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

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

**Multi\-Employer Plans**

United’s participation in the IAM National Pension Plan (“IAM Plan”) for the annual period ended December 31, 2017 is outlined in the table below\. There have been no significant changes that affect the comparability of 2017 and 2016 contributions\. The risks of participating in these multi\-employer plans are different from single\-employer plans, as United may be subject to additional risks that others do not meet their obligations, which in certain circumstances could revert to United\. The IAM Plan reported $414 million in employers’ contributions for the year ended December 31, 2016\. For 2016, the Company’s contributions to the IAM Plan represented more than 5% of total contributions to the IAM Plan\.

|                                                    |                                                                                |
| -------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- |
| Pension Fund                                       | IAM National Pension Fund                                                                                |
| EIN/ Pension Plan Number                           | 51\-6031295 \- 002                                                                                |
| Pension Protection Act Zone Status (2017 and 2016) | Green Zone\. Plans in the green zone are at least 80 percent funded\.                                      |
| FIP/RP Status Pending/Implemented                  | No                                                                                |
| United’s Contributions                             | $50 million, $41 million and $40 million in the years ended December 31, 2017, 2016 and 2015, respectively |
| Surcharge Imposed                                  | No                                                                                |
| Expiration Date of Collective Bargaining Agreement | N/A                                                                                |

At the date the Consolidated Financial Statements were issued, Forms 5500 were not available for the plan year ending in 2017\.

**Profit Sharing**

Substantially all employees participate in profit sharing based on a percentage of pre\-tax earnings, excluding special charges, profit sharing expense and share\-based compensation\. Profit sharing percentages range from 5% to 20% depending on the work group, and in some cases profit sharing percentages vary above and below certain pre\-tax margin thresholds\. Eligible U\.S\. co\-workers in each participating work group receive a profit sharing payout using a formula based on the ratio of each qualified co\-worker’s annual eligible earnings to the eligible earnings of all qualified co\-workers in all domestic work groups\. Eligible non\-U\.S\.co\-workers receive profit sharing based on the calculation under the U\.S\. profit sharing plan for management and administrative employees\. The Company recorded profit sharing and related payroll tax expense of $349 million, $628 million and $698 million in 2017, 2016 and 2015, respectively\. Profit sharing expense is recorded as a component of Salaries and related costs in the Company’s statements of consolidated operations\.

84


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

Industry Competition

Domestic

The markets in which we operate are highly competitive\. On most of our domestic nonstop routes, we currently face competing service from other domestic airlines, including major network airlines, low\-cost carriers and ultra\-low\-cost carriers such as Alaska Airlines, Allegiant Air, Delta Air Lines, Frontier Airlines, Hawaiian Airlines, JetBlue Airways, Southwest Airlines, Spirit Airlines and United Airlines\. Competition is even greater between cities that require a connection, where the major airlines compete via their respective hubs\. In addition, we face competition on some of our connecting routes from airlines operating point\-to\-point service on such routes\. We also compete with all\-cargo and charter airlines and, particularly on shorter segments, ground and rail transportation\.

On all of our routes, pricing decisions are affected, in large part, by the need to meet competition from other airlines\. Price competition occurs on a market\-by\-market basis through price discounts, changes in pricing structures, fare matching, targeted promotions and loyalty program initiatives\. Airlines typically use discounted fares and other promotions to stimulate traffic during normally slack travel periods, when they begin service to new cities or when they have excess capacity, to generate cash flow, to maximize revenue per available seat mile and to establish, increase or preserve market share\. Most airlines will quickly match price reductions in a particular market, and we have often elected to match discounted or promotional fares initiated by other air carriers in certain markets in order to compete in those markets\. In addition, low\-fare, low\-cost carriers, such as Southwest Airlines and JetBlue Airways, and so\-called ultra\-low\-cost carriers, such as Allegiant Air, Frontier Airlines and Spirit Airlines, compete in many of the markets in which we operate and competition from these carriers is increasing\.

