortization expense was $2\.4 billion, $2\.2 billion and $1\.9 billion for the years ended December 31, 2018, 2017 and 2016, respectively\.

***(g) Leases***

We determine if an arrangement is a lease at inception\. Operating leases are included in operating lease ROU assets, current operating lease liabilities and noncurrent operating lease liabilities in our consolidated balance sheet\. Finance leases are included in property and equipment, current maturities of long\-term debt and finance leases and long\-term debt and finance leases, net of current maturities, in our consolidated balance sheet\.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease\. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term\.

We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments\. We give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates\.

Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option\. Leases with a term of 12 months or less are not recorded on the balance sheet\. Our lease agreements do not contain any residual value guarantees\.

Under certain of our capacity purchase agreements with third\-party regional carriers, we do not own the underlying aircraft\. However, since we control the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to be leased for accounting purposes\. For these capacity purchase agreements, we account for the lease and non\-lease components separately\. The lease component consists of the aircraft and the non\-lease components consist of services, such as the crew and maintenance\. We allocate the consideration in the capacity purchase agreements to the lease and non\-lease components using their estimated relative standalone prices\. See Note 12(b) for additional information on our capacity purchase agreements\.

For real estate, we account for the lease and non\-lease components as a single lease component\.

***(h) Income Taxes***

Income taxes are accounted for under the asset and liability method\. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards\. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes\.

90


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

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

material adverse impact on the Company’s financial position and results of operations and could result in the impairment of material amounts of related tangible and intangible assets\. In addition, competition from revenue\-sharing joint ventures 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 joint ventures 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\.

***The airline industry may undergo further change with respect to alliances and joint ventures or due to consolidations, any of which could have a material adverse effect on the Company\.***

The Company faces and may continue to face strong competition from other carriers due to the modification of alliances and formation of new joint ventures\. Carriers may improve their competitive positions through airline alliances, slot swaps and/or joint ventures\. Certain types of airline joint ventures further competition by allowing multiple airlines to coordinate routes, pool revenues and costs, and enjoy other mutual benefits, achieving many of the benefits of consolidation\. “Open Skies” agreements, including the agreements between the United States and the EU and between the United States and Japan, may also give rise to better integration opportunities among international carriers\. Movement of airlines between current global airline alliances could reduce joint network coverage for members of such alliances while also creating opportunities for joint ventures and bilateral alliances that did not exist before such realignment\. There is ongoing speculation that further airline and airline alliance consolidations or reorganizations could occur in the future, especially if new “Open Skies” agreements between Brazil and the United States are fully implemented\. The Company routinely engages in analysis and discussions regarding its own strategic position, including current and potential alliances, asset acquisitions and divestitures and may have future discussions with other airlines regarding strategic activities\. If other airlines participate in such activities, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of the Company and potentially impairing the Company’s ability to realize expected benefits from its own strategic relationships\.

***Insufficient liquidity may have a material adverse effect on the Company’s financial position and business\.***

The Company has a significant amount of financial leverage from fixed obligations, including aircraft lease and debt financings, leases of airport property and other facilities, and other material cash obligations\. In addition, the Company has substantial noncancelable commitments for capital expenditures, including for the acquisition of new aircraft and related spare engines\.

Although the Company’s cash flows from operations and its available capital, including the proceeds from financing transactions, have been sufficient to meet these obligations and commitments to date, the Company’s future liquidity could be negatively affected by the risk factors discussed in this report, including, but not limited to, substantial volatility in the price of fuel, adverse economic conditions, disruptions in the global capital markets and catastrophic external events\.

If the Company’s liquidity is materially diminished due to the various risk factors noted in this report, or otherwise, the Company might not be able to timely pay its leases and debts or comply with certain operating and financial covenants under its financing and credit card processing agreements or with other material provisions of its contractual obligations\. Certain of these covenants require the Company or United, as applicable, to maintain minimum liquidity and/or minimum collateral coverage ratios\. The Company’s or United’s ability to comply with these covenants may be affected by events beyond its control, including the overall industry revenue environment, the level of fuel costs and the appraised value of the collateral\.

