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

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

At December 31, 2018, American had approximately $10\.6 billion of federal NOLs carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which American expects to be available for use in 2019\. American is a member of AAG’s consolidated federal and certain state income tax returns\. The amount of federal NOL Carryforwards available in those returns is $10\.2 billion, substantially all of which is expected to be available for use in 2019\. The federal NOL Carryforwards will expire beginning in 2022 if unused\. American also had approximately $3\.1 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2018, which will expire in years 2019 through 2038 if unused\. American’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred\. Substantially all of American’s remaining federal NOL Carryforwards attributable to US Airways Group are subject to limitation under Section 382; however, American’s ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation\. American elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9\.5 billion (with $8\.6 billion of unlimited NOL still remaining at December 31, 2018) of its federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382\. Similar limitations may apply for state income tax purposes\. American’s ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another future ownership change occurs\. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three\-year period can potentially limit a company’s future use of NOLs and tax credits\. See Part I, Item 1A\. Risk Factors – *“Our ability to utilize our NOL Carryforwards may be limited”* for unaudited additional discussion of this risk\.

At December 31, 2018, American had an AMT credit carryforward of approximately $452 million available for federal income tax purposes, which is now expected to be fully refundable over the next several years as a result of the repeal of corporate AMT\.

In 2018, American recorded an income tax provision of $534 million, with an effective rate of approximately 24%, which was substantially non\-cash\. American’s income tax provision included an $18 million special income tax charge related to an international income tax matter\. Substantially all of American’s income before income taxes is attributable to the United States\.

American is part of the AAG consolidated income tax return\. American files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates\. American’s 2015 through 2017 tax years are still subject to examination by the Internal Revenue Service\. Various state and foreign jurisdiction tax years remain open to examination and American is under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions\. American believes that the effect of any assessments will not be material to its consolidated financial statements\.

The amount of, and changes to, American’s uncertain tax positions were not material in any of the years presented\. American accrues interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively\.

The 2017 Tax Act was enacted on December 22, 2017\. The 2017 Tax Act is the most comprehensive tax change in more than 30 years\. American has completed its evaluation of the 2017 Tax Act and American has reflected the impact of its effects, including the impact of lower corporate income tax rates (21% vs\. 35%) on its deferred tax assets and liabilities and the one\-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred\. For the year ended December 31, 2017, American recognized a special income tax provision of $924 million to reflect these impacts of the 2017 Tax Act\.

**6\. Risk Management**

American’s economic prospects are heavily dependent upon two variables it cannot control: the health of the economy and the price of fuel\.

Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, American’s revenues are heavily influenced by the condition of the U\.S\. economy and economies in other regions of the world\. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by American’s competitors, all of which in turn have had, and may have in the future, a negative effect on American’s business\. In addition, during challenging economic times, actions by its competitors to increase their revenues can have an adverse impact on American’s revenues\.

American’s operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in American’s business\. Market prices for jet fuel have fluctuated substantially over the past several years and prices continue to be highly volatile\. Because of the amount of fuel needed to

155


Annual Report of Southwest Airlines Co\. for year 2017

and international expansion presents unique challenges; and (iii) the Company has faced an increased presence of other low\-cost, low\-fare carriers\. As a result, the Company is reliant on the success of its revenue strategies to help offset certain increasing costs\. The timely and effective execution of the Company's strategic plans could be negatively affected by (i) the Company's ability to timely and effectively implement, transition, and maintain related information technology systems and infrastructure; (ii) the Company's ability to effectively balance its investment of incremental operating expenses and capital expenditures related to its strategies against the need to effectively control costs; and (iii) the Company's dependence on third parties with respect to its strategic plans\.

***The airline industry has faced on\-going security concerns and related cost burdens; further threatened or actual terrorist attacks, or other hostilities, could significantly harm the airline industry and the Company's operations\.***

Terrorist attacks or other crimes and hostilities, actual and threatened, have from time to time materially adversely affected the demand for air travel and also have resulted in increased safety and security costs for the Company and the airline industry generally\. Safety measures create delays and inconveniences and can, in particular, reduce the Company's competitiveness against surface transportation for short\-haul routes\. Additional terrorist attacks or other hostilities, even if not made directly on the airline industry, or the fear of such attacks or other hostilities (including elevated national threat warnings or selective cancellation or redirection of flights due to terror threats) would likely have a further significant negative impact on the Company and the airline industry\.

***Airport capacity constraints and air traffic control inefficiencies have limited and could continue to limit the Company's growth; changes in or additional governmental regulation could increase the Company's operating costs or otherwise limit the Company's ability to conduct business\.***

Almost all commercial service airports are owned and/or operated by units of local or state governments\. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost\. Similarly, the federal government singularly controls all U\.S\. airspace, and airlines are completely dependent on the FAA operating that airspace in a safe and efficient manner\. The current air traffic control system is mainly radar\-based and supported in large part by antiquated equipment and technologies\. The FAA's protracted transition to a satellite\-based air traffic control system, as well as the implementation of policies and standards that account for the precision of global positioning system\-supported aircraft technologies, could continue to adversely impact airspace capacity and the overall efficiency of the system, resulting in limited opportunities for the Company to grow, longer scheduled flight times, increased delays and cancellations, and increased fuel consumption and aircraft emissions\. As discussed above under "Business \- Regulation," airlines are also subject to other extensive regulatory requirements\. These requirements often impose substantial costs on airlines\. The Company's strategic plans and results of operations could be negatively affected by changes in law and future actions taken by domestic and foreign governmental agencies having jurisdiction over its operations, including, but not limited to:

|   |                                          |
| - | ---------------------------------------- |
| • | increases in airport rates and charges;  |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | limitations on airport gate capacity or use of other airport facilities such as the 2016 and 2017 reallocation of slots at John Wayne Airport in Orange County, California, which caused the Company to reduce service at that airport;  |

|   |                                    |
| - | ---------------------------------- |
| • | limitations on route authorities;  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------- |
| • | actions and decisions that create difficulties in obtaining access at slot\-controlled airports;  |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------- |
| • | actions and decisions that create difficulties in obtaining operating permits and approvals;  |

|   |                                       |
| - | ------------------------------------- |
| • | changes to environmental regulations; |

|   |                                 |
| - | ------------------------------- |
| • | new or increased taxes or fees; |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------- |
| • | changes to laws that affect the services that can be offered by airlines in particular markets and at particular airports; |

|   |                                        |
| - | -------------------------------------- |
| • | restrictions on competitive practices; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------- |
| • | changes in laws that increase costs for safety, security, compliance, or other Customer Service standards; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------- |
| • | changes in laws that may limit the Company's ability to enter into fuel derivative contracts to hedge against increases in fuel prices; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------- |
| • | changes in laws that may limit or regulate the Company's ability to promote the Company’s business or fares; and |

25


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

**NOTE 3\. REVENUE**

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue\. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on\-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program\. Mileage Plan other revenue includes brand and marketing revenue from our co\-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions\. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions\.