In addition to price competition, airlines compete for market share by increasing the size of their route system and the number of markets they serve\. The American Eagle regional carriers increase the number of markets we serve by flying to lower demand markets and providing connections at our hubs\. Many of our competitors also own or have agreements with regional airlines that provide similar services at their hubs and other locations\. We also compete on the basis of scheduling (frequency and flight times), availability of nonstop flights, on\-time performance, type of equipment, cabin configuration, amenities provided to passengers, loyalty programs, the automation of travel agent reservation systems, onboard products and other services\.

International

In addition to our extensive domestic service, we provide international service to Canada, Mexico, the Caribbean, Central and South America, Asia, Europe, Australia and New Zealand, and in 2020, will expand our international service to include Israel as well as Morocco, our first African destination\. In providing international air transportation, we compete with other U\.S\. airlines, foreign investor\-owned airlines and foreign state\-owned or state\-affiliated airlines\. Competition is increasing from foreign state\-owned and state\-affiliated airlines in the Gulf region, including Emirates, Etihad Airways and Qatar Airways \.  These carriers have large numbers of international widebody aircraft in service and on order and are increasing service to the U\.S\. from locations both in and outside the Middle East\. Service to and from locations outside of the Middle East is provided by some of these carriers under so\-called “fifth freedom” rights permitted under international treaties which allow service to and from stopover points between an airline’s home country and the ultimate destination\. Such flights, such as a stopover in Europe on flights to the United States, allow the carrier to sell tickets for travel between the stopover point and the United States in competition with service provided by us\. We believe these state\-owned and state\-affiliated carriers in the Gulf region, including their affiliated carriers, benefit from significant government subsidies, which have allowed them to grow quickly, reinvest in their product and expand their global presence\. Competition is also increasing from low\-cost airlines executing international long\-haul expansion strategies\.

In order to increase our ability to compete for international air transportation service, which is subject to extensive government regulation, U\.S\. and foreign carriers have entered into bilateral and multilateral marketing relationships, alliances, cooperation agreements and JBAs to exchange traffic among each other’s flights and route networks\. See “ Distribution and Marketing Agreements ” above for further discussion\.

8


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

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

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

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

Under all of our aircraft and engine purchase agreements, our total future commitments as of December 31, 2018 are expected to be as follows (approximately, in millions):

|                                                              |          |          |          |          |          |                         |           |
| ------------------------------------------------------------ | -------- | -------- | -------- | -------- | -------- | ----------------------- | --------- |
|                                                              | **2019** | **2020** | **2021** | **2022** | **2023** | **2024 and Thereafter** | **Total** |
| Payments for aircraft commitments and certain engines  ^(1)^ | $2,906   | $1,683   | $994     | $1,378   | $1,450   | $6,047                  | $14,458   |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | These amounts are net of purchase deposits currently held by the manufacturers and include all commitments for regional aircraft\. We have granted a security interest in certain of our purchase deposits with Boeing\. Our purchase deposits held by all manufacturers totaled  $1\.3 billion  as of  December 31, 2018 \. |

Additionally, we have purchase commitments related to jet fuel, construction projects and information technology support as follows (approximately): $1\.9 billion in 2019, $1\.1 billion in 2020, $1\.0 billion in 2021, $32 million in 2022 and $7 million in 2023\.

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

American has capacity purchase agreements with third\-party regional carriers\. The capacity purchase agreements provide that all revenues, including passenger, in\-flight, ancillary, mail and freight revenues, go to American\. In return, American agrees to pay predetermined fees to these airlines for operating an agreed\-upon number of aircraft, without regard to the number of passengers on board\. In addition, these agreements provide that American either reimburses or pays 100% of certain variable costs, such as airport landing fees, fuel and passenger liability insurance\. American controls marketing, scheduling, ticketing, pricing and seat inventories\.

As of December 31, 2018, American’s capacity purchase agreements with third\-party regional carriers had expiration dates ranging from 2019 to 2027, with rights of American to extend the respective terms of certain agreements\. See Part I, Item 2\. Properties for unaudited information on the aircraft operated by third\-party regional carriers under such capacity purchase agreements\.

