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

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

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

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

Under certain of American’s capacity purchase agreements with third\-party regional carriers, American does not own the underlying aircraft\. However, since American controls the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to be leased for accounting purposes\. For these capacity purchase agreements, American accounts for the lease and non\-lease components separately\. The lease component consists of the aircraft and the non\-lease components consist of services, such as the crew and maintenance\. American allocates the consideration in the capacity purchase agreements to the lease and non\-lease components using their estimated relative standalone prices\. See Note 10(b) for additional information on its capacity purchase agreements \.

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

(h) Income Taxes

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

American provides a valuation allowance for its deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized\. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income\. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets\. Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond American’s control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand\.

(i) Goodwill

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

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill\. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill\. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded\. Based upon American’s annual assessment, there was   no  goodwill impairment in  2019 \. The carrying value of the goodwill on American’s consolidated balance sheets was   $4\.1 billion  as of  December 31, 2019  and  2018 \.

(j) Other Intangibles, Net

Intangible assets consist primarily of domestic airport slots, customer relationships, marketing agreements, international slots and route authorities, airport gate leasehold rights and tradenames\.

Definite\-Lived Intangible Assets

Definite\-lived intangible assets are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable\.

124


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

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

|                               |        |
| ----------------------------- | ------ |
| 2013 Revolving Facility       | $1,000 |
| 2014 Revolving Facility       | 1,543  |
| April 2016 Revolving Facility | 300    |
| Total                         | $2,843 |

Secured financings are collateralized by assets, primarily aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots and pre\-delivery payments\.

At December 31, 2018, the maturities of long\-term debt are as follows (in millions):

|                     |         |
| ------------------- | ------- |
| 2019                | $2,508  |
| 2020                | 1,815   |
| 2021                | 3,409   |
| 2022                | 1,344   |
| 2023                | 3,892   |
| 2024 and thereafter | 9,754   |
| Total               | $22,722 |

***(a) 2013, 2014, April 2016 and December 2016 Credit Facilities***

*2013 Credit Facilities*

In May 2018, American and AAG entered into a Fourth Amendment (the Fourth Amendment to the 2013 Credit Agreement) to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of May 21, 2015, which amended and restated the Credit and Guaranty Agreement dated as of June 27, 2013 (as previously amended, the 2013 Credit Agreement, the revolving facility established thereunder, the 2013 Revolving Facility, the term loan facility established thereunder, the 2013 Term Loan Facility, and the 2013 Revolving Facility together with the 2013 Term Loan Facility, the 2013 Credit Facilities), pursuant to which American refinanced $1\.8 billion of the existing term loans outstanding under the 2013 Credit Facilities with proceeds of term loans incurred under the Fourth Amendment to the 2013 Credit Agreement (the 2013 Replacement Term Loans)\. The LIBOR margin on the 2013 Replacement Term Loans was reduced from 2\.00% to 1\.75% and the base rate margin on the 2013 Replacement Term Loans was reduced from 1\.00% to 0\.75%\. Additionally, the maturity date of the 2013 Replacement Term Loans was extended to June 2025 pursuant to the Fourth Amendment to the 2013 Credit Agreement\.

In December 2018, American and AAG entered into a Fifth Amendment (the Fifth Amendment to the 2013 Credit Agreement) to the 2013 Credit Agreement, as previously amended by the Fourth Amendment to the 2013 Credit Agreement\. Pursuant to the Fifth Amendment to the 2013 Credit Agreement, adjustments to the 2013 Revolving Facility were made, including reducing the total aggregate commitments under the 2013 Revolving Facility by $200 million, extending the maturity date for the revolver loans thereunder from October 2022 to October 2023 and reducing the LIBOR margin from 2\.25% to 2\.00% and the base rate margin from 1\.25% to 1\.00% for certain of the lenders of the revolver loans thereunder\. As of December 31, 2018, there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility\.

*2014 Credit Facilities*

In September 2018, American and AAG entered into a Fifth Amendment (the Fifth Amendment to the 2014 Credit Agreement) to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of April 20, 2015, which amended and restated the Credit and Guaranty Agreement dated as of October 10, 2014 (as previously amended, the 2014 Credit Agreement, the revolving credit facility established thereunder, the 2014 Revolving Facility, the term loan facility established thereunder, the 2014 Term Loan Facility, and the 2014 Revolving Facility together with the 2014 Term Loan Facility, the 2014 Credit Facilities)\. The Fifth Amendment to the 2014 Credit Agreement provides for incremental term loans in the amount of $500 million under the 2014 Term Loan Facility\. The terms of such incremental term loans are substantially similar to the terms of the existing term loans under the 2014 Term Loan Facility, including those with regard to maturity and interest rate margins\. As of December 31, 2018, approximately $1\.2 billion was outstanding under the 2014 Term Loan Facility\.

In December 2018, American and AAG entered into a Sixth Amendment (the Sixth Amendment to the 2014 Credit Agreement) to the 2014 Credit Agreement, as previously amended by the Fifth Amendment to the 2014 Credit Agreement\.

147


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

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

**Number** | **Description**                                                                                |
| 4\.39                         | [Trust Supplement No\. 2015\-2AA, dated as of September 24, 2015, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex42.htm)                                                                                |
| 4\.40                         | [Trust Supplement No\. 2015\-2A, dated as of September 24, 2015, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.3 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex43.htm)                                                                                |
| 4\.41                         | [Trust Supplement No\. 2015\-2B, dated as of September 24, 2015, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.4 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex44.htm)                                                                                |
| 4\.42                         | [Intercreditor Agreement (2015\-2), dated as of September 24, 2015, among Wilmington Trust Company, as Trustee of the American Airlines Pass Through Trust 2015\-2AA, as Trustee of the American Airlines Pass Through Trust 2015\-2A and as Trustee of the American Airlines Pass Through Trust 2015\-2B, Commonwealth Bank of Australia, New York Branch, as Class AA Liquidity Provider, Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Class A Liquidity Provider and Class B Liquidity Provider, and Wilmington Trust Company, as Subordination Agent (incorporated by reference to Exhibit 4\.5 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex45.htm) |
| 4\.43                         | [Note Purchase Agreement, dated as of September 24, 2015, among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements and Wilmington Trust Company, as Subordination Agent (incorporated by reference to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex46.htm)                                                                                |
| 4\.44                         | [Form of Participation Agreement (Participation Agreement among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein) (incorporated by reference to Exhibit B to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex46.htm)                                                                                |
| 4\.45                         | [Form of Indenture and Security Agreement (Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (incorporated by reference to Exhibit C to Exhibit 4\.6 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex46.htm)                                                                                |
| 4\.46                         | [Form of Pass Through Trust Certificate, Series 2015\-2AA (incorporated by reference to Exhibit A to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex42.htm)                                                                                |
| 4\.47                         | [Form of Pass Through Trust Certificate, Series 2015\-2A (incorporated by reference to Exhibit A to Exhibit 4\.3 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex43.htm)                                                                                |
| 4\.48                         | [Form of Pass Through Trust Certificate, Series 2015\-2B (incorporated by reference to Exhibit A to Exhibit 4\.4 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex44.htm)                                                                                |
| 4\.49                         | [Revolving Credit Agreement (2015\-2AA), dated as of September 24, 2015, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2015\-2AA, as Borrower, and Commonwealth Bank of Australia, New York Branch, as Liquidity Provider (incorporated by reference to Exhibit 4\.12 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex412.htm)                                                                                |
| 4\.50                         | [Revolving Credit Agreement (2015\-2A), dated as of September 24, 2015, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2015\-2A, as Borrower, and Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Liquidity Provider (incorporated by reference to Exhibit 4\.13 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex413.htm)                                                                                |
| 4\.51                         | [Revolving Credit Agreement (2015\-2B), dated as of September 24, 2015, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2015\-2B, as Borrower, and Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Liquidity Provider (incorporated by reference to Exhibit 4\.14 to American’s Current Report on Form 8\-K filed on September 24, 2015 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515327525/d69559dex414.htm)                                                                                |
| 4\.52                         | [Note Purchase Agreement, dated as of April 24, 2013, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.) Wilmington Trust Company, as Pass Through Trustee, Wilmington Trust Company, as Subordination Agent, Wilmington Trust, National Association, as Escrow Agent, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4\.12 to US Airways Group’s Current Report on Form 8\-K filed on April 25, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513171448/d526546dex412.htm)                                                                                |