The Company disaggregates revenue by segment in Note 13\. The level of detail within the Company’s statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors\.

**Passenger Ticket and Ancillary Services Revenue**

The primary performance obligation on a typical passenger ticket is to provide air travel to the passenger\. Ticket revenue is collected in advance of travel and recorded as Air Traffic Liability (ATL) on the consolidated balance sheets\. The Company satisfies its performance obligation and recognizes ticket revenue for each flight segment when the transportation is provided\.

Ancillary passenger revenues relate to items such as checked\-bag fees, ticket change fees, and on\-board food and beverage sales, all of which are provided at time of flight\. As such, the obligation to perform these services is satisfied at the time of travel and is recorded with ticket revenue in Passenger revenue\.

Revenue is also recognized for tickets that are expected to expire unused, a concept referred to as “passenger ticket breakage\.” Passenger ticket breakage is recorded at the flight date using estimates made at the time of sale based on the Company’s historical experience of expired tickets, and other facts such as program changes and modifications\.

In addition to selling tickets on its own marketed flights, Alaska has interline agreements with partner airlines under which it sells multi\-city tickets with one or more segments of the trip flown by a partner airline, or it operates a connecting flight sold by a partner airline\. Each segment in a connecting flight represents a separate performance obligation\. Revenue on segments sold and operated by the Company is recognized as Passenger revenue in the gross amount of the allocated ticket price when the travel occurs, while the commission paid to the partner airline is recognized as a selling expense when the related transportation is provided\. Revenue on segments operated by a partner airline is deferred for the full amount of the consideration received at the time the ticket is sold and, once the segment has been flown the Company records the net amount, after compensating the partner airline, as Cargo and other revenue\.

A portion of revenue from the Mileage Plan™ program is recorded in Passenger revenue\. As members are awarded mileage credits on flown tickets, these credits become a distinct performance obligation to the Company\. The Company allocates the transaction price to each performance obligation identified in a passenger ticket contract on a relative standalone selling price basis\. The standalone selling price for loyalty mileage credits issued is discussed in the *Loyalty**Mileage Credits* section of this Note below\. The amount allocated to the mileage credits is deferred on the balance sheet\. Once a member travels using a travel award redeemed with mileage credits on one of the Company's airline carriers, the revenue associated with those mileage credits is recorded as Passenger revenue\.

Taxes collected from passengers, including transportation excise taxes, airport and security fees and other fees, are recorded on a net basis within passenger revenue in the consolidated statements of operations\.

Passenger revenue recognized in the consolidated statements of operations (in millions):

|                                                                               |                                      |                                      |                                      |
| ----------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                                               | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                                               | **2018**                             | **2017**                             | **2016**                             |
| Passenger ticket revenue, including ticket breakage and net of taxes and fees | **$6,483**                           | $6,246                               | $4,568                               |
| Passenger ancillary revenue                                                   | **530**                              | 514                                  | 381                                  |
| Mileage Plan ^TM^  passenger revenue                                          | **619**                              | 541                                  | 443                                  |
| **Total passenger revenue**                                                   | **$7,632**                           | $7,301                               | $5,392                               |

 70


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

**ITEM 3\. LEGAL PROCEEDINGS**

*Chapter 11 Cases*\. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court)\. On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan)\. On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger\.

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims\. The shares of AAG common stock issued to the Disputed Claims Reserve were originally issued on December 13, 2013 and have at all times since been included in the number of shares issued and outstanding as reported from time to time in our quarterly and annual reports, including for purposes of calculating earnings per share\. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve\. However, we are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution in the Disputed Claims Reserve are not sufficient to fully pay any additional allowed unsecured claims\. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders and former convertible noteholders treated as stockholders under the Plan\. On February 12, 2019, in accordance with the approval granted by the Bankruptcy Court on December 6, 2018, an aggregate of approximately 17\.3 million shares of AAG common stock were distributed from the Disputed Claims Reserve to former AMR shareholders and convertible noteholders\. After giving effect to this distribution, the Disputed Claims Reserve holds approximately 7\.2 million shares of AAG common stock\.

*Private Party Antitrust Action Related to Passenger Capacity\.* We, along with Delta Air Lines, Inc\., Southwest Airlines Co\., United Airlines, Inc\. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity\. The U\.S\. lawsuits have been consolidated in the Federal District Court for the District of Columbia (the DC Court)\. On June 15, 2018, we reached a preliminary settlement agreement with the plaintiffs in the amount of $45 million that, once approved, will resolve all claims in the U\.S\. lawsuits\. That settlement received preliminary approval from the DC Court on June 18, 2018\.

*Private Party Antitrust Action Related to the Merger*\. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al\., v\. AMR Corporation, et al\., was filed in the United States Bankruptcy Court for the Southern District of New York\. The complaint named as defendants US Airways Group, US Airways, AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture\. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger\. On August 29, 2018, the Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross\-motion for summary judgment\. A bench trial is presently scheduled for March 2019\. We believe this lawsuit is without merit and intend to vigorously defend against the allegations\.

*DOJ Investigation Related to the United States Postal Service*\. In April 2015, the Department of Justice (DOJ) informed us of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air\. In October 2015, we received a Civil Investigative Demand from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis\. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes\. We are cooperating fully with the DOJ with regard to its investigation\.

*General*\. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time\. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control\. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material\. See Part I, Item 1A\. Risk Factors –*“We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity”* for additional discussion\.

**ITEM 4\. MINE SAFETY DISCLOSURES**

Not Applicable\.

39


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

***FINANCIAL CONDITION AND FINANCIAL MARKETS***

***Our business, financial condition and results of operations are substantially exposed to the volatility of jet fuel prices\. Significant increases in jet fuel costs would harm our business\.***

Fuel costs constitute a significant portion of our total operating expenses\. Future increases in the price of jet fuel may harm our business, financial condition and results of operations unless we are able to increase fares and fees or add additional ancillary services to attempt to recover increasing fuel costs\.

***Our indebtedness and other fixed obligations could lead to liquidity constraints that may restrict our activities\.***

We incurred a significant amount of new debt to finance our acquisition of Virgin America\. Although we have paid down a large portion of the merger\-related debt, we now carry, and will continue to carry for the foreseeable future, a substantial amount of debt\. Due to our high fixed costs, including aircraft lease commitments and debt service, a decrease in revenues would result in a disproportionately greater decrease in earnings\.

Our outstanding long\-term debt and other fixed obligations could have important consequences\. For example, they could limit our ability to obtain additional financing to fund our future capital expenditures, working capital or other purposes; require us to dedicate a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; or limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions\.

Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, we cannot ensure we will be able to do so in the future\. If we fail to do so, our business could be harmed\.

***Our maintenance costs will increase as our fleet ages, and we will periodically incur substantial maintenance costs due to the timing of maintenance events of our aircraft\.***

As of December 31, 2018, the average age of our NextGen aircraft (B737\-700, \-800, \-900, \-900ERs) was approximately 8\.1 years, the average age of our A319, A320, and A321neo aircraft was approximately 7\.9 years, the average age of our E175 aircraft was approximately 1\.4 years, and the average age of our Q400 aircraft was approximately 11\.2 years\. Currently, our newer aircraft require less maintenance than they will in the future\. Any significant increase in maintenance expenses could have a material adverse effect on our results of operations\.