As of December 31, 2018, American’s minimum fixed obligations under its capacity purchase agreements with third\-party regional carriers are as follows (approximately, in millions):

|                                                                                |          |          |          |          |          |                         |           |
| ------------------------------------------------------------------------------------------------------- | -------- | -------- | -------- | -------- | -------- | ----------------------- | --------- |
|                                                                                | **2019** | **2020** | **2021** | **2022** | **2023** | **2024 and Thereafter** | **Total** |
| Minimum fixed obligations under capacity purchase agreements with third\-party regional carriers  ^(1)^ | $1,101   | $930     | $765     | $618     | $487     | $1,043                  | $4,944    |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Represents minimum payments under capacity purchase agreements with third\-party regional carriers, which are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and American’s actual payments could differ materially\. Excludes payments for the lease of certain aircraft under capacity purchase agreements, which are reflected in the operating lease obligations in Note 6\.  |

***(c) Airport Redevelopment***

*Los Angeles International Airport (LAX)*

In 2018, we executed a lease agreement with Los Angeles World Airports (LAWA), which owns and operates LAX, in connection with a $1\.6 billion modernization project related to LAX Terminals 4 and 5\. Construction will occur in a phased approach, which started in October 2018 and is expected to be completed in 2028\. The modernization project will include a unified departure hall to combine the entranceway of Terminals 4 and 5, reconfigured ticket counter and check\-in areas with seamless access to security screening areas, 16 security screening lanes with automated technology and upgraded amenities at gate areas\. The project will also include renovated break rooms, multi\-use meeting rooms and team gathering spaces throughout the terminals to support our team members at LAX\.

121


Annual Report of Southwest Airlines Co\. for year 2019

In addition, the New Lease Standard eliminated the previous build\-to\-suit lease accounting guidance and resulted in derecognition of build\-to\-suit assets and liabilities that remained on the balance sheet after the end of the construction period, including the related deferred taxes\. However, given the Company's guarantee associated with the bonds issued to fund the Dallas Love Field Modernization Program (the "LFMP"), the remaining debt service amount as of the adoption date was considered a minimum rental payment under the New Lease Standard, and therefore was recorded as a lease liability with a corresponding right\-of\-use asset on the Consolidated Balance Sheet that will be reduced through debt service payments made in 2019 and beyond\. See Note  7  for disclosures related to the New Lease Standard, and Note  4  for further information on the Company’s build\-to\-suit projects\.

The following table provides the Consolidated Balance Sheet impact of applying the New Lease Standard effective as of January 1, 2019\. The impact to the Company's results of operations and cash flows was not significant:

|                                                   |                                             |                                             |                                       |
| ------------------------------------------------- | ------------------------------------------- | ------------------------------------------- | ------------------------------------- |
|                                                   | **Balance as of January 1, 2019**           | **Balance as of January 1, 2019**           | **Balance as of January 1, 2019**     |
| **(** **in millions** **)**                       | **Balances removed under prior accounting** | **Balances added under New Lease Standard** | **Net impact of New Lease Standard**  |
| Prepaid expenses and other current assets         | $1                                          | $—                                          | $

(1

)                  |
| Flight equipment                                  | —                                           | (110

)                               | (110

)                         |
| Assets constructed for others                     | 1,669                                       | —                                           | (1,669

)                       |
| Less allowance for depreciation and amortization  | (166

)                               | (2

)                                 | 164                                   |
| Operating lease right\-of\-use assets             | —                                           | 1,466                                       | 1,466                                 |
| Other assets                                      | 121                                         | —                                           | (121

)                         |
| Total assets                                      | $1,625                                      | $1,354                                      | $

(271

)                |
| Accounts payable                                  | $8                                          | $—                                          | $

(8

)                  |
| Accrued liabilities                               | 37                                          | —                                           | (37