167


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

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

The failure or inability of insurance to cover a significant liability related to an environmental or other incident associated with the operation of the Monroe refinery could have a material adverse effect on our consolidated financial results\.

Monroe's refining operations are subject to various hazards unique to refinery operations, including explosions, fires, toxic emissions and natural catastrophes\. Monroe could incur substantial losses, including cleanup costs, fines and other sanctions and third\-party claims, and its operations could be interrupted, as a result of such an incident\. Monroe's insurance coverage does not cover all potential losses, costs or liabilities, and Monroe could suffer losses for uninsurable or uninsured risks or in amounts greater than its insurance coverage\. In addition, Monroe's ability to obtain and maintain adequate insurance may be affected by conditions in the insurance market over which it has no control\. If Monroe were to incur a significant liability for which it is not fully insured or for which insurance companies do not or are unable to provide coverage, this could have a material adverse effect on our consolidated financial results of operations or consolidated financial position\.

The operation of the refinery by Monroe is subject to significant environmental regulation\. Failure to comply with environmental regulations or the enactment of additional regulation could have a negative impact on our consolidated financial results\.

Monroe's operations are subject to extensive environmental, health and safety laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures and greenhouse gas emissions\. Monroe could incur fines and other sanctions, cleanup costs and third\-party claims as a result of violations of or liabilities under environmental, health and safety requirements, which if significant, could have a material adverse effect on our financial results\. In addition, the enactment of new environmental laws and regulations, including any laws or regulations relating to greenhouse gas emissions, could significantly increase the level of expenditures required for Monroe or restrict its operations\.

In particular, under the Energy Independence and Security Act of 2007, the EPA has adopted RFS that mandate the blending of renewable fuels into Transportation Fuels\. RINs are assigned to renewable fuels produced or imported into the U\.S\. that are blended into Transportation Fuels to demonstrate compliance with this obligation\. A refinery may meet its obligation under RFS by blending the necessary volumes of renewable fuels with Transportation Fuels or by purchasing RINs in the open market or through a combination of blending and purchasing RINs\.

Because the refinery operated by Monroe does not blend renewable fuels, it must purchase its RINs requirement in the secondary market or obtain a waiver from the EPA\. As a result, Monroe is exposed to the market price of RINs\. Market prices for RINs have been volatile, marked by periods of sharp increases and decreases\. We cannot predict the future prices of RINs\. Purchasing RINs at elevated prices could have a material impact on our results of operations and cash flows\.

Existing laws or regulations could change, and the minimum volumes of renewable fuels that must be blended with refined petroleum products may increase\. Increases in the volume of renewable fuels that must be blended into Monroe's products could limit the refinery's production if sufficient numbers of RINs are not available for purchase or relief from this requirement is not obtained, which could have an adverse effect on our consolidated financial results\.

If we lose senior management and other key employees and they are not replaced by individuals with comparable skills, our operating results could be adversely affected\.

We are dependent on the experience and industry knowledge of our officers and other key employees to design and execute our business plans\. If we experience a substantial turnover in our leadership and other key employees, and these persons are not replaced by individuals with comparable skills, our performance could be materially adversely impacted\. Furthermore, we may be unable to attract and retain additional qualified executives as needed in the future\.

Our reputation and brand could be damaged if we are exposed to significant adverse publicity through social media\.

We operate in a highly visible, public environment with significant exposure to social media\. Adverse publicity, whether justified or not, can rapidly spread through social or digital media\. In particular, passengers can use social media to provide feedback about their interaction with us in a manner that can be quickly and broadly disseminated\. To the extent we are unable to respond timely and appropriately to adverse publicity, our brand and reputation may be damaged\. Significant damage to our overall reputation and brand image could have a negative impact on our financial results\.

 16


Annual Report of Southwest Airlines Co\. for year 2017

amounts that are paid or received in connection with the purchase or sale of financial derivative instruments (i\.e\., premium costs of option contracts) have been classified as a component of Other (gains) losses, net, in the Consolidated Statement of Income in the period in which the instrument settles or expires\. Under the new ASU, such amounts are reflected as a component of the line item to which the hedge relates, which in the case of the Company’s jet fuel hedges is Fuel and oil expense\. This ASU requires prospective adoption\. However, as previous hedge accounting rules did not specify the classification of such premium expense, and such provision only consists of a reclassification of expense between income statement line items, the Company will retrospectively apply this reclassification to prior period financial statements in 2018 in order to enhance comparability\. For the Company's full year 2017 and 2016 results, the amounts to be reclassified in 2018 are $135 million and $153 million, respectively\.

On March 10, 2017, the FASB issued ASU No\. 2017\-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost\. The standard requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period\. The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in nonoperating expenses\. This ASU requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017\. The Company thus will reclassify $14 million and $12 million of Salaries, wages, and benefits expense to Other (gains) and losses within the Consolidated Statement of Income for years ended 2017 and 2016, respectively\. The Company will adopt this guidance as of January 1, 2018\.

On January 26, 2017, the FASB issued ASU No\. 2017\-04, Simplifying the Test for Goodwill Impairment\. The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test (as defined by the FASB), which requires a hypothetical purchase price allocation (implied fair value of goodwill) to measure impairment loss\. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted\. The Company does not expect this ASU to have a significant impact on its financial statement presentation or results\.