***The application of the acquisition method of accounting resulted in us recording a significant amount of goodwill, which could result in significant future impairment charges and negatively affect our financial results\.***

In accordance with acquisition accounting rules, we recorded goodwill on our consolidated balance sheet to the extent the Virgin America acquisition purchase price exceeded the net fair value of Virgin America’s tangible and identifiable intangible assets and liabilities as of the acquisition date\. Goodwill is not amortized, but is tested for impairment at least annually\. We could record impairment charges in our results of operations as a result of, among other items, extreme fuel price volatility, a significant decline in the fair value of certain tangible or intangible assets, unfavorable trends in forecasted results of operations and cash flows, uncertain economic environment and other uncertainties\. We can provide no assurance that a significant impairment charge will not occur in one or more future periods\. Any such charges may materially negatively affect our financial results\.

***Our ability to use Virgin America’s net operating loss carryforwards to offset future taxable income for U\.S\. federal and state income tax purposes may be limited if we are unable to earn adequate taxable income in future periods\.***

Our ability to use the net operating loss carryforwards (NOLs) will depend on the amount of taxable income generated in future periods\. The NOLs may expire before we can generate sufficient taxable income to utilize the NOLs\.

 24


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

AMERICAN AIRLINES, INC\.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

|                                                            |                             |                             |                             |
| ---------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                            | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                            | **2019**                    | **2018**                    | **2017**                    |
| **Net income**                                             | $1,972                      | $1,658                      | $1,285                      |
| **Other comprehensive income (loss), net of tax:**         |                             |                             |                             |
| Pension, retiree medical and other postretirement benefits | (434

)               | (116

)               | (68

)                |
| Investments                                                | 3                           | (3

)                 | (1

)                 |
| **Total other comprehensive loss, net of tax**             | (431

)               | (119

)               | (69

)                |
| **Total comprehensive income**                             | $1,541                      | $1,539                      | $1,216                      |

See accompanying notes to consolidated financial statements\.

118


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

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

The fair value of American’s retiree medical and other postretirement benefits plans assets at December 31, 2017 by asset category, were as follows (in millions):

|                          |                                                                                |                                                                              |                                                                                |                                                     |
| ------------------------ | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- |
|                          | **Fair Value Measurements as of December 31, 2017**                                                 | **Fair Value Measurements as of December 31, 2017**                          | **Fair Value Measurements as of December 31, 2017**                            | **Fair Value Measurements as of December 31, 2017** |
| **Asset Category**       | **Quoted Prices in**

**Active Markets for**

**Identical Assets**

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

**Observable**

**Inputs**

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

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Money market fund        | $5                                                                                | $—                                                                           | $—                                                                             | $5                                                  |
| Mutual funds – AAL Class | —                                                                                | 290                                                                          | —                                                                              | 290                                                 |
| Total                    | $5                                                                                | $290                                                                         | $—                                                                             | $295                                                |

Investments in the retiree medical and other postretirement benefits plans’ mutual funds are valued by quoted prices on the active market, which is fair value and represents the net asset value of the shares of such funds as of the close of business at the end of the period\. The AAL Class mutual fund restricts trading only to American, resulting in a fair value classification of Level 2\. Investments included approximately 30% of investments in non\-U\.S\. common stocks in both 2018 and 2017\. Net asset value is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination\.

***Defined Contribution Plans***

American contributed $856 million, $844 million and $761 million to its defined contribution plans for the years ended December 31, 2018, 2017 and 2016, respectively\.

***Profit Sharing Program***

American accrues 5% of its pre\-tax income excluding special items for its profit sharing program\. For the year ended December 31, 2018, American accrued $175 million for this program, which will be distributed to employees in the first quarter of 2019\.

**9\. Accumulated Other Comprehensive Loss**

The components of AOCI are as follows (in millions):

|                                                            |                                                                                |                                    |                                                         |       |           |
| ---------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------- | ------------------------------------------------------- | ----- | --------- |
|                                                            | **Pension,
Retiree
Medical and
Other
Postretirement
Benefits** | **Unrealized Loss on Investments** | **Income Tax
Benefit
(Provision)**  **^(1)^** |       | **Total** |
| Balance at December 31, 2016                               | $(4,394)                                                                                | $—                                 | $(788)                                                  |       | $(5,182)  |
| Other comprehensive income (loss) before reclassifications | (27)                                                                                | (1)                                | 14                                                      |       | (14)      |
| Amounts reclassified from AOCI                             | (87)                                                                                | —                                  | 32                                                      | ^(2)^ | (55)      |
| Net current\-period other comprehensive income (loss)      | (114)                                                                                | (1)                                | 46                                                      |       | (69)      |
| Balance at December 31, 2017                               | (4,508)                                                                                | (1)                                | (742)                                                   |       | (5,251)   |
| Other comprehensive income (loss) before reclassifications | (61)                                                                                | (4)                                | 15                                                      |       | (50)      |
| Amounts reclassified from AOCI                             | (89)                                                                                | —                                  | 20                                                      | ^(2)^ | (69)      |
| Net current\-period other comprehensive income (loss)      | (150)                                                                                | (4)                                | 35                                                      |       | (119)     |
| Balance at December 31, 2018                               | $(4,658)                                                                                | $(5)                               | $(707)                                                  |       | $(5,370)  |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income until the obligations are fully extinguished\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision on American’s consolidated statements of operations\. |

165


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

ITEM 9B\. OTHER INFORMATION

None\.

PART III

ITEM 10\. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE  REGISTRANT

Information required by this item is set forth under the headings "Board Operations," "Proposal 1 \- Election of Directors" and "Section 16 Beneficial Ownership Reporting Compliance" in our Proxy Statement to be filed with the Commission related to our 2020 Annual Meeting of Stockholders ("Proxy Statement"), and is incorporated by reference\. Pursuant to instruction 3 to paragraph (b) of Item 401 of Regulation S\-K, certain information regarding executive officers is contained in Part I of this Form 10\-K\.

ITEM 11\. EXECUTIVE COMPENSATION

Information required by this item is set forth under the headings "Executive Compensation" and "Director Compensation" in our Proxy Statement and is incorporated by reference\.