)                          |
| Current operating lease liabilities               | —                                           | 355                                         | 355                                   |
| Current maturities of long\-term debt             | —                                           | (14

)                                | (14

)                          |
| Long\-term debt less current maturities           | —                                           | (96

)                                | (96

)                          |
| Deferred income taxes                             | (17

)                                | —                                           | 17                                    |
| Construction obligation                           | 1,602                                       | —                                           | (1,602

)                       |
| Noncurrent operating lease liabilities            | —                                           | 1,119                                       | 1,119                                 |
| Other noncurrent liabilities                      | 60                                          | —                                           | (60

)                          |
| Retained earnings                                 | (65

)                                | (10

)                                | 55                                    |
| Total liabilities and stockholders' equity        | $1,625                                      | $1,354                                      | $

(271

)                |

77


Annual Report of Southwest Airlines Co\. for year 2018

Net cash provided by operating activities for 2018, 2017, and 2016 was $4\.9 billion, $3\.9 billion, and $4\.3 billion, respectively\. Operating cash inflows are primarily derived from providing air transportation to Customers\. The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date\. Operating cash outflows are related to the recurring expenses of airline operations\. The operating cash flows for 2018, 2017, and 2016 were impacted primarily by the Company's results of operations, as adjusted for non\-cash items as well as changes in the Air traffic liability and Accrued liabilities balances\. During 2018, the Company's operating cash flows were positively impacted by the reduction in the federal corporate tax rate to 21 percent, from the previous rate of 35 percent\. Operating cash flows also can be significantly impacted by the Company’s fuel and interest rate hedge positions and the corresponding cash collateral requirements associated with those positions\. The Company has the ability to post aircraft in lieu of cash collateral in certain situations\. See Note 10 to the Consolidated Financial Statements for further information\. During 2018, the Company had net cash outflows of $15 million in cash collateral to derivative counterparties\. During 2017 and 2016, the Company had net cash inflows of $316 million and $535 million, respectively, in cash collateral from derivative counterparties\. Cash flows associated with entering into new fuel derivatives, which are also classified as Other, net, operating cash flows, were net outflows of $63 million in 2018, $142 million in 2017, and $165 million in 2016\. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, fund stock repurchases, pay dividends, and provide working capital\.

Net cash used in investing activities for 2018, 2017, and 2016 was $2\.0 billion, $2\.4 billion, and $2\.3 billion, respectively\. Investing activities in 2018, 2017, and 2016 included Capital expenditures, primarily related to aircraft and other equipment, technology projects, payments associated with airport construction projects, denoted as Assets constructed for others, and changes in the balance of the Company's short\-term and noncurrent investments\. See Note 4 to the Consolidated Financial Statements for further information\. During 2018, Capital expenditures were $1\.9 billion, the majority of which were payments for new aircraft delivered to the Company\. During 2017 and 2016, Capital expenditures were $2\.1 billion and $2\.0 billion, respectively\. During 2018, 2017, and 2016, the Company's purchases and sales of short\-term and noncurrent investments resulted in net cash outflows of $67 million, $159 million, and $125 million, respectively\. The Company currently estimates its 2019 capital expenditures will be approximately $1\.9 billion\.

Net cash used in financing activities for 2018, 2017, and 2016 was $2\.5 billion, $1\.7 billion, and $1\.9 billion, respectively\. During 2018, the Company repaid $342 million in debt and capital lease obligations, compared with $592 million and $591 million (including convertible notes) during 2017 and 2016, respectively\. During 2017, the Company issued, under its shelf registration statement, $300 million 2\.75% senior unsecured notes due 2022 and $300 million 3\.45% senior unsecured notes due 2027, compared with the 2016 borrowing of $215 million under a secured term loan agreement and issuance of $300 million3\.00% senior unsecured notes due 2026 under its shelf registration statement\. See Note 6 to the Consolidated Financial Statements for further information\. During 2018, the Company received a reimbursement from the City of Houston for $116 million for the investment and updates made at Houston William P\. Hobby Airport\. See Note 4 to the Consolidated Financial Statements for further information regarding the reimbursement\. The Company repurchased $2\.0 billion of its outstanding common stock through authorized share repurchases during 2018, compared with repurchases of $1\.6 billion and $1\.8 billion during 2017 and 2016, respectively\. The Company also paid $332 million in dividends to Shareholders during 2018, compared with $274 million in 2017 and $222 million in 2016\. Although the Company currently intends to continue paying dividends on a quarterly basis for the foreseeable future, the Company's Board of Directors may change the timing, amount, and payment of dividends on the basis of results of operations, financial condition, cash requirements, future prospects, and other factors deemed relevant by the Board of Directors\.