On February 25, 2016, the FASB issued ASU No\. 2016\-02, Leases\. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted\. The guidance requires lessees to recognize a right\-of\-use asset and a lease liability on the balance sheet for all leases (with the exception of short\-term leases) at the lease commencement date and recognize expenses on the income statement in a similar manner to the current guidance in Accounting Standards Codification 840, Leases\. The lease liability will be measured at the present value of the unpaid lease payments and the right\-of\-use asset will be derived from the calculation of the lease liability\. Lease payments will include fixed and in\-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, fees paid by the lessee to the owners of a special\-purpose entity for restructuring the transaction, and probable amounts the lessee will owe under a residual value guarantee\. Lease payments will not include variable lease payments other than those that depend on an index or rate, any guarantee by the lessee of the lessor’s debt, or any amount allocated to non\-lease components\.

The Company has formed a project team to evaluate and implement the standard, and currently believes the most significant impact of this ASU on its accounting will be the balance sheet impact of its aircraft operating leases, which will significantly increase assets and liabilities\. See Note 7 for further information on leases\. The future lease commitments disclosed in Note 7 include contractual payments due to lessors, but does not consider certain items that the standard requires to be assessed in determining the final asset and liability to be reflected on the Company's balance sheet, such as lease renewal options and potential impairments, nor does it consider the sublease income that is due from third parties (which will be disclosed separately)\. The Company also has operating leases related to terminal operations space and other real estate leases\. Although the real estate leases may also have a substantial impact to the balance sheet, the Company does not expect the leases related to terminal operations space to have a significant impact since variable lease payments, other than those based on an index or rate, are excluded from the measurement of the lease liability\. The Company also does not expect the adoption of this ASU to impact any of its existing debt covenants\.

82


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

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are those that require significant judgments and estimates\. Accordingly, the actual results may differ materially from these estimates\. For a discussion of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements\.

Loyalty Program

Our SkyMiles loyalty program generates customer loyalty by rewarding customers with incentives to travel on Delta\. This program allows customers to earn mileage credits ("miles") by flying on Delta, Delta Connection and other airlines that participate in the loyalty program\. When traveling, customers earn redeemable miles based on the passenger's loyalty program status and ticket price\. Customers can also earn miles through participating companies such as credit card companies, hotels, car rental agencies and ridesharing companies\. To facilitate transactions with participating companies, we sell miles to non\-airline businesses, customers and other airlines\. Miles are redeemable by customers in future periods for air travel on Delta and other participating airlines, membership in our Sky Club and other program awards\.

To reflect the miles earned, the loyalty program includes two types of transactions that are considered revenue arrangements with multiple performance obligations: (1) miles earned with travel and (2) miles sold to participating companies\.

Passenger Ticket Sales Earning Miles\.  Passenger ticket sales earning miles under our loyalty program provide customers with (1) miles earned and (2) air transportation, which are considered performance obligations\. We value each performance obligation on a standalone basis\. To value the miles earned, we consider the quantitative value a passenger receives by redeeming miles for a ticket rather than paying cash, which is referred to as equivalent ticket value ("ETV")\. Our estimate of ETV is adjusted for miles that are not likely to be redeemed ("breakage")\. We use statistical models to estimate breakage based on historical redemption patterns\. A change in assumptions as to the actual redemption activity for miles or the estimated fair value of miles expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years\. We recognize breakage proportionally during the period in which the remaining miles are actually redeemed\.

At December 31, 2019, the aggregate deferred revenue balance associated with the SkyMiles program was $6\.7 billion\. A hypothetical 10% change in the number of outstanding miles estimated to be redeemed would result in an impact of approximately $200 million on annual revenue recognized\.

We defer revenue for the miles when earned and recognize loyalty travel awards in passenger revenue as the miles are redeemed and transportation is provided\. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize passenger revenue when we provide transportation or if the ticket goes unused\. A hypothetical 10% increase in our estimate of the ETV of a mile would decrease annual passenger revenue by approximately $100 million, as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales\.

Sale of Miles\.  Customers may earn miles based on their spending with participating companies such as credit card companies, hotels, car rental agencies and ridesharing companies with which we have marketing agreements to sell miles\. Our contracts to sell miles under these marketing agreements have multiple performance obligations\. Payments are typically due monthly based on the volume of miles sold during the period, and the terms of our marketing contracts are from one to eleven years\. During the years ended December 31, 2019 and 2018, total cash sales from marketing agreements were $4\.2 billion and $3\.5 billion, respectively, which are allocated to travel and other performance obligations, as discussed below\.

Our most significant contract to sell miles relates to our co\-brand credit card relationship with American Express\. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta\-American Express co\-branded credit card holders ("cardholders") and American Express Membership Rewards program participants, and allow American Express to market its services or products using our customer database\. Cardholders earn miles for making purchases using co\-branded cards, and certain cardholders may also check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive priority boarding and other benefits while traveling on Delta\. Additionally, participants in the American Express Membership Rewards program may exchange their points for miles under the loyalty program\. We sell miles at agreed\-upon rates to American Express which are then provided to their customers under the co\-brand credit card program and the Membership Rewards program\.

41


Annual Report of Southwest Airlines Co\. for year 2017

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

**Fair Value**

**(per share)** |
| Outstanding December 31, 2014           | 2,077                          |                                | $16\.92                                                        |
| Granted                                 | 561                            | (a)                            | 45\.80                                                         |
| Vested                                  | (1,095)                        |                                | 13\.33                                                         |
| Surrendered                             | (58)                           |                                | 25\.49                                                         |
| Outstanding December 31, 2015           | 1,485                          |                                | 30\.17                                                         |
| Granted                                 | 675                            | (b)                            | 37\.29                                                         |
| Vested                                  | (665)                          |                                | 23\.29                                                         |
| Surrendered                             | (56)                           |                                | 36\.29                                                         |
| Outstanding December 31, 2016, Unvested | 1,439                          |                                | 36\.52                                                         |
| Granted                                 | 717                            | (c)                            | 52\.73                                                         |
| Vested                                  | (806)                          |                                | 30\.23                                                         |
| Surrendered                             | (56)                           |                                | 43\.86                                                         |
| Outstanding December 31, 2017, Unvested | 1,294                          |                                | $45\.32                                                        |

(a) Includes 183 thousand PBRSUs

(b) Includes 247 thousand PBRSUs

(c) Includes 235 thousand PBRSUs

In addition, the Company granted approximately 26 thousand shares of unrestricted stock at a weighted average grant price of $57\.04 in 2017, approximately 27 thousand shares at a weighted average grant price of $42\.90 in 2016, and approximately 28 thousand shares at a weighted average grant price of $41\.27 in 2015, to members of its Board of Directors\.

A remaining balance of up to 22 million shares of the Company’s common stock may be issued pursuant to grants under the 2007 Equity Plan\.

***Employee Stock Purchase Plan***

Under the amended 1991 Employee Stock Purchase Plan ("ESPP"), which has been approved by Shareholders, the Company is authorized to issue up to a remaining balance of 9 million shares of the Company’s common stock to Employees of the Company\. These shares may be issued at a price equal to 90 percent of the market value at the end of each monthly purchase period\. Common stock purchases are paid for through periodic payroll deductions\. For the years ended December 31, 2017, 2016, and 2015, participants under the plan purchased 544 thousand shares, 622 thousand shares, and 597 thousand shares at average prices of $50\.13, $36\.57, and $36\.40, respectively\. The weighted\-average fair value of each purchase right under the ESPP granted for the years ended December 31, 2017, 2016, and 2015, which is equal to the ten percent discount from the market value of the Common Stock at the end of each monthly purchase period, was $5\.57, $4\.06, and $4\.04, respectively\.