17


Annual Report of Southwest Airlines Co\. for year 2018

least 10 consecutive hours prior to a flight attendant's flight duty period\. The rules affect the Company’s staffing flexibility, which could impact the Company’s operational performance, costs, and Customer Experience\.

The Reauthorization Act also contains provisions directing the FAA to issue new regulations to establish minimum dimensions for seat size that are necessary for the safety of passengers\. Further, the Reauthorization Act expands human trafficking training requirements beyond flight attendants to include several public\-facing Employee work groups\.

In addition to its role as safety regulator, the FAA operates the nation’s air traffic control system and has continued its lengthy and ongoing effort to implement a multi\-faceted, air traffic control modernization program called "NextGen\." The Air Traffic Organization ("ATO") is the operational arm of the FAA\. The ATO is responsible for providing safe and efficient air navigation services to all of the United States and large portions of the Atlantic and Pacific Oceans and the Gulf of Mexico\. The Company is subject to any operational changes imposed by the FAA/ATO as they relate to the NextGen program, as well as the day\-to\-day management of the air traffic control system\. The Reauthorization Act directs the FAA to (i) undertake a comprehensive review and prepare a full report on NextGen implementation and (ii) annually report on NextGen progress and return on investment\.

The Company is subject to various other federal, state, and local laws and regulations relating to occupational safety and health, including Occupational Safety and Health Administration and Food and Drug Administration regulations\.

**Security Regulation**

Pursuant to the Aviation and Transportation Security Act ("ATSA"), the TSA, a division of the U\.S\. Department of Homeland Security, is responsible for certain civil aviation security matters\. ATSA and subsequent TSA regulations and procedures implementing ATSA address, among other things, (i) flight deck security; (ii) the use of federal air marshals onboard flights; (iii) airport perimeter access security; (iv) airline crew security training; (v) security screening of passengers, baggage, cargo, mail, employees, and vendors; (vi) training and qualifications of security screening personnel; (vii) provision of passenger data to CBP; and (viii) background checks\.

Under ATSA, substantially all security officers at airports are federal employees, and significant other elements of airline and airport security are overseen and performed by federal employees, including federal security managers, federal law enforcement officers, and federal air marshals\. TSA personnel and TSA\-mandated security procedures can affect the Company's operations, costs, and Customer experience\. For example, as part of its security measures, the TSA regulates the types of liquid items that can be carried onboard aircraft\. In addition, as part of its Secure Flight program, the TSA requires airlines to collect a passenger's full name (as it appears on a government\-issued ID), date of birth, gender, and Redress Number (if applicable)\. Airlines must transmit this information to Secure Flight, which uses the information to perform matching against terrorist watch lists\. After matching passenger information against the watch lists, Secure Flight transmits the matching results back to airlines\. This serves to identify individuals for enhanced security screening and to prevent individuals on watch lists from boarding an aircraft\. It also helps prevent the misidentification of passengers who have names similar to individuals on watch lists\. The TSA has also implemented enhanced security procedures as part of its enhanced, multi\-layer approach to airport security, including physical pat down procedures, at security checkpoints\. Such enhanced security procedures have raised privacy concerns by some air travelers, and have caused delays at screening checkpoints\.

Pursuant to the Reauthorization Act, the FAA is required to issue an order requiring installation of a physical secondary cockpit barrier on each newly\-manufactured aircraft for delivery to a passenger air carrier\. This could impose a substantial cost on the Company\.

The Company, in conjunction with the TSA, participates in TSA PreCheck™, a pre\-screening initiative that allows a select group of low risk passengers to move through security checkpoints with greater efficiency and ease when traveling\. Eligible passengers may use dedicated screening lanes at certain airports the Company serves for screening benefits, which include leaving on shoes, light outerwear, and belts, as well as leaving laptops and permitted liquids in carryon bags\. A similar CBP\-administered program, Global Entry^®^, allows expedited clearance for pre\-approved, low\-risk international travelers upon arrival in the United States\.