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

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about the number of shares of common stock that may be issued under Delta's equity compensation plans as of December 31, 2019\.

|                                                              |                                                              |                                                              |                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |
|:------------------------------------------------------------ |:------------------------------------------------------------ |:------------------------------------------------------------ | --------------------------------------------------------------------------------------------------:| --------------------------------------------------------------------------------------------------:| -------------------------------------------------------------------------------------:| --------------------------------------------------------------------------------------------------------------------------------------------------:| --------------------------------------------------------------------------------------------------------------------------------------------------:|
| Plan Category                                                | Plan Category                                                | Plan Category                                                | (a) No\. of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights^(1)^ | (a) No\. of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights^(1)^ | (b) Weighted\-Average Exercise Price of Outstanding Options, Warrants and Rights^(2)^ | (c) No\. of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))^(3)^ | (c) No\. of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))^(3)^ |
| Equity compensation plans approved by securities holders     | Equity compensation plans approved by securities holders     | Equity compensation plans approved by securities holders     |                                                                                5,334,334  |                                                                                5,334,334  |                                                                              $36\.60  |                                                                                24,809,943  |                                                                                24,809,943  |
| Equity compensation plans not approved by securities holders | Equity compensation plans not approved by securities holders | Equity compensation plans not approved by securities holders |                                                                                —  |                                                                                —  |                                                                                —  |                                                                                —  |                                                                                —  |
| Total                                                        | Total                                                        | Total                                                        |                                                                                5,334,334  |                                                                                5,334,334  |                                                                              $36\.60  |                                                                                24,809,943  |                                                                                24,809,943  |

^(1)^ Includes a maximum of 1,395,451 shares of common stock that may be issued upon the achievement of certain performance conditions under outstanding performance share awards as of December 31, 2019\.

^(2)^ Includes performance share awards, which do not have exercise prices\. The weighted average exercise price of options is  $49\.57\.

^(3)^ Reflects shares remaining available for issuance under Delta's Performance Compensation Plan\. If any shares of our common stock are covered by an award under the Plan that expires, is canceled, forfeited or otherwise terminates without delivery of shares (including shares surrendered or withheld for payment of taxes related to an award), then such shares will again be available for issuance under the Plan except for (i) any shares tendered in payment of an option, (ii) shares withheld to satisfy any tax withholding obligation with respect to the exercise of an option or stock appreciation right ("SAR") or (iii) shares covered by a stock\-settled SAR or other awards that were not issued upon the settlement of the award\. Because 2,590,479 shares of restricted stock remain unvested and subject to forfeiture, these shares could again be available for issuance\.

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

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

Information required by this item is set forth under the headings "Board Operations" and "Proposal 1 \- Election of Directors" in our Proxy Statement and is incorporated by reference\.

98


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

***Property, Equipment and Depreciation***

Property and equipment are recorded at cost and depreciated using the straight\-line method over their estimated useful lives less an estimated salvage value, which are as follows:

|                                                |                                                                 |                             |
| ---------------------------------------------- | --------------------------------------------------------------- | --------------------------- |
|                                                | **Estimated Useful Life**                                       | **Estimated Salvage Value** |
| Aircraft and other flight equipment:           |                                                                 |                             |
| Boeing 737, Airbus A319/320, and E175 aircraft | 20\-25 years                                                    | 10%                         |
| Bombardier Q400 aircraft                       | 15 years                                                        | 5%                          |
| Buildings                                      | 25 \- 30 years                                                  | 10%                         |
| Minor building and land improvements           | 10 years                                                        | —%                          |
| Capitalized leases and leasehold improvements  | Generally shorter of lease term or

estimated useful life | —%                          |
| Computer hardware and software                 | 3\-10 years                                                     | —%                          |
| Other furniture and equipment                  | 5\-10 years                                                     | —%                          |

Near the end of an asset's estimated useful life, management updates the salvage value estimates based on current market conditions and expected use of the asset\. Repairable and rotable aircraft parts are included in Aircraft and other flight equipment, and are depreciated over the associated fleet life\.

In 2016, the Company changed its accounting estimate for the expected useful life of the B737 NextGen aircraft, which includes the B737\-700, \-800, \-900, \-900ER aircraft and the related parts, from 20 years to 25 years\. The change in estimate was precipitated by management's annual accounting policy review, which considered market studies, asset performance and intended use, as well as industry benchmarking\. The change in estimate was applied prospectively effective October 1, 2016\.

Capitalized interest, based on the Company’s weighted\-average borrowing rate, is added to the cost of the related asset, and is depreciated over the estimated useful life of the asset\.

Maintenance and repairs, other than engine maintenance on B737\-800 engines, are expensed when incurred\. Major modifications that extend the life or improve the usefulness of aircraft are capitalized and depreciated over their estimated period of use\. Maintenance on B737\-800 engines is covered under a power\-by\-the\-hour agreement with a third party, whereby the Company pays a determinable amount, and transfers risk, to a third party\. The Company expenses the contract amounts based on engine usage\.

The Company evaluates long\-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the total carrying amount of an asset or asset group may not be recoverable\. The Company groups assets for purposes of such reviews at the lowest level at which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities, which is generally the fleet level\. An impairment loss is considered when estimated future undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition are less than its carrying amount\. If the asset or asset group is not considered recoverable, a write\-down equal to the excess of the carrying amount over the fair value will be recorded\.

***Goodwill***

Goodwill represents the excess of purchase price over the fair value of the related net assets acquired in the Company's acquisition of Virgin America and is not amortized\. The total balance of goodwill is associated with the Mainline reporting unit\. The Company reviews goodwill for impairment annually in Q4, or more frequently if events or circumstances indicate than an impairment may exist\. If fair value of the reporting unit does not exceed the carrying amount, an impairment charge may be recorded\. In 2018, the fair value of the reporting unit with goodwill substantially exceeded its carrying value\.

***Intangible Assets***

Intangible assets recorded in conjunction with the acquisition of Virgin America consist primarily of indefinite\-lived airport slots, finite\-lived airport gates and finite\-lived customer relationships\. Finite\-lived intangibles are amortized over their estimated useful lives\. Indefinite\-lived intangibles are not amortized, but are tested at least annually for impairment using a similar methodology to property, equipment and goodwill, as described above\.

 63


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

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

Fuel Hedging Program

We have recently managed our fuel price risk through a hedging program intended to reduce the financial impact from changes in the price of fuel as fuel prices are subject to potential volatility\.  We may utilize different contract and commodity types in this program and frequently test their economic effectiveness against our financial targets\. We closely monitor the hedge portfolio and rebalance the portfolio based on market conditions, which may result in locking in gains or losses on hedge contracts prior to their settlement dates\. In addition, we enter into derivatives with third parties to hedge financial risk related to Monroe’s refining margins\.

Fuel Supply Availability

We are currently able to obtain adequate supplies of aircraft fuel, including fuel produced by Monroe or procured through the exchange of non\-jet fuel products the refinery produces, and crude oil for Monroe's operations\. However, it is impossible to predict the future availability or price of aircraft fuel and crude oil\. Weather\-related events, natural disasters, political disruptions or wars involving oil\-producing countries, changes in government policy concerning aircraft fuel production, transportation, taxes or marketing, changes in refining capacity, environmental concerns and other unpredictable events may result in future fuel supply shortages and fuel price increases\.

Other Businesses

Cargo

Through our global network, our cargo operations are able to connect the world's major freight gateways\. We generate cargo revenues in domestic and international markets through the use of cargo space on regularly scheduled passenger aircraft\. We are a member of SkyTeam Cargo, a global airline cargo alliance, whose other members are Aeroflot, Aerolíneas Argentinas, Aeroméxico Cargo, Air France\-KLM Cargo, Alitalia Cargo, China Airlines Cargo, China Cargo Airlines, China Southern Cargo, Czech Airlines Cargo and Korean Air Cargo\. SkyTeam Cargo offers a global network spanning six continents\.