***Taxes***

Grants of RSUs result in the creation of a deferred tax asset, which is a temporary difference, until the time the RSU vests\. All excess tax benefits and tax deficiencies are recorded through the income statement\. Due to the treatment of RSUs for tax purposes, the Company’s effective tax rate from year to year is subject to variability\.

**10****\. FINANCIAL DERIVATIVE INSTRUMENTS**

***Fuel Contracts***

Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices\. Furthermore, jet fuel and oil typically represent one of the largest operating expenses for airlines\. The Company

92


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

Financial Condition and Liquidity

We expect to meet our cash needs for the next 12 months from cash flows from operations, cash and cash equivalents, restricted cash equivalents, short\-term investments and financing arrangements\. As of  December 31, 2018 , we had  $4\.8 billion  in unrestricted liquidity, consisting of  $1\.8 billion  in cash and cash equivalents and short\-term investments and  $3\.0 billion  in undrawn revolving credit facilities\. During  2018 , we used existing cash and cash generated from operations to fund capital expenditures of  $5\.2 billion , and return  $2\.5 billion  to shareholders\.

Sources of Liquidity

Operating Activities

Cash flows from operating activities continue to provide our primary source of liquidity\. We generated positive cash flows from operations of  $7\.0 billion  in  2018 ,  $5\.0 billion  in  2017  and  $7\.2 billion  in  2016 \. We had lower operating cash flows during 2017 primarily due to incremental pension plan contributions, as discussed below\. We also expect to generate positive cash flows from operations in  2019 \.

Our operating cash flows are impacted by the following factors:

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

Fuel \. Fuel expense represented approximately  23%  of our total operating expenses for  2018 \. The market price for jet fuel is volatile, which can impact the comparability of our periodic cash flows from operations\.

Pension Contributions\.  We sponsor defined benefit pension plans for eligible employees and retirees\. These plans are closed to new entrants and are frozen for future benefit accruals\. Our funding obligations for these plans are governed by the Employee Retirement Income Security Act, as modified by the Pension Protection Act of 2006\.  We had no minimum funding requirements in 2018\. However, during the first three months of 2018, we voluntarily contributed approximately  $500 million  to these plans\. In the first half of 2017, we contributed $3\.5 billion to our qualified defined benefit pension plans using net proceeds from a $2\.0 billion debt issuance, shares of our common stock from treasury with a value of $350 million and existing cash\. We contributed $1\.3 billion in 2016\. We have no minimum funding requirements in 2019, but we plan to voluntarily contribute approximately  $500 million  to these plans\.

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

We pay profit sharing annually in February\. We paid $1\.1 billion in 2018, $1\.1 billion in 2017 and $1\.5 billion in 2016, to our employees in recognition of their contributions toward meeting our financial goals\. During the year ended December 31, 2018, we recorded  $1\.3 billion  in profit sharing expense based on 2018 pre\-tax profit, which we paid to employees in February 2019\.

Effective October 1, 2017, we aligned our profit sharing plans under a single formula\. Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2\.5 billion of annual profit and 20% of annual profit above $2\.5 billion\. Prior to that time, the profit sharing program for pilots used this formula but for 2016 and the first nine months of 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit and, if we exceeded our prior\-year results, the program paid 20% of the year\-over\-year increase in profit to eligible employees\.

 38


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

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

The following table summarizes the accounting treatment of our derivative contracts:

|                                 |                                                                       |                                                                                |
| ------------------------------- | --------------------------------------------------------------------- | ------------------------------------------------------------------------------------- |
|                                 | **Impact of Unrealized Gains and Losses**                             | **Impact of Unrealized Gains and Losses**                                             |
| **Accounting Designation**      | **Effective Portion**                                                 | **Ineffective Portion**                                                               |
| Not designated as hedges        | Change in fair value of hedge is recorded in earnings                 | Change in fair value of hedge is recorded in earnings                                 |
| Designated as cash flow hedges  | Market adjustments are recorded in AOCI                               | Excess, if any, over effective portion of hedge is recorded in non\-operating expense |
| Designated as fair value hedges | Market adjustments are recorded in long\-term debt and capital leases | Excess, if any, over effective portion of hedge is recorded in non\-operating expense |

We perform, at least quarterly, an assessment of the effectiveness of our derivative contracts designated as hedges, including assessing the possibility of counterparty default\. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in earnings\. We believe our derivative contracts that continue to be designated as hedges, consisting of interest rate and foreign currency exchange contracts, will continue to be highly effective in offsetting changes in fair value or cash flow, respectively, attributable to the hedged risk\.

 Cash flows associated with purchasing and settling hedge contracts generally are classified as operating cash flows\. However, if a hedge contract includes a significant financing element at inception, cash flows associated with the hedge contract are recorded as financing cash flows\.

Hedge Margin\.  In accordance with our fuel, interest rate and foreign currency hedge contracts, we may require counterparties to fund the margin associated with our gain position and/or counterparties may require us to fund the margin associated with our loss position on these contracts\. The amount of the margin, if any, is periodically adjusted based on the fair value of the hedge contracts\. The margin requirements are intended to mitigate a party's exposure to the risk of counterparty default\. We do not offset margin funded to counterparties or margin funded to us by counterparties against fair value amounts recorded for our hedge contracts\.

The hedge margin we receive from counterparties is recorded in prepaid expenses and other, with the offsetting obligation in accounts payable\. The hedge margin we provide to counterparties is recorded in prepaid expenses and other\.

Long\-Lived Assets

The following table summarizes our property and equipment:

|                                                       |                                                |                  |                  |
| ----------------------------------------------------- | ---------------------------------------------- | ---------------- | ---------------- |
|                                                       |                                                | **December 31,** | **December 31,** |
| **(in millions, except for estimated useful life)**   | **Estimated Useful Life**                      | **2017**         | **2016**         |
| Flight equipment                                      | 20\-32 years                                   | $30,688          | $28,135          |
| Ground property and equipment                         | 3\-40 years                                    | 7,665            | 6,581            |
| Flight and ground equipment under capital leases      | Shorter of lease term or estimated useful life | 1,147            | 1,056            |
| Advance payments for equipment                        |                                                | 1,160            | 1,059            |
| Less: accumulated depreciation and amortization ^(1)^ |                                                | (14,097

) | (12,456

) |
| Total property and equipment, net                     |                                                | $26,563          | $24,375          |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Includes accumulated amortization for flight and ground equipment under capital leases in the amount of   $668 million  and   $757 million  at  December 31, 2017  and  2016 , respectively\. |

We record property and equipment at cost and depreciate or amortize these assets on a straight\-line basis to their estimated residual values over their estimated useful lives\. The estimated useful life for leasehold improvements is the shorter of lease term or estimated useful life\. Depreciation and amortization expense related to our property and equipment was   $2\.2 billion ,   $1\.9 billion  and   $1\.8 billion  for each of the years ended  December 31, 2017 ,  2016  and  2015 , respectively\. Residual values for owned aircraft, engines, spare parts and simulators are generally   5%  to   10%  of cost\.