The Company is a "well\-known seasoned issuer" and currently has an effective shelf registration statement registering an indeterminate amount of debt and equity securities for future sales\. The Company currently intends to use the proceeds from any future securities sales off this shelf registration statement for general corporate purposes\.

The Company has access to a $1 billion unsecured revolving credit facility expiring in August 2022\. The revolving credit agreement has an accordion feature that would allow the Company, subject to, among other things, the procurement of incremental commitments, to increase the size of the facility to $1\.5 billion\. Interest on the facility is based on the Company's credit ratings at the time of borrowing\. At the Company's current ratings, the interest cost

54


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

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

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

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

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

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

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

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

We lease certain aircraft, engines and ground equipment, in addition to the majority of our ground facilities and terminal space\. As of December 31, 2017, we had 421 aircraft under operating leases, with remaining terms ranging from three months to approximately 12 years\. Airports are utilized for flight operations under lease arrangements with the municipalities or agencies owning or controlling such airports\. Substantially all leases provide that the lessee must pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property\. Some leases also include renewal and purchase options\.

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

|                               |          |          |          |          |          |                         |           |
| ----------------------------- | -------- | -------- | -------- | -------- | -------- | ----------------------- | --------- |
|                               | **2018** | **2019** | **2020** | **2021** | **2022** | **2023 and Thereafter** | **Total** |
| Future minimum lease payments | $2,195   | $1,974   | $1,784   | $1,339   | $1,159   | $3,266                  | $11,717   |

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

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

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

American has capacity purchase agreements with third\-party regional carriers\. The capacity purchase agreements provide that all revenues, including passenger, in\-flight, ancillary, mail and freight revenues, go to American\. In return, American agrees to pay predetermined fees to these airlines for operating an agreed\-upon number of aircraft, without regard to the number of passengers on board\. In addition, these agreements provide that American reimburses 100% of certain variable costs, such as airport landing fees and passenger liability insurance\. American controls marketing, scheduling, ticketing, pricing and seat inventories\.

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

116


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

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

The components of our deferred tax assets and liabilities were (in millions):

|                                                    |                  |                  |
| -------------------------------------------------- | ---------------- | ---------------- |
|                                                    | **December 31,** | **December 31,** |
|                                                    | **2019**         | **2018**         |
| Deferred tax assets:                               |                  |                  |
| Operating loss carryforwards                       | $2,103           | $2,343           |
| Leases                                             | 2,077            | 2,189            |
| Loyalty program liability                          | 1,755            | 1,770            |
| Pensions                                           | 1,229            | 1,430            |
| Postretirement benefits other than pensions        | 145              | 145              |
| Rent expense                                       | 126              | 136              |
| Alternative minimum tax (AMT) credit carryforwards | 90               | 175              |
| Reorganization items                               | 30               | 33               |
| Other                                              | 613              | 631              |
| Total deferred tax assets                          | 8,168            | 8,852            |
| Valuation allowance                                | (34

)     | (30

)     |
| Net deferred tax assets                            | 8,134            | 8,822            |
| Deferred tax liabilities:                          |                  |                  |
| Accelerated depreciation and amortization          | (5,196