Ancillary Businesses

We have several other businesses arising from our airline operations, including aircraft maintenance, repair and overhaul ("MRO"), staffing and other services, vacation wholesale operations and our private jet operations\. In  2017 , the total revenue from these businesses was approximately $1 billion\.

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | In addition to providing maintenance and engineering support for our fleet of over 900 aircraft, our MRO operation, known as Delta TechOps, serves aviation and airline customers from around the world\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Delta Global Services provides services to us and to third parties, including staffing services, aviation solutions, professional security and training services\. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------- |
| • | Our vacation wholesale business, Delta Vacations, provides vacation packages to third\-party consumers\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Our private jet operations, Delta Private Jets, provides aircraft charters, aircraft management and programs allowing members to purchase flight time by the hour\. |

Distribution and Expanded Product Offerings

Our tickets are sold through various distribution channels, including: (1) digital channels, such as delta\.com and mobile applications/web, (2) telephone reservations, (3) online travel agencies and (4) traditional "brick and mortar" and other agencies\. We make fare and product information widely available across those channels, ensuring customers always receive the best information and service options\. An increasing number of our tickets are sold through Delta digital direct channels, driving more direct, personalized interactions with our customers and reducing distribution costs\.

 5


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

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

Aircraft maintenance materials and outside repairs increased $98 million, or 5\.9%, in 2016 as compared to 2015 primarily due to a year\-over\-year increase in airframe maintenance visits as a result of the cyclical timing of these visits and volume\-driven increases in component costs, partially offset by a reduction in costs due to the timing of maintenance on certain engines\.

Aircraft rent decreased $74 million, or 9\.8%, in 2016 as compared to 2015 primarily due to lease expirations, the purchase or capital lease conversion of several operating leased aircraft and lower lease renewal rates for certain aircraft\.

The table below presents special charges incurred by the Company during the years ended December 31 (in millions):

|                                                            |          |          |
|:---------------------------------------------------------- | --------:| --------:|
|                                                            | **2016** | **2015** |
| Impairment of assets                                       |    $412  |     $79  |
| Cleveland airport lease restructuring                      |      74  |       —  |
| Labor agreement costs                                      |      64  |      18  |
| Severance and benefit costs                                |      37  |     107  |
| (Gains) losses on sale of assets and other special charges |      51  |     122  |
| Total special charges                                      |    $638  |    $326  |

See Note 14 to the financial statements included in Part II, Item 8 of this report for additional information\.

Other operating expenses increased $343 million, or 6\.8%, in 2016 as compared to 2015 primarily due to increases in ground handling costs, food and technology costs associated with the Company’s enhanced customer experience initiatives, rate\-driven increases in hotel expenses for crews, increases in marketing expenses related to the 2016 Summer Olympics and volume\-driven increases in cargo costs\.

***Nonoperating Income (Expense)***

The following table illustrates the year\-over\-year dollar and percentage changes in the Company’s nonoperating income (expense) for the years ended December 31 (in millions, except percentage changes):

|                                 |          |          |                              |              |
|:------------------------------- | --------:| --------:| ----------------------------:| ------------:|
|                                 | **2016** | **2015** | **Increase  <br>(Decrease)** | **% Change** |
| Interest expense                |   $(614) |   $(669) |                        $(55) |       (8\.2) |
| Interest capitalized            |      72  |      49  |                          23  |       46\.9  |
| Interest income                 |      42  |      25  |                          17  |       68\.0  |
| Miscellaneous, net              |     (19) |    (352) |                        (333) |      (94\.6) |
| Total nonoperating expense, net |   $(519) |   $(947) |                       $(428) |      (45\.2) |

The decrease in interest expense of $55 million, or 8\.2%, in 2016 as compared to 2015 was primarily due to the prepayment of certain debt issuances in 2015 and declining balances of other debt, partially offset by interest expense on debt issued for the acquisition of new aircraft, the conversion of certain operating leases to capital leases and certain constructed airport assets accounted for as capital leases\.

In 2015, Miscellaneous, net included losses of $80 million from fuel derivatives not qualifying for hedge accounting\. Foreign currency losses were approximately $43 million and $129 million in 2016 and 2015, respectively\. Foreign currency results included $8 million and $61 million of foreign exchange losses for 2016 and 2015, respectively, related to the Company’s cash holdings in Venezuela\. Miscellaneous, net for 2015 also includes a $134 million special charge related to the write\-off of unamortized non\-cash debt discounts for the early redemption of the 6% Notes due 2026 (the “2026 Notes”) and the 6% Notes due 2028 (the “2028 Notes”)\.

34


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

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

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

The Audit Committee of the UAL Board of Directors has adopted a policy on pre\-approval of services of the Company's independent registered public accounting firm\. As a wholly\-owned subsidiary of UAL, United's audit services are determined by UAL\. The policy provides that the Audit Committee shall pre\-approve all audit and non\-audit services to be provided to UAL and its subsidiaries and affiliates by its independent auditors\. The process by which this is carried out is as follows:

For recurring services, the Audit Committee reviews and pre\-approves the independent registered public accounting firm's annual audit services in conjunction with the annual appointment of the outside auditors\. The reviewed materials include a description of the services along with related fees\. The Audit Committee also reviews and pre\-approves other classes of recurring services along with fee thresholds for pre\-approved services\. In the event that the additional services are required prior to the next scheduled Audit Committee meeting, pre\-approvals of additional services follow the process described below\.

Any requests for audit, audit related, tax and other services not contemplated with the recurring services approval described above must be submitted to the Audit Committee for specific pre\-approval and cannot commence until such approval has been granted\. Normally, pre\-approval is provided at regularly scheduled meetings\. However, the authority to grant specific pre\-approval between meetings, as necessary, has been delegated to the Chair of the Audit Committee\. The Chair must update the Audit Committee at the next regularly scheduled meeting of any services that were granted specific pre\-approval\.

On a periodic basis, the Audit Committee reviews the status of services and fees incurred year\-to\-date and a list of newly pre\-approved services since its last regularly scheduled meeting\. The Audit Committee has considered whether the  2019  and  2018  non\-audit services provided by Ernst & Young LLP, the Company's independent registered public accounting firm, are compatible with maintaining auditor independence\.

All of the services in  2019  and  2018  under the Audit Fees, Audit Related Fees, Tax Fees and All Other Fees categories below have been approved by the Audit Committee pursuant to paragraph (c)(7) of Rule 2\-01 of Regulation S\-X of the Exchange Act\.