We capitalize certain internal and external costs incurred to develop and implement software and amortize those costs over an estimated useful life of  three  to  10  years\. Included in the depreciation and amortization expense discussed above, we recorded   $189 million ,   $160 million  and   $148 million  for amortization of capitalized software for the years ended  December 31, 2017 ,  2016  and  2015 , respectively\. The net book value of these assets totaled   $659 million  and   $549 million  at  December 31, 2017  and  2016 , respectively\.

 58


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

**EXECUTIVE OFFICERS**

The executive officers of Air Group, and executive officers of Alaska, Virgin America and Horizon who have significant decision\-making responsibilities, their positions and their respective ages are as follows:

|                      |                                                                                |         |                                                                 |
| -------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | --------------------------------------------------------------- |
| **Name**             | **Position**                                                                                | **Age** | **Air Group**

**or Subsidiary**

**Officer Since** |
| Bradley D\. Tilden   | Chairman and Chief Executive Officer of Alaska Air Group, Inc\., Chairman of Alaska Airlines, Inc\. and Virgin America Inc\., Chairman of Horizon Air Industries, Inc\.                 | 57      | 1994                                                            |
| Benito Minicucci     | President and Chief Operating Officer of Alaska Airlines, Inc\. and Chief Executive Officer of Virgin America Inc\.                                                                     | 51      | 2004                                                            |
| Brandon S\. Pedersen | Executive Vice President/Finance and Chief Financial Officer of Alaska Air Group, Inc\. and Alaska Airlines, Inc\., and Chief Financial Officer of Virgin America Inc\.                 | 51      | 2003                                                            |
| Andrew R\. Harrison  | Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc\.                                                                                | 47      | 2008                                                            |
| Kyle B\. Levine      | Vice President Legal, General Counsel and Corporate Secretary of Alaska Air Group, Inc\. and Alaska Airlines, Inc\. and Chief Ethics and Compliance Officer of Alaska Air Group, Inc\.  | 46      | 2016                                                            |
| David L\. Campbell   | Former President and Chief Executive Officer of Horizon Air Industries, Inc\.                                                                                | 56      | 2014                                                            |
| Gary L\. Beck        | President and Chief Executive Officer of Horizon Air Industries, Inc\.                                                                                | 70      | 2018                                                            |
| Peter D\. Hunt       | President and Chief Operating Officer of Virgin America Inc\.                                                                                | 48      | 2017                                                            |
| Shane R\. Tackett    | Senior Vice President, Revenue and E\-commerce of Alaska Airlines, Inc\.                                                                                | 39      | 2017                                                            |
| Andrea L\. Schneider | Vice President People of Alaska Airlines, Inc\.                                                                                | 52      | 2017                                                            |
| Diana Birkett Rakow  | Vice President External Relations of Alaska Airlines, Inc\.                                                                                | 40      | 2017                                                            |

*Mr\. Tilden* joined Alaska Airlines in 1991, became Controller of Alaska Air Group and Alaska Airlines in 1994 and was named Vice President/Finance at Alaska Airlines in January 1999 and at Alaska Air Group in February 2000\. He was elected Alaska Airlines Chief Financial Officer in February 2000, Executive Vice President/Finance and Chief Financial Officer of both companies in January 2002 and Executive Vice President/Finance and Planning of Alaska Airlines in April 2007\. Mr\. Tilden was named President of Alaska Airlines in December 2008 and, in May 2012, he was elected President and CEO of Alaska Air Group and Alaska Airlines and CEO of Horizon Air\. He leads Air Group’s Management Executive Committee and was elected to the Air Group Board in 2010 and became Chairman of the Board in January 2014\. In December 2017, Mr\. Tilden was elected as President and CEO of Horizon Air, effective January 5, 2018, until Mr\. Beck was elected effective January 15, 2018\.

*Mr\. Minicucci* joined Alaska Airlines in 2004 as Staff Vice President of Maintenance and Engineering and was promoted to Vice President of Seattle Operations in June 2008\. He was elected Executive Vice President/Operations and Chief Operating Officer of Alaska Airlines in December 2008\. In May 2016, he was named President of Alaska Airlines and, in December 2016, Chief Executive Officer of Virgin America\. He is a member of Air Group’s Management Executive Committee\.

*Mr\. Pedersen* joined Alaska Airlines in 2003 as Staff Vice President/Finance and Controller of Alaska Air Group and Alaska Airlines and was elected Vice President/Finance and Controller for both entities in 2006\. He was elected Chief Financial Officer of Alaska Air Group and Alaska Airlines in June 2010 and Executive Vice President/Finance and Chief Financial

 16


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

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

in average full\-time equivalent employees, partially offset by a decrease in profit sharing and other employee incentives\.

Aircraft fuel expense increased $1\.1 billion, or 18\.9%, primarily due to increased fuel prices and a 3\.5% increase in capacity\. The table below presents the significant changes in aircraft fuel cost per gallon for the years ended December 31 (in millions, except percentage changes):

|                                                                |                   |                   |                       |                              |                              |                              |
|:-------------------------------------------------------------- | -----------------:| -----------------:| ---------------------:| ----------------------------:| ----------------------------:| ----------------------------:|
|                                                                | **(In millions)** | **(In millions)** | **%**
**Change** | **Average price per gallon** | **Average price per gallon** | **Average price per gallon** |
|                                                                |          **2017** |          **2016** | **%**
**Change** |                     **2017** |                     **2016** |        **%**
**Change** |
| Total aircraft fuel purchase cost excluding fuel hedge impacts |          $ 6,911  |          $ 5,596  |                23\.5  |                     $ 1\.74  |                     $ 1\.43  |                       21\.7  |
| Hedge losses reported in fuel expense                          |                2  |              217  |                   NM  |                           —  |                       0\.06  |                          NM  |
| Fuel expense                                                   |            6,913  |            5,813  |                18\.9  |                       1\.74  |                       1\.49  |                       16\.8  |
| Total fuel consumption (gallons)                               |            3,978  |            3,904  |                 1\.9  |                              |                              |                              |

Landing fees and other rent increased $75 million, or 3\.5%, in 2017 as compared to the year\-ago period due to higher rental and landing fee rates\.

Regional capacity purchase costs increased $35 million, or 1\.6%, in 2017 as compared to the year\-ago period despite regional capacity being down 3\.8% in 2017 as compared to 2016 due to increases in annual rates, maintenance cycle\-related costs and lease return costs\.

Depreciation and amortization increased $172 million, or 8\.7%, in 2017 as compared to 2016 primarily due to additions of new and used aircraft, aircraft improvements and increases in information technology infrastructure and application development projects\.