)  | (5,280

)  |
| Leases                                             | (1,979

)  | (2,081

)  |
| Other                                              | (343

)    | (326

)    |
| Total deferred tax liabilities                     | (7,518

)  | (7,687

)  |
| Net deferred tax asset                             | $616             | $1,135           |

At  December 31, 2019 , we had approximately   $9\.1 billion  of federal NOLs carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which we expect to be available for use in 2020\. The federal NOL Carryforwards will expire beginning in 2023 if unused\. We also had approximately   $3\.0 billion  of NOL Carryforwards to reduce future state taxable income at  December 31, 2019 , which will expire in years 2020 through 2039 if unused\. Our ability to deduct our NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred\. Substantially all of our remaining federal NOL Carryforwards attributable to US Airways Group are subject to limitation under Section 382; however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation\. We elected to be covered by certain special rules for federal income tax purposes that permitted approximately   $9\.0 billion  (with   $7\.3 billion  of unlimited NOL still remaining at  December 31, 2019 ) of our federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382\. Similar limitations may apply for state income tax purposes\. Our ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another future ownership change occurs\. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three\-year period can potentially limit a company’s future use of NOLs and tax credits\.

At  December 31, 2019 , we had an AMT credit carryforward of approximately   $170 million  available for federal income tax purposes, which is presently expected to be fully refundable over the next several years as a result of the repeal of corporate AMT as part of the 2017 Tax Act\.

In  2019 , we recorded an income tax provision of   $570 million , with an effective rate of approximately   25% , which was substantially non\-cash due to utilization of our NOLs as described above\. Substantially all of our income before income taxes is attributable to the United States\.

We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate\. Our 2016 through 2018 tax years are still subject to examination by the Internal Revenue Service\. Various state and foreign jurisdiction tax years remain open to examination and we are under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions\. We believe that the effect of any assessments will not be material to our consolidated financial statements\.

95


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

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Firm Order and Option Aircraft

As of December 31, 2018, United had firm commitments and options to purchase new aircraft from Boeing, Airbus and Embraer as presented in the table below:

|                                                                           |                                                                           |
| ------------------------------------------------------------------------- | ------------------------------------------------------------------------- |
| **Aircraft Type**                                                         | **Number of Firm  <br>Commitments (a)**                                   |
| Airbus A350                                                               | 45                                                                        |
| Boeing 737 MAX                                                            | 175                                                                       |
| Boeing 777\-300ER                                                         | 4                                                                         |
| Boeing 787                                                                | 24                                                                        |
| Embraer E175                                                              | 25                                                                        |
| (a) United also has options and purchase rights for additional aircraft\. | (a) United also has options and purchase rights for additional aircraft\. |

The aircraft listed in the table above are scheduled for delivery from 2019 through 2027\. To the extent the Company and the aircraft manufacturers with whom the Company has existing orders for new aircraft agree to modify the contracts governing those orders, the amount and timing of the Company's future capital commitments could change\. In 2019, United expects to take delivery of 25 Embraer E175 aircraft, 20 Boeing 737 MAX aircraft, 8 Boeing 787 aircraft and 2 Boeing 777\-300ER aircraft\.United also has agreements to purchase 20 used Airbus A319 aircraft with expected delivery dates through 2022\. See Notes 10 and 13 to the financial statements included in Part II, Item 8 of this report for additional information\.

**Facilities**

United's principal facilities relate to leases of airport facilities, gates, hangar sites, terminal buildings and other facilities in the municipalities it serves\. United has major terminal facility leases at SFO, Washington Dulles, Chicago O'Hare, LAX, Denver, Newark, Houston Bush and Guam with expiration dates ranging from 2019 through 2055\. Substantially all of these facilities are leased on a net\-rental basis, resulting in the Company's responsibility for maintenance, insurance and other facility\-related expenses and services\.