The aggregate fees billed for professional services rendered by the Company's independent auditors in  2019  and  2018  are as follows (in thousands):

|                                              |          |          |
| -------------------------------------------- | -------- | -------- |
| **Service**                                  | **2019** | **2018** |
| Audit Fees                                   | $4,323   | $3,992   |
| Audit Related Fees                           | 403      | 375      |
| Tax Fees                                     | 174      | 166      |
| All Other Fees                               | —        | 2        |
| Total Fees                                   | $4,900   | $4,535   |
| Note: UAL and United amounts are the same\.  |          |          |

Audit Fees\.  For  2019  and  2018 , audit fees consist primarily of the audit and quarterly reviews of the consolidated financial statements and the audit of the effectiveness of internal control over financial reporting of United Airlines Holdings, Inc\. and its wholly\-owned subsidiaries\. Audit fees also include the audit of the consolidated financial statements of United, attestation services required by statute or regulation, comfort letters, consents, assistance with and review of documents filed with the SEC, and accounting and financial reporting consultations and research work necessary to comply with generally accepted auditing standards\.

Audit Related Fees\.  For  2019 , fees for audit\-related services primarily consisted of accounting consultations for proposed or future transactions and identifying and testing changes in the internal control environment prior to the implementation of the new revenue accounting system, which went into effect during the third quarter of  2019 \. For  2018 , fees for audit\-related services consisted of consultations related to the adoption of new accounting standards prior to adoption\.

Tax Fees\.  Tax fees for  2019  and  2018  relate to professional services provided for research and consultations regarding tax accounting and tax compliance matters and review of U\.S\. and international tax impacts of certain transactions, exclusive of tax services rendered in connection with the audit\.

All Other Fees\.  Fees for all other services billed in  2018  consist of subscriptions to Ernst & Young LLP's on\-line accounting research tool\.

94


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

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

35% primarily because of the non\-cash income tax expense of $180 million that was related to losses on fuel derivatives designated for hedge accounting\. Subsequent to the release of the valuation allowance in 2015, this deferred income tax expense of $180 million remained in AOCI until all fuel derivatives were settled in December 2016\.

Total income tax expense in 2017 includes the provisional one\-time transition tax of $19 million on previously deferred foreign earnings\. The undistributed cumulative earnings of foreign subsidiaries contributing to the one\-time transition tax were $122 million\. The Company expects to repatriate these earnings in 2018\.

As of December 31, 2017, we had not completed our analysis of all aspects of the Tax Act\. However, we have made a provisional estimate for its effect on our existing deferred tax balances and the one\-time transition tax\. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%\. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts\.

Temporary differences and carryforwards that give rise to deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows (in millions):

|                                                                  |           |           |            |            |
|:---------------------------------------------------------------- | ---------:| ---------:| ----------:| ----------:|
|                                                                  |   **UAL** |   **UAL** | **United** | **United** |
|                                                                  |  **2017** |  **2016** |   **2017** |   **2016** |
| Deferred income tax asset (liability):                           |           |           |            |            |
| Federal and state net operating loss (“NOL”) carryforwards       |     $601  |   $1,613  |      $574  |    $1,571  |
| Deferred revenue                                                 |    1,069  |    2,096  |     1,069  |     2,096  |
| Employee benefits, including pension, postretirement and medical |    1,051  |    1,662  |     1,051  |     1,662  |
| Alternative minimum tax credit carryforwards                     |        —  |      116  |         —  |       116  |
| Other                                                            |      351  |      523  |       351  |       522  |
| Less: Valuation allowance                                        |      (63) |      (68) |       (63) |       (68) |
| Total deferred tax assets                                        |  $ 3,009  |   $5,942  |    $2,982  |    $5,899  |
| Depreciation                                                     |  $(2,431) |  $(3,961) |   $(2,431) |   $(3,961) |
| Intangibles                                                      |     (803) |   (1,326) |      (803) |    (1,326) |
| Total deferred tax liabilities                                   |  $(3,234) |  $(5,287) |   $(3,234) |   $(5,287) |
| Net deferred tax asset (liability)                               |    $(225) |     $655  |     $(252) |      $612  |

United and its domestic consolidated subsidiaries file a consolidated federal income tax return with UAL\. Under an intercompany tax allocation policy, United and its subsidiaries compute, record and pay UAL for their own tax liability as if they were separate companies filing separate returns\. In determining their own tax liabilities, United and each of its subsidiaries take into account all tax credits or benefits generated and utilized as separate companies and they are each compensated for the aforementioned tax benefits only if they would be able to use those benefits on a separate company basis\.

The Company’s federal and state NOL carryforwards relate to prior years’ NOLs, which may be used to reduce tax liabilities in future years\. These tax benefits are mostly attributable to federal pre\-tax NOL carryforwards of $2\.4 billion for UAL\. If not utilized these federal pre\-tax NOLs will expire as follows (in billions): $0\.2 in 2026, $0\.5 in 2028 and $1\.7 thereafter\. In addition, for UAL the majority of tax benefits of the state NOLs of $49 million, net of a valuation allowance of $52 million, will expire over a five to 20\-year period\.

The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets\. The Company establishes valuation allowances if it is not more

76


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

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

2\. Special Items, Net

Special items, net on our consolidated statements of operations consisted of the following (in millions):

|                                                                          |                             |                             |                             |
| ------------------------------------------------------------------------ | --------------------------- | --------------------------- | --------------------------- |
|                                                                          | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                          | **2019**                    | **2018**                    | **2017**                    |
| Fleet restructuring expenses  ^(1)^                                      | $271                        | $422                        | $232                        |
| Fleet impairment  ^(2)^                                                  | 213                         | —                           | —                           |
| Merger integration expenses  ^(3)^                                       | 191                         | 268                         | 273                         |
| Litigation reserve adjustments                                           | (53

)                | 45                          | —                           |
| Mark\-to\-market adjustments on bankruptcy obligations, net  ^(4)^       | (11

)                | (76

)                | 27                          |
| Severance expenses  ^(5)^                                                | 11                          | 58                          | —                           |
| Intangible asset impairment  ^(6)^                                       | —                           | 26                          | —                           |
| Labor contract expenses                                                  | —                           | 13                          | 46                          |
| Employee 2017 Tax Act bonus expense  ^(7)^                               | —                           | —                           | 123                         |
| Other operating charges, net                                             | 13                          | 31                          | 11                          |
| Mainline operating special items, net                                    | 635                         | 787                         | 712                         |
| Regional operating special items, net                                    | 6                           | 6                           | 22                          |
| Operating special items, net                                             | 641                         | 793                         | 734                         |
| Debt refinancing and extinguishment charges                              | 16                          | 13                          | 22                          |
| Mark\-to\-market adjustments on equity and other investments, net  ^(8)^ | (5

)                 | 104                         | —                           |
| Other nonoperating income, net                                           | (8

)                 | (4

)                 | —                           |
| Nonoperating special items, net                                          | 3                           | 113                         | 22                          |
| Income tax special items  ^(9)^                                          | —                           | 18                          | —                           |
| Impact of the 2017 Tax Act  ^(10)^                                       | —                           | —                           | 823                         |
| Income tax special items, net                                            | —                           | 18                          | 823                         |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment grounded or expected to be grounded earlier than planned\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Fleet impairment principally includes a non\-cash write\-down of aircraft related to the planned retirement of our Embraer E190 fleet\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(3)^ | Merger integration expenses included costs associated with integration projects, principally our technical operations, flight attendant, human resources and payroll systems\. |