Aircraft maintenance materials and outside repairs increased $107 million, or 6\.1%, in 2017 as compared to 2016 primarily due to an increase in airframe and engine maintenance visits and additional repairs to wireless and inflight entertainment equipment\.

Aircraft rent decreased $59 million, or 8\.7%, in 2017 as compared to 2016 primarily due to the purchase of leased aircraft and lower lease renewal rates\.

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

|                                                            |          |          |
|:---------------------------------------------------------- | --------:| --------:|
|                                                            | **2017** | **2016** |
| Severance and benefit costs                                |    $116  |     $37  |
| Impairment of assets                                       |      25  |     412  |
| Cleveland airport lease restructuring                      |       —  |      74  |
| Labor agreement costs                                      |       —  |      64  |
| (Gains) losses on sale of assets and other special charges |      35  |      51  |
| Total special charges                                      |    $176  |    $638  |

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

Other operating expenses increased $236 million, or 4\.4%, in 2017 as compared to 2016 primarily due to increased costs in food, marketing and technology associated with the Company’s enhanced customer experience initiatives, and due to volume\-driven increases in cargo trucking and handling costs\.

31


Annual Report of United Continental Holdings, Inc\. and United Airlines, Inc\. for year 2018

[Table of Contents](https://www.example.com#sCFFD9DA26B5659A3A528A4B51B718F87)

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholder and the Board of Directors of United Airlines, Inc\.

**Opinion on the Financial Statements**

We have audited the accompanying consolidated balance sheets of United Airlines, Inc\. (the "Company") as of December 31, 2018 and 2017, and the related statements of consolidated operations, comprehensive income (loss), cash flows, and stockholder's equity, for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements")\. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U\.S\. generally accepted accounting principles\.

**Adoption of ASU No\. 2014\-09**

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue in 2018, 2017 and 2016 due to the adoption of ASU No\. 2014\-09, *Revenue from Contracts with Customers (Topic 606)\.*

**Basis for Opinion**

These financial statements are the responsibility of the Company's management\. Our responsibility is to express an opinion on the Company's financial statements based on our audits\. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U\.S\. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB\.

We conducted our audits in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud\. The Company is not required to have, nor were we engaged to perform an audit of the Company's internal control over financial reporting\. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting\. Accordingly, we express no such opinion\.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks\. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements\. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements\. We believe that our audits provide a reasonable basis for our opinion\.

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2009\.

Chicago, Illinois

February 28, 2019

41


Annual Report of United Continental Holdings, Inc\. and United Airlines, Inc\. for year 2018

[Table of Contents](https://www.example.com#sCFFD9DA26B5659A3A528A4B51B718F87)

**Results of Operations**

*2018* *Compared to* *2017*

***Operating Revenue***

The table below illustrates the year\-over\-year percentage change in the Company's operating revenues for the years ended December 31 (in millions, except percentage changes):

|                         |          |          |                         |              |
| ----------------------- | -------- | -------- | ----------------------- | ------------ |
|                         | **2018** | **2017** | **Increase (Decrease)** | **% Change** |
| Passenger revenue       | $37,706  | $34,460  | $3,246                  | 9\.4         |
| Cargo                   | 1,237    | 1,114    | 123                     | 11\.0        |
| Other operating revenue | 2,360    | 2,210    | 150                     | 6\.8         |
| Total operating revenue | $41,303  | $37,784  | $3,519                  | 9\.3         |

The table below presents selected passenger revenue and operating data of the Company, broken out by geographic region, expressed as year\-over\-year changes:

|                                                                                |                                                                                |                                                                                |                                        |                                        |                                        |
| --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | -------------------------------------- | -------------------------------------- | -------------------------------------- |
|                                                                                | **Increase (decrease) from 2017 (a):**                                                                    | **Increase (decrease) from 2017 (a):**                                                                    | **Increase (decrease) from 2017 (a):** | **Increase (decrease) from 2017 (a):** | **Increase (decrease) from 2017 (a):** |
|                                                                                | **Domestic**                                                                                | **Atlantic**                                                                                | **Pacific**                            | **Latin**                              | **Total**                              |
| Passenger revenue (in millions)                                                                           | $2,340                                                                                | $688                                                                                | $185                                   | $33                                    | $3,246                                 |
| Passenger revenue                                                                                | 11\.1%                                                                                | 11\.7 %                                                                                | 4\.3 %                                 | 1\.0 %                                 | 9\.4%                                  |
| Average fare per passenger                                                                                | 2\.8%                                                                                | 0\.2 %                                                                                | 8\.5 %                                 | 2\.5 %                                 | 2\.3%                                  |
| Yield                                                                                | 3\.8%                                                                                | (0\.4)%                                                                                | 2\.7 %                                 | (0\.3)%                                | 2\.8%                                  |
| PRASM                                                                                | 4\.1%                                                                                | 6\.3 %                                                                                | 3\.0 %                                 | 0\.8 %                                 | 4\.3%                                  |
| Passengers                                                                                | 8\.1%                                                                                | 11\.5 %                                                                                | (3\.9)%                                | (1\.4)%                                | 6\.9%                                  |
| RPMs (traffic)                                                                                | 7\.0%                                                                                | 12\.1 %                                                                                | 1\.5 %                                 | 1\.3 %                                 | 6\.4%                                  |
| ASMs (capacity)                                                                                | 6\.7%                                                                                | 5\.1 %                                                                                | 1\.3 %                                 | 0\.3 %                                 | 4\.9%                                  |
| Passenger load factor (points)                                                                            | 0\.2                                                                                | 5\.1                                                                                | 0\.2                                   | 0\.8                                   | 1\.2                                   |
| (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\. | (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\. | (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\. |                                        |                                        |                                        |

Passenger revenue increased $3\.2 billion, or 9\.4%, in 2018 as compared to 2017, primarily due to a 6\.4% increase in traffic\. PRASM increased 4\.3% in 2018 as compared to 2017\. The increase in PRASM was driven by improvements in scheduling, higher corporate demand, increases in close\-in bookings in the domestic markets and premium cabin demand improvements in the Atlantic and Pacific markets\.

Cargo revenue increased $123 million, or 11\.0%, in 2018 as compared to 2017, primarily due to freight volume and higher yield in the Atlantic and Pacific markets\.

Other operating revenue increased $150 million, or 6\.8%, in 2018 as compared to 2017, primarily due to increased revenue related to MileagePlus miles sales\.