United also maintains administrative offices, catering, cargo, training facilities, maintenance facilities and other facilities to support operations in the cities served\. In addition, United has multiple leases, which expire from 2019 through 2029, for its principal executive office and operations center in downtown Chicago and administrative offices in downtown Houston\.

|              |                         |
| ------------ | ----------------------- |
| **ITEM 3\.** | **LEGAL PROCEEDINGS\.** |

On June 30, 2015, UAL received a Civil Investigative Demand ("CID") from the Antitrust Division of the DOJ seeking documents and information from the Company in connection with a DOJ investigation related to statements and decisions about airline capacity\. The Company is working with the DOJ and has completed its response to the CID\. The Company is not able to predict what action, if any, might be taken in the future by the DOJ or other governmental authorities as a result of the investigation\. Beginning on July 1, 2015, subsequent to the announcement of the CID, UAL and United were named as defendants in multiple class action lawsuits that asserted claims under the Sherman Antitrust Act, which have been consolidated in the United States District Court for the District of Columbia\. The complaints generally allege collusion among U\.S\. airlines on capacity impacting airfares and seek treble damages\. The Company intends to vigorously defend against the class action lawsuits\.

On October 13, 2015, United received a CID from the Civil Division of the DOJ\. The CID requested documents and oral testimony from United in connection with an industry\-wide DOJ investigation related to delivery scan and other data purportedly required for payment for the carriage of mail under United's International Commercial Air Contracts with the U\.S\. Postal Service\. The Company has been responding to the DOJ's request and cooperating in the investigation since that time\. On November 8, 2016, the DOJ Criminal Division met with representatives from the Company and advised they are conducting an industry\-wide investigation into the same matter\. The Company is also cooperating with the government in this aspect of their investigation and, on December 21, 2016, representatives from the Company met with both the Civil and Criminal Divisions to provide additional information\. The Company cannot predict what action, if any, might be taken in the future by the DOJ or other governmental authorities as a result of these investigations\.

20


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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized\.

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------- |
|       | UNITED AIRLINES HOLDINGS, INC\.

UNITED AIRLINES, INC\.

(Registrants) |
| By:   | /s/ Gerald Laderman                                                                |
|       | Gerald Laderman                                                                    |
|       | Executive Vice President and Chief Financial Officer                               |
| Date: | February 24, 2020                                                                  |

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of United Airlines Holdings, Inc\. and in the capacities and on the date indicated\.

|                        |                                                      |
| ---------------------- | ---------------------------------------------------- |
| Signature              | Capacity                                             |
| /s/ Oscar Munoz        | Chief Executive Officer, Director                    |
| Oscar Munoz            | (Principal Executive Officer)                        |
| /s/ Gerald Laderman    | Executive Vice President and Chief Financial Officer |
| Gerald Laderman        | (Principal Financial Officer)                        |
| /s/ Chris Kenny        | Vice President and Controller                        |
| Chris Kenny            | (Principal Accounting Officer)                       |
| /s/ Carolyn Corvi      | Director                                             |
| Carolyn Corvi          |                                                      |
| /s/ Jane C\. Garvey    | Director                                             |
| Jane C\. Garvey        |                                                      |
| /s/ Barney Harford     | Director                                             |
| Barney Harford         |                                                      |
| /s/ Michele J\. Hooper | Director                                             |
| Michele J\. Hooper     |                                                      |
| /s/ Todd M\. Insler    | Director                                             |
| Todd M\. Insler        |                                                      |

103


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

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

The fair value of our retiree medical and other postretirement benefits plans assets by asset category, were as follows (in millions):

|                          |                                                                                |                                                                              |                                                                                |                                                     |
| ------------------------ | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- |
|                          | **Fair Value Measurements as of December 31, 2019**                                      | **Fair Value Measurements as of December 31, 2019**                          | **Fair Value Measurements as of December 31, 2019**                            | **Fair Value Measurements as of December 31, 2019** |
| **Asset Category**       | **Quoted Prices in**