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

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------- |
| ^(5)^ | Severance expenses primarily included costs associated with reductions of management and support staff team members\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(6)^ | Intangible asset impairment includes a non\-cash charge to write\-off our Brazil route authority as a result of the U\.S\.\-Brazil open skies agreement\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(7)^ | Employee bonus expense included costs related to the   $1,000  cash bonus and associated payroll taxes granted to mainline employees in recognition of the 2017 Tax Act\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(8)^ | Mark\-to\-market adjustments on equity and other investments, net primarily relates to net unrealized gains and losses associated with our equity investment in China Southern Airlines Company Limited (China Southern Airlines)\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------- |
| ^(9)^ | Income tax special items for  2018  included an   $18 million  charge related to an international income tax matter\. |

85


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

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

The Company records passenger revenue related to the air transportation element when the transportation is delivered\. The other elements are generally recognized as Other operating revenue when earned\.

**Expiration of Miles**

The Company accounts for miles sold and awarded that will never be redeemed by program members, which we refer to as breakage\. The Company reviews its breakage estimates annually based upon the latest available information regarding redemption and expiration patterns\. Miles expire after 18 months of member account inactivity\.

The Company’s estimate of the expected expiration of miles requires significant management judgment\. Current and future changes to expiration assumptions or to the expiration policy, or to program rules and program redemption opportunities, may result in material changes to the deferred revenue balance as well as recognized revenues from the programs\.

**Other Information**

The following table provides additional information related to the frequent flyer program (in millions):

|                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |
|:-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------:| -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------:| -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------:| -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------:| -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------:|
|                                                                                **Year Ended** **December 31,**                                                                                |                                                                                **Cash Proceeds
from Miles Sold
and Earned** |                                                                                **Other Revenue**
**Recognized Upon**
**Award of Miles
to Third\-Party
Customers (a)** |                                                                                **Increase in Frequent**
**Flyer Deferred
Revenue for Miles
Awarded (b)** |                                                                                **Decrease in
Advanced
Purchase**
**of Miles (c)** |
|                                                                                2017                                                                                |                                                                                $2,343  |                                                                                $1,183  |                                                                                $2,025  |                                                                                $(865) |
|                                                                                2016                                                                                |                                                                                3,022  |                                                                                1,221  |                                                                                2,050  |                                                                                (249) |
|                                                                                2015                                                                                |                                                                                2,999  |                                                                                1,050  |                                                                                2,173  |                                                                                (224) |
| (a) This amount represents other revenue recognized during the period from the sale of miles to third parties, representing the marketing\-related deliverable services component of the sale\. | (a) This amount represents other revenue recognized during the period from the sale of miles to third parties, representing the marketing\-related deliverable services component of the sale\. | (a) This amount represents other revenue recognized during the period from the sale of miles to third parties, representing the marketing\-related deliverable services component of the sale\. | (a) This amount represents other revenue recognized during the period from the sale of miles to third parties, representing the marketing\-related deliverable services component of the sale\. | (a) This amount represents other revenue recognized during the period from the sale of miles to third parties, representing the marketing\-related deliverable services component of the sale\. |
|                                                 (b) This amount represents the increase to Frequent flyer deferred revenue during the period\.                                                  |                                                                                (b) This amount represents the increase to Frequent flyer deferred revenue during the period\. |                                                                                (b) This amount represents the increase to Frequent flyer deferred revenue during the period\. |                                                                                (b) This amount represents the increase to Frequent flyer deferred revenue during the period\. |                                                                                (b) This amount represents the increase to Frequent flyer deferred revenue during the period\. |
|            (c) This amount represents the net decrease in the advance purchase of miles obligation due to cash payments for the sale of miles less than miles awarded to customers\.            |                       (c) This amount represents the net decrease in the advance purchase of miles obligation due to cash payments for the sale of miles less than miles awarded to customers\. |                       (c) This amount represents the net decrease in the advance purchase of miles obligation due to cash payments for the sale of miles less than miles awarded to customers\. |                       (c) This amount represents the net decrease in the advance purchase of miles obligation due to cash payments for the sale of miles less than miles awarded to customers\. |                       (c) This amount represents the net decrease in the advance purchase of miles obligation due to cash payments for the sale of miles less than miles awarded to customers\. |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (d) | **Cash and Cash Equivalents and Restricted Cash—** Highly liquid investments with a maturity of three months or less on their acquisition date are classified as cash and cash equivalents\. |

Restricted cash primarily includes cash collateral for letters of credit and collateral associated with obligations for facility leases and workers’ compensation\. Restricted cash is classified as short\-term or long\-term in the consolidated balance sheets based on the expected timing of return of the assets to the Company\.

63


Annual Report of Southwest Airlines Co\. for year 2018

of Indiana, the Eastern District of Louisiana, the District of Minnesota, the District of New Jersey, the Eastern District of New York, the Southern District of New York, the Middle District of North Carolina, the District of Oklahoma, the Eastern District of Pennsylvania, the Northern District of Texas, the District of Vermont, and the Eastern District of Wisconsin\. On October 13, 2015, the Judicial Panel on Multi\-District Litigation centralized the cases to the United States District Court in the District of Columbia\. On March 25, 2016, the plaintiffs filed a Consolidated Amended Complaint in the consolidated cases alleging that the defendants conspired to restrict capacity from 2009 to present\. The plaintiffs seek to bring their claims on behalf of a class of persons who purchased tickets for domestic airline travel on the defendants' airlines from July 1, 2011 to present\. They seek treble damages, injunctive relief, and attorneys' fees and expenses\. On May 11, 2016, the defendants moved to dismiss the Consolidated Amended Complaint, and on October 28, 2016, the Court denied this motion\. On December 20, 2017, the Company reached an agreement to settle these cases with a proposed class of all persons who purchased domestic airline transportation services from July 1, 2011, to the date of the settlement\. The Company agreed to pay $15 million and to provide certain cooperation with the plaintiffs as set forth in the settlement agreement\. The Court granted preliminary approval of the settlement on January 3, 2018\. The plaintiffs provided notice to the settlement class pursuant to a notice program approved by the Court, and the deadline for class members to opt out or object was January 4, 2019\. The fairness hearing for the settlement is scheduled for March 22, 2019\. The Company denies all allegations of wrongdoing\.