The Company also participates in the TSA Known Crewmember^®^ program, which is a risk\-based screening system that enables TSA security officers to positively verify the identity and employment status of flight\-crew members\. The program expedites flight crew member access to sterile areas of airports\.

13


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

Components of Lease Expense

The impact of leases, including variable lease cost, on earnings for the twelve months ended December 31, 2019 was as follows (in millions):

|                                 |                                 |                                 |                                |                                |                                |       |
|:------------------------------- |:------------------------------- |:------------------------------- |:------------------------------:|:------------------------------:|:------------------------------:| -----:|
|                                 |                                 |                                 |         Classification         |         Classification         |         Classification         |  2019 |
| Expense                         | Expense                         | Expense                         |                                |                                |                                |       |
| Aircraft                        | Aircraft                        | Aircraft                        |         Aircraft rent          |         Aircraft rent          |         Aircraft rent          | $ 246 |
| CPA Aircraft                    | CPA Aircraft                    | CPA Aircraft                    |         Aircraft rent          |         Aircraft rent          |         Aircraft rent          |    79 |
| Airport and terminal facilities | Airport and terminal facilities | Airport and terminal facilities | Landing fees and other rentals | Landing fees and other rentals | Landing fees and other rentals |   324 |
| Corporate real estate and other | Corporate real estate and other | Corporate real estate and other | Landing fees and other rentals | Landing fees and other rentals | Landing fees and other rentals |    19 |
| Total lease expense             | Total lease expense             | Total lease expense             |                                |                                |                                | $ 668 |
| Revenue                         | Revenue                         | Revenue                         |                                |                                |                                |       |
| Lease income                    | Lease income                    | Lease income                    |    Cargo and other revenues    |    Cargo and other revenues    |    Cargo and other revenues    |  (13) |
| Net lease impact                | Net lease impact                | Net lease impact                |                                |                                |                                | $ 655 |

Supplemental Cash Flow Information

During the year ended December 31, 2019, the Company paid $347 million for capitalized operating leases\. The Company also acquired $176 million of operating lease assets in exchange for assumption of the same total of operating lease liabilities, inclusive of lease extensions\.

Lease Term and Discount Rate

As most leases do not provide an implicit interest rate, the Company generally utilizes the incremental borrowing rate (IBR) based on information available at the commencement date of the lease to determine the present value of lease payments\. The weighted average IBR and weighted average remaining lease term (in years) for all asset classes were as follows at December 31, 2019\.

|                                  |                                  |                                  |                       |                       |  |  |  |                                       |                                       |                                       |
|:-------------------------------- |:-------------------------------- |:-------------------------------- | ---------------------:| ---------------------:|:- |:- |:- | -------------------------------------:| -------------------------------------:| -------------------------------------:|
|                                  |                                  |                                  | Weighted Average IBR  | Weighted Average IBR  |  |  |  | Weighted Average Remaining Lease term | Weighted Average Remaining Lease term | Weighted Average Remaining Lease term |
| Aircraft                         | Aircraft                         | Aircraft                         |                4\.0 % |                4\.0 % |  |  |  |                                  7\.0 |                                  7\.0 |                                  7\.0 |
| CPA Aircraft                     | CPA Aircraft                     | CPA Aircraft                     |                4\.3 % |                4\.3 % |  |  |  |                                  9\.2 |                                  9\.2 |                                  9\.2 |
| Airports and terminal facilities | Airports and terminal facilities | Airports and terminal facilities |                4\.1 % |                4\.1 % |  |  |  |                                 10\.0 |                                 10\.0 |                                 10\.0 |
| Corporate real estate and other  | Corporate real estate and other  | Corporate real estate and other  |                4\.2 % |                4\.2 % |  |  |  |                                 34\.9 |                                 34\.9 |                                 34\.9 |

69


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

In light of constraints on existing facilities, there is presently a significant amount of capital spending underway at major airports in the United States, including large projects underway at a number of airports where we have significant operations, such as ORD, LAX, LGA and DCA\. This spending is expected to result in increased costs to airlines and the traveling public that use those facilities as the airports seek to recover their investments through increased rental, landing and other facility costs\. In some circumstances, such costs could be imposed by the relevant airport authority without our approval\. Accordingly, our operating costs are expected to increase significantly at many airports at which we operate, including a number of our hubs and gateways, as a result of capital spending projects currently underway and additional projects that we expect to commence over the next several years\.