25


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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act\.

|                               |     |   |    |   |
| ----------------------------- | --- | - | -- | - |
| American Airlines Group Inc\. | Yes | ☐ | No | ☒ |
| American Airlines, Inc\.      | Yes | ☐ | No | ☒ |

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days\.

|                               |     |   |    |   |
| ----------------------------- | --- | - | -- | - |
| American Airlines Group Inc\. | Yes | ☒ | No | ☐ |
| American Airlines, Inc\.      | Yes | ☒ | No | ☐ |

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S\-T (§232\.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)\.

|                               |     |   |    |   |
| ----------------------------- | --- | - | -- | - |
| American Airlines Group Inc\. | Yes | ☒ | No | ☐ |
| American Airlines, Inc\.      | Yes | ☒ | No | ☐ |

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S\-K (§ 229\.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10\-K or any amendment to this Form 10\-K\.

|                               |   |
| ----------------------------- | - |
| American Airlines Group Inc\. | ☒ |
| American Airlines, Inc\.      | ☒ |

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non\-accelerated filer, a smaller reporting company, or emerging growth company\. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b\-2 of the Exchange Act\.

|                               |                           |                     |                          |                             |                           |
| ----------------------------- | ------------------------- | ------------------- | ------------------------ | --------------------------- | ------------------------- |
| American Airlines Group Inc\. | ☒ Large Accelerated Filer | ☐ Accelerated Filer | ☐ Non\-accelerated Filer | ☐ Smaller Reporting Company | ☐ Emerging Growth Company |
| American Airlines, Inc\.      | ☐ Large Accelerated Filer | ☐ Accelerated Filer | ☒ Non\-accelerated Filer | ☐ Smaller Reporting Company | ☐ Emerging Growth Company |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act\.

|                               |   |
| ----------------------------- | - |
| American Airlines Group Inc\. | ☐ |
| American Airlines, Inc\.      | ☐ |

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b\-2 of the Act)\.

|                               |     |   |    |   |
| ----------------------------- | --- | - | -- | - |
| American Airlines Group Inc\. | Yes | ☐ | No | ☒ |
| American Airlines, Inc\.      | Yes | ☐ | No | ☒ |

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court\.

|                               |     |   |    |   |
| ----------------------------- | --- | - | -- | - |
| American Airlines Group Inc\. | Yes | ☒ | No | ☐ |
| American Airlines, Inc\.      | Yes | ☒ | No | ☐ |

As of February 20, 2019, there were 449,055,548 shares of American Airlines Group Inc\. common stock outstanding\. The aggregate market value of the voting stock held by non\-affiliates of the registrant as of June 30, 2018, was approximately $17 billion\.

As of February 20, 2019, there were 1,000 shares of American Airlines, Inc\. common stock outstanding, all of which were held by American Airlines Group Inc\.

**OMISSION OF CERTAIN INFORMATION**

American Airlines Group Inc\. and American Airlines, Inc\. meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10\-K and have therefore omitted the information otherwise called for by Items 10\-13 of Form 10\-K as allowed under General Instruction I(2)(c)\.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the proxy statement related to American Airlines Group Inc\.’s 2019 Annual Meeting of Stockholders, which proxy statement will be filed under the Securities Exchange Act of 1934 within 120 days of the end of American Airlines Group Inc\.’s fiscal year ended December 31, 2018, are incorporated by reference into Part III of this Annual Report on Form 10\-K\.


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

**Domestic and Global Regulatory Landscape**

***General***

Airlines are subject to extensive domestic and international regulatory requirements\. Domestically, the DOT and the Federal Aviation Administration (FAA) exercise significant regulatory authority over air carriers\.

The DOT, among other things, oversees domestic and international codeshare agreements, international route authorities, competition and consumer protection matters such as advertising, denied boarding compensation and baggage liability\. The Antitrust Division of the Department of Justice (DOJ), along with the DOT in certain instances, have jurisdiction over airline antitrust matters\.

The FAA similarly exercises safety oversight and regulates most operational matters of our business, including how we operate and maintain our aircraft\. FAA requirements cover, among other things, required technology and necessary onboard equipment; systems, procedures and training necessary to ensure the continuous airworthiness of our fleet of aircraft; safety measures and equipment; crew scheduling limitations and experience requirements; and many other technical aspects of airline operations\. Additionally, the FAA sets pilot qualification standards and imposes complex rest requirements for pilots, as well as stringent duty period requirements for pilots and flight attendants\.

The FAA also controls the national airspace system, including operational rules and fees for air traffic control (ATC) services\. The efficiency, reliability and capacity of the ATC network has a significant impact on our costs and on the timeliness of our operations\.

The U\.S\. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services\.

***Airport Access and Operations***

Domestically, any U\.S\. airline authorized by the DOT is generally free to operate scheduled passenger service between any two points within the U\.S\. and its territories, with the exception of certain airports that require landing and take\-off rights and authorizations (slots) and other facilities, and certain airports that impose geographic limitations on operations or curtail operations based on the time of day\. Operations at three major domestic airports we serve (John F\. Kennedy International Airport (JFK) and La Guardia Airport (LGA) in New York City, and Ronald Reagan Washington National Airport (DCA) in Washington, D\.C\.) and many foreign airports we serve (including London Heathrow Airport (LHR)) are regulated by governmental entities through allocations of slots or similar regulatory mechanisms that limit the rights of carriers to conduct operations at those airports\. Each slot represents the authorization to land at or take off from the particular airport during a specified time period\. In addition to slot restrictions, operations at LGA and DCA are also limited based on the stage length of the flight\.

Our ability to provide service can also be impaired at airports, such as ORD and LAX, where the airport gate and other facilities are inadequate to accommodate all of the service that we would like to provide\.

Existing law also permits domestic local airport authorities to implement procedures and impose restrictions designed to abate noise, provided such procedures and restrictions do not unreasonably interfere with interstate or foreign commerce or the national transportation system\. In some instances, these restrictions have caused curtailments in service or increases in operating costs\.

***Airline Fares, Taxes and User Fees***

Airlines are permitted to establish their own domestic fares without governmental regulation\. The DOT maintains authority over certain international fares, rates and charges, but applies this authority on a limited basis\. In addition, international fares and rates are sometimes subject to the jurisdiction of the governments of the foreign countries which we serve\.

Airlines are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation, and to collect other taxes and charge other fees, such as foreign taxes, security fees and passenger facility charges\. Although these taxes and fees are not our operating expenses, they represent an additional cost to our customers\. These taxes and fees are subject to increase from time to time\.

11


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

**ITEM 7\. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Background**

Together with our wholly\-owned regional airline subsidiaries and third\-party regional carriers operating as American Eagle, we operate an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries\. We have hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D\.C\. In 2017, approximately 200 million passengers boarded our flights\.

**Strategic Objectives**

We are focused on four long\-term strategic objectives: Create a World\-Class Customer Experience, Make Culture a Competitive Advantage, Ensure Long\-Term Financial Strength and Think Forward, Lead Forward\.