In addition, on July 8, 2015, the Company was named as a defendant in a putative class action filed in the Federal Court in Canada alleging that the Company, Air Canada, American Airlines, Delta Air Lines, and United Airlines colluded to restrict capacity and maintain higher fares for Canadian residents traveling in the United States and for travel between the United States and Canada\. Similar lawsuits were filed in the Supreme Court of British Columbia on July 15, 2015, Court of Queen's Bench for Saskatchewan on August 4, 2015, Superior Court of the Province of Quebec on September 21, 2015, and Ontario Superior Court of Justice on October 6, 2015\. In December 2015, the Company entered into Tolling and Discontinuance agreements with putative class counsel in the Federal Court, British Columbia, and Ontario proceedings and a discontinuance agreement with putative class counsel in the Quebec proceeding\. The other defendants entered into an agreement with the same putative class counsel to stay the Federal Court, British Columbia, and Quebec proceedings and to proceed in Ontario\. On June 10, 2016, the Federal Court granted plaintiffs' motion to discontinue that action against the Company without prejudice and stayed the action against the other defendants\. On July 13, 2016, the plaintiff unilaterally discontinued the action against the Company in British Columbia\. On February 14, 2017, the Quebec Court granted the plaintiff’s motion to discontinue the Quebec proceeding against the Company and to stay that proceeding against the other defendants\. On March 10, 2017, the Ontario Court granted the plaintiff’s motion to discontinue that proceeding as to the Company\. On September 29, 2017, the Company and the other defendants entered into a tolling agreement suspending any limitations periods that may apply to possible claims among them for contribution and indemnity arising from the Canadian litigation\. The Saskatchewan claim has not been served on the Company, and the time for the Company to respond to that complaint has not yet begun to run\. The plaintiff in that case generally seeks damages (including punitive damages in certain cases), prejudgment interest, disgorgement of any benefits accrued by the defendants as a result of the allegations, injunctive relief, and attorneys' fees and other costs\. The Company denies all allegations of wrongdoing and intends to vigorously defend this civil case in Canada\. The Company does not currently serve Canada\.

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service\.

The Company’s management does not expect that the outcome in any of its currently ongoing legal proceedings or the outcome of any proposed adjustments presented to date by the Internal Revenue Service, individually or collectively, will have a material adverse effect on the Company’s financial condition, results of operations, or cash flow\.

|               |                                |
| ------------- | ------------------------------ |
| **Item 4\.**  | ***Mine Safety Disclosures***  |

Not applicable\.

31


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

Assumptions

We used the following actuarial assumptions to determine our benefit obligations and our net periodic cost for the periods presented:

|                                   |                  |                  |
| --------------------------------- | ---------------- | ---------------- |
|                                   | **December 31,** | **December 31,** |
| **Benefit Obligations** **^(1)^** | **2018**         | **2017**         |
| Weighted average discount rate    | 4\.33%           | 3\.69%           |

|                                                                    |                             |                             |                             |
| ------------------------------------------------------------------ | --------------------------- | --------------------------- | --------------------------- |
|                                                                    | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
| **Net Periodic Cost** **^(1)^**                                    | **2018**                    | **2017**                    | **2016**                    |
| Weighted average discount rate \- pension benefit                  | 3\.69%                      | 4\.14%                      | 4\.57%                      |
| Weighted average discount rate \- other postretirement benefit     | 3\.69%                      | 4\.19%                      | 4\.53%                      |
| Weighted average discount rate \- other postemployment benefit     | 3\.65%                      | 4\.14%                      | 4\.50%                      |
| Weighted average expected long\-term rate of return on plan assets | 8\.97%                      | 8\.96%                      | 8\.94%                      |
| Assumed healthcare cost trend rate for the next year ^(2)^         | 6\.75%                      | 7\.00%                      | 6\.50%                      |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Future employee compensation levels do not impact our frozen defined benefit pension plans or other postretirement plans and impact only a small portion of our other postemployment obligation\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Healthcare cost trend rate is assumed to decline gradually to   5\.00%  by  2026  and remain unchanged thereafter\. |

Expected Long\-Term Rate of Return\.  Our expected long\-term rate of return on plan assets is based primarily on plan\-specific investment studies using historical market return and volatility data\. Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically\. We also expect to receive a premium for investing in less liquid private markets\. We review our rate of return on plan assets assumptions annually\. Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation\. The investment strategy for our defined benefit pension plan assets is to earn a long\-term return that meets or exceeds our annualized return target while taking an acceptable level of risk and maintaining sufficient liquidity to pay current benefits and other cash obligations of the plan\. This is achieved by investing in a globally diversified mix of public and private equity, fixed income, real assets, hedge funds and other assets and instruments\. Our expected long\-term rate of return on assets for net periodic pension benefit cost for the year ended  December 31, 2018  was   8\.97% \.

Healthcare Cost Trend Rate\.  Assumed healthcare cost trend rates have an effect on the amounts reported for the other postretirement benefit plans\. A   1%  change in the healthcare cost trend rate used in measuring the plan benefit obligation for these plans would have the following effects:

|                                                                |                 |                      |
| -------------------------------------------------------------- | --------------- | -------------------- |
| **(in millions)**                                              | **1% Increase** | **1% (Decrease)**    |
| Increase (decrease) in total service and interest cost         | $1              | $

(2

) |
| Increase (decrease) in the accumulated plan benefit obligation | 9               | (29

)         |

Life Expectancy \.  Changes in life expectancy may significantly change our benefit obligations and future expense\. We use the Society of Actuaries ("SOA") published mortality data, other publicly available information and our own perspective of future longevity to develop our best estimate of life expectancy\. The SOA publishes updated mortality tables for U\.S\. plans and updated improvement scales\. Each year we consider updates by the SOA in setting our mortality assumptions for purposes of measuring pension and other postretirement and postemployment benefit obligations\.

Benefit Payments

Benefit payments in the table below are based on the same assumptions used to measure the related benefit obligations\. Actual benefit payments may vary significantly from these estimates\. Benefits earned under our pension plans and certain postemployment benefit plans are expected to be paid from funded benefit plan trusts, while our other postretirement benefits are funded from current assets\.

 84


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

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

The expected effects of adoption of the New Revenue Standard to our December 31, 2017 balance sheet are as follows:

|                                      |             |                      |           |
| ------------------------------------ | ----------- | -------------------- | --------- |
|                                      | As Reported | New Revenue Standard | As Recast |
| Deferred tax asset                   | $427        | $1,389               | $1,816    |
| Air traffic liability                | 3,978       | 64                   | 4,042     |
| Current loyalty program liability    | 2,791       | 384                  | 3,175     |
| Noncurrent loyalty program liability | —           | 5,647                | 5,647     |
| Total stockholders’ equity (deficit) | 3,926       | (4,706)              | (780)     |

*Standards Effective for 2019 Reporting Periods*

***ASU 2016\-02: Leases (Topic 842) (the New Lease Standard)***

The New Lease Standard requires lessees to recognize a lease liability and a right\-of\-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the New Revenue Standard\. The New Lease Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years\. Early adoption is permitted\. We expect we will adopt the New Lease Standard effective January 1, 2019\. Entities are required to adopt the New Lease Standard using a modified retrospective approach, which results in the recast of each prior reporting period presented, for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients\. We are currently evaluating how the adoption of the New Lease Standard will impact our consolidated financial statements\. Interpretations are on\-going and could have a material impact on our implementation\. Currently, we expect that the adoption of the New Lease Standard will have a material impact on our consolidated balance sheet due to the recognition of right\-of\-use assets and lease liabilities principally for certain leases currently accounted for as operating leases\.

93