In addition, operations at three major domestic airports, certain smaller domestic airports and many foreign airports served by us are regulated by governmental entities through the use of slots or similar regulatory mechanisms that limit the rights of carriers to conduct operations at those airports\. Each slot represents the authorization to land at or take off from the particular airport during a specified time period and may have other operational restrictions as well\. In the U\.S\., the DOT and the FAA currently regulate the allocation of slots or slot exemptions at DCA and two New York City airports: JFK and LGA\. Our operations at these airports generally require the allocation of slots or similar regulatory authority\. In addition to slot restrictions, operations at LGA and DCA are also limited based on a so\-called “perimeter rule” which generally limits the stage length of the flights that can be operated from those airports to 1,500 and 1,250 miles, respectively\. Similarly, our operations at LHR, international airports in Beijing, Frankfurt, Paris, Tokyo and other airports outside the U\.S\. are regulated by local slot authorities pursuant to the IATA Worldwide Scheduling Guidelines and/or applicable local law\. Termination of slot controls at some or all of the foregoing airports could affect our operational performance and competitive position\. We currently have sufficient slots or analogous authorizations to operate our existing flights and we have generally, but not always, been able to obtain the rights to expand our operations and to change our schedules\. However, there is no assurance that we will be able to obtain sufficient slots or analogous authorizations in the future or as to the cost of acquiring such rights because, among other reasons, such allocations are often sought after by other airlines and are subject to changes in governmental policies\. We cannot provide any assurance that regulatory changes regarding the allocation of slots, the continued enforcement of a perimeter rule or similar regulatory authority will not have a material adverse impact on our operations\.

Our ability to provide service can also be impaired at airports, such as ORD and LAX where the airport gate and other facilities are currently inadequate to accommodate all of the service that we would like to provide, or airports such as Dallas Love Field Airport where we have no access to gates at all\.

Any limitation on our ability to acquire or maintain adequate gates, ticketing facilities, operations areas, operations control facilities, slots (where applicable), or office space could have a material adverse effect on our business, results of operations and financial condition\.

***If we encounter problems with any of our third\-party regional operators or third\-party service providers, our operations could be adversely affected by a resulting decline in revenue or negative public perception about our services\.***

A significant portion of our regional operations are conducted by third\-party operators on our behalf, substantially all of which are provided for under capacity purchase agreements\. Due to our reliance on third parties to provide these essential services, we are subject to the risk of disruptions to their operations, which may result from many of the same risk factors disclosed in this report, such as the impact of adverse economic conditions, the inability of third parties to hire or retain skilled personnel, including pilots and mechanics, and other risk factors, such as an out\-of\-court or bankruptcy restructuring of any of our regional operators\. Many of these third\-party regional operators provide significant regional capacity that we would be unable to replace in a short period of time should that operator fail to perform its obligations to us\. Disruptions to capital markets, shortages of skilled personnel and adverse economic conditions in general have subjected certain of these third\-party regional operators to significant financial pressures, which have in the past and may in the future lead to bankruptcies among these operators\. We may also experience disruption to our regional operations if we terminate the capacity purchase agreement with one or more of our current operators and transition the services to another provider\. Any significant disruption to our regional operations would have a material adverse effect on our business, results of operations and financial condition\.