*Create a World\-Class Customer Experience*

We began 2017 by being named *Air Transport World’s* Airline of the Year in recognition of our successful integration and the significant investments we made in our product and people\. Also in 2017, we:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Recorded our best on\-time departure and arrival performance since 2003, and our best baggage handling performance since the DOT began reporting this information in 1994\. |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------- |
| • | Operated the youngest fleet among the major U\.S\. network carriers and invested $4\.1 billion in new aircraft \. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Introduced new streaming\-capable, satellite\-based internet access on our Boeing 737 MAX aircraft, which will be rolled out across most of our domestic mainline fleet\. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Introduced Basic Economy, a product to compete with ultra low\-cost carriers, which is now offered nationwide and to leisure markets in Mexico and most of the Caribbean\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Commenced our roll out of Premium Economy, which offers a wider seat, more legroom, an amenity kit and enhanced meal choices on international flights\. |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Expanded a number of our lounges by opening Flagship First Dining, a new exclusive experience for customers in First Class on international and A321T transcontinental flights, which we now offer in our Miami, Los Angeles and New York\-JFK lounges \. |

*Make Culture a Competitive Advantage*

We are creating an environment that cares for frontline team members, provides competitive pay and equips our team with the right tools to support our customers\. During 2017, we:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Kept team member pay competitive through initiatives such as a mid\-contract salary increase for pilots and flight attendants and continued step increases from a mid\-contract pay increase for mechanics and fleet service workers \. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Invested more than $300 million in facilities and equipment, including renovations to team member spaces, mobile devices for pilots and flight attendants, and the ongoing One Campus One Team initiative at our global support center in Fort Worth, Texas\. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Provided customer service instruction to approximately 35,000 team members through “Elevate the Everyday Experience” training and launched training for leaders that emphasizes supporting team members who directly serve customers\. |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Announced that work on our CFM56\-5B engines, which power much of our Airbus narrowbody fleet, will move in\-house to our maintenance facility located in Tulsa, Oklahoma beginning later in 2018\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Shared the benefits of the recent Tax Cuts and Jobs Act by issuing $1,000 payments to all non\-officer team members at American and its wholly\-owned regional carriers\. While we do not yet pay federal cash income taxes, we believe the new tax law will reduce our future tax bill and allow more investments in equipment and facilities \. |

45


Annual Report of United Continental Holdings, Inc\. and United Airlines, Inc\. for year 2018

[Table of Contents](https://www.example.com#sCFFD9DA26B5659A3A528A4B51B718F87)

|           |                 |                                                                                |
| --------- | --------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|  ^10\.103 | UAL
United | [Supplemental Agreement No\. 58 to Purchase Agreement No\. 1951, dated January 6, 2012 (filed as Exhibit 10\.1 to UAL's Form 10\-Q for the quarter ended March 31, 2012, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312512186734/d316621dex101.htm)                                                   |
|  ^10\.104 | UAL
United | [Supplemental Agreement No\. 59 to Purchase Agreement No\. 1951, dated July 12, 2012 (filed as Exhibit 10\.5 to UAL's Form 10\-Q for the quarter ended September 30, 2012, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312512435658/d408868dex105.htm)                                                 |
|  ^10\.105 | UAL
United | [Supplemental Agreement No\. 60 to Purchase Agreement No\. 1951, dated November 7, 2012 (filed as Exhibit 10\.2 to UAL's Form 10\-Q for the quarter ended June 30, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex102.htm)                                                   |
|  ^10\.106 | UAL
United | [Supplemental Agreement No\. 61 to Purchase Agreement No\. 1951, dated September 11, 2013 (filed as Exhibit 10\.1 for the quarter ended September 30, 2013, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513409916/d578285dex101.htm)                                                                |
|  ^10\.107 | UAL
United | [Supplemental Agreement No\. 62 to Purchase Agreement No\. 1951, dated January 14, 2015 (filed as Exhibit 10\.3 for the quarter ended March 31, 2015, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312515144255/d891332dex103.htm)                                                                      |
|  ^10\.108 | UAL
United | [Supplemental Agreement No\. 63 to Purchase Agreement No\. 1951, dated May 26, 2015 (filed as Exhibit 10\.1 for the quarter ended June 30, 2015, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312515261239/d941677dex101.htm)                                                                          |
|  ^10\.109 | UAL
United | [Supplemental Agreement No\. 64 to Purchase Agreement No\. 1951, dated June 12, 2015 (filed as Exhibit 10\.2 for the quarter ended June 30, 2015, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312515261239/d941677dex102.htm)                                                                         |
|  ^10\.110 | UAL
United | [Aircraft General Terms Agreement, dated October 10, 1997, by and among Continental and Boeing (filed as Exhibit 10\.15 to Continental's Form 10\-K for the year ended December 31, 1997, Commission File Number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/0000319687-98-000003.txt)                                             |
|  ^10\.111 | UAL
United | [Letter Agreement 6\-1162\-CHL\-048, dated February 8, 2002, by and among Continental and Boeing (filed as Exhibit 10\.44 to Continental's Form 10\-K for the year ended December 31, 2001, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968702000006/exhibit1044.htm)                                 |
|  ^10\.112 | UAL
United | [Purchase Agreement No\. 2484, including exhibits and side letters, dated December 29, 2004, by and among Continental and Boeing (filed as Exhibit 10\.27 to Continental's Form 10\-K for the year ended December 31, 2004, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968705000036/exhibit1027.htm) |
|  ^10\.113 | UAL
United | [Supplemental Agreement No\. 1 to Purchase Agreement No\. 2484, dated June 30, 2005 (filed as Exhibit 10\.5 to Continental's Form 10\-Q for the quarter ended June 30, 2005, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968705000095/fexhibit105.htm)                                                |
|  ^10\.114 | UAL
United | [Supplemental Agreement No\. 2, including exhibits and side letters, to Purchase Agreement No\. 2484, dated January 20, 2006 (filed as Exhibit 10\.27(b) to Continental's Form 10\-K for the year ended December 31, 2005, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968706000013/fexh1027b.htm)    |
|  ^10\.115 | UAL
United | [Supplemental Agreement No\. 3 to Purchase Agreement No\. 2484, dated May 3, 2006 (filed as Exhibit 10\.4 to Continental's Form 10\-Q for the quarter ended June 30, 2006, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968706000062/fexhibit104.htm)                                                  |
|  ^10\.116 | UAL
United | [Supplemental Agreement No\. 4 to Purchase Agreement No\. 2484, dated July 14, 2006 (filed as Exhibit 10\.5 to Continental's Form 10\-Q for the quarter ended September 30, 2006, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968706000073/fexhibit105.htm)                                           |
|  ^10\.117 | UAL
United | [Supplemental Agreement No\. 5 to Purchase Agreement No\. 2484, dated March 12, 2007 (filed as Exhibit 10\.1 to Continental's Form 10\-Q for the quarter ended March 31, 2007, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968707000018/fexhibit101.htm)                                              |
|  ^10\.118 | UAL
United | [Supplemental Agreement No\. 6 to Purchase Agreement No\. 2484, dated October 22, 2008 (filed as Exhibit 10\.25(f) to Continental's Form 10\-K for the year ended December 31, 2008, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968709000008/f123108form10kexh1025f.htm)                             |
|  ^10\.119 | UAL
United | [Supplemental Agreement No\. 7 to Purchase Agreement No\. 2484, dated November 7, 2012 (filed as Exhibit 10\.179 to UAL's Form 10\-K for the year ended December 31, 2012, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513074391/d436512dex10179.htm)                                               |

104