In addition, our reliance upon others to provide essential services on behalf of our operations may result in our relative inability to control the efficiency and timeliness of contract services\. We have entered into agreements with contractors to provide various facilities and services required for our operations, including distribution and sale of airline seat inventory, reservations, provision of information technology and services, regional operations, aircraft maintenance, ground services and facilities and baggage handling\. Similar agreements may be entered into in any new markets we decide to serve\. These agreements are generally subject to termination after notice by the third\-party service provider\. We are also at risk should one

22


Annual Report of Southwest Airlines Co\. for year 2017

constructed for others ("ACFO") in the Consolidated Balance Sheet, along with a corresponding outflow within Assets constructed for others in the Consolidated Statement of Cash Flows, and an increase to Construction obligation (with a corresponding cash inflow from Financing activities in the Consolidated Statement of Cash Flows) as reimbursements are received from Broward County\.

**Los Angeles International Airport**

In March 2013, the Company executed a lease agreement (the "T1 Lease") with Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles International Airport ("LAX")\. Under the T1 Lease, which was amended in June 2014 and September 2017, the Company is overseeing and managing the design, development, financing, construction, and commissioning of the airport's Terminal 1 Modernization Project at a cost not to exceed $526 million (including proprietary renovations, or $510 million excluding proprietary renovations)\. In October 2017, the Company executed a separate lease agreement with LAWA (the "T1\.5 Lease")\. The Company will oversee and manage the design, development, financing, construction, and commissioning of a passenger processing facility between Terminal 1 and 2 (the "Terminal 1\.5 Project")\. The Terminal 1\.5 Project is expected to include ticketing, baggage claim, passenger screening, and a bus gate at a cost not to exceed $479 million for site improvements and non\-proprietary improvements\.

These projects are being funded primarily using the Regional Airports Improvement Corporation (the "RAIC"), which is a quasi\-governmental special purpose entity that acts as a conduit borrower under syndicated credit facilities provided by groups of lenders\. Loans made under the separate credit facilities for the Terminal 1 Modernization Project and the Terminal 1\.5 Project are being used to fund the development of each of these projects, and the outstanding loans will be repaid with the proceeds of LAWA’s payments to purchase completed construction phases\. The Company has guaranteed the obligations of the RAIC under each of the credit facilities of the respective lease agreements\. At December 31, 2017, the Company's outstanding remaining guaranteed obligations under the credit facilities for the Terminal 1 Modernization Project and the Terminal 1\.5 Project were $230 million and $36 million, respectively\.

Construction on the Terminal 1 Modernization Project began during 2014 and is estimated to be completed during 2018\. Construction on the Terminal 1\.5 Project began during third quarter 2017 and is estimated to be completed during 2020\. The Company has determined that due to its agreed upon role in overseeing and managing these projects, it is considered the owner of these projects for accounting purposes\. LAWA is reimbursing the Company (through the RAIC credit facilities) for the site improvements and non\-proprietary improvements, while proprietary improvements will not be reimbursed\. As a result, the costs incurred to fund these projects are included within ACFO and all amounts that have been or will be reimbursed will be included within Construction obligation on the accompanying Consolidated Balance Sheet\.

**Dallas Love Field**

During 2008, the City of Dallas approved the Love Field Modernization Program ("LFMP"), a project to reconstruct Dallas Love Field with modern, convenient air travel facilities\. Pursuant to a Program Development Agreement with the City of Dallas and the Love Field Airport Modernization Corporation (or "LFAMC," a Texas non\-profit "local government corporation" established by the City of Dallas to act on the City of Dallas' behalf to facilitate the development of the LFMP), the Company managed this project\.

Although the City of Dallas received commitments from various sources that helped to fund portions of the LFMP project, including the FAA, the Transportation Security Administration, and the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds\. The Company guaranteed principal and interest payments on $456 million of such bonds issued by the LFAMC\. As of December 31, 2017, $424 million of principal remained outstanding\. The Company utilized the accounting guidance provided for lessees involved in asset construction\. Upon completion of different phases of the LFMP project, the Company has placed the associated assets in service and has begun depreciating the assets over their estimated useful lives\. The corresponding LFMP liabilities are being reduced primarily through the Company's airport rental payments to the City of Dallas as the construction costs of this project are passed through to the Company via recurring airport rates and charges\. Major construction was effectively completed

84