**Active Markets for Identical Assets**

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

**Observable**

**Inputs**

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

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Money market fund        | $4                                                                                | $—                                                                           | $—                                                                             | $4                                                  |
| Mutual funds – AAL Class | —                                                                                | 200                                                                          | —                                                                              | 200                                                 |
| Total                    | $4                                                                                | $200                                                                         | $—                                                                             | $204                                                |

|                          |                                                                                |                                                                              |                                                                                |                                                     |
| ------------------------ | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- |
|                          | **Fair Value Measurements as of December 31, 2018**                                      | **Fair Value Measurements as of December 31, 2018**                          | **Fair Value Measurements as of December 31, 2018**                            | **Fair Value Measurements as of December 31, 2018** |
| **Asset Category**       | **Quoted Prices in**

**Active Markets for Identical Assets**

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

**Observable**

**Inputs**

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

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Money market fund        | $4                                                                                | $—                                                                           | $—                                                                             | $4                                                  |
| Mutual funds – AAL Class | —                                                                                | 221                                                                          | —                                                                              | 221                                                 |
| Total                    | $4                                                                                | $221                                                                         | $—                                                                             | $225                                                |

Investments in the retiree medical and other postretirement benefits plans’ mutual funds are valued by quoted prices on the active market, which is fair value, and represents the net asset value of the shares of such funds as of the close of business at the end of the period\. The AAL Class mutual funds are offered only to benefit plans of American, therefore, trading is restricted only to American, resulting in a fair value classification of Level 2\. Investments included approximately   24%  and   30%  of investments in non\-U\.S\. common stocks in  2019  and  2018 , respectively\. Net asset value is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination\.

Defined Contribution and Multiemployer Plans

The costs associated with our defined contribution plans were   $860 million ,   $846 million  and   $820 million  for the years ended  December 31, 2019 ,  2018  and  2017 , respectively\.

We participate in the International Association of Machinists & Aerospace Workers (IAM) National Pension Fund, Employer Identification No\. 51\-6031295 and Plan No\. 002 (the IAM Pension Fund)\. Our contributions to the IAM Pension Fund were   $32 million ,   $31 million  and   $31 million  for the years ended  December 31, 2019 ,  2018  and  2017 , respectively\. The IAM Pension Fund reported   $467 million  in employers’ contributions for the year ended  December 31, 2018 , which is the most recent year for which such information is available\. For  2018 , our contributions represented more than   5%  of total contributions to the IAM Pension Fund\.

On March 29, 2019, the actuary for the IAM Pension Fund certified that the fund was in endangered status despite reporting a funded status of over   80% \. Additionally, the IAM Pension Fund’s Board voluntarily elected to enter into critical status on April 17, 2019\. In connection with the entry into critical status, the IAM Pension Fund adopted a rehabilitation plan on April 17, 2019 (the Rehabilitation Plan)\. Under the Rehabilitation Plan, we were subject to an immaterial contribution surcharge, which ceased to apply June 14, 2019 upon our adoption of a contribution schedule under the Rehabilitation Plan\. The contribution schedule we adopted provides for   2\.5%  annual increases to our contribution rate\. This contribution schedule will remain in effect through the earlier of December 31, 2031 or the date the IAM Pension Fund emerges from critical status\.

Profit Sharing Program

We accrue   5%  of our pre\-tax income excluding net special items for our profit sharing program\. For the year ended  December 31, 2019 , we accrued   $213 million  for this program, which will be distributed to employees in the first quarter of  2020 \.

106


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

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Low Fares and Great Value*  \- W e offer the highest guest relevance of any carrier from the West Coast, with a 20% lower cost structure than legacy carriers\. Competition in our markets is significant, and we know that we must defend our customer base as we grow our network presence by providing guests with an increased choice of schedule times and fares\. In 2018, we introduced our Saver Fare product, which will offer greater choice for our guests, allowing them to purchase and pay for the ticket type and other amenities they value most\. This, combined with enhancements to our onboard product, will enable us to continue to deliver significant value to our guests\.  |

We are also focused on providing meaningful utility and routes to our guests\. From our West Coast hub cities, we lead all other airlines in non\-stop markets, daily flights and seat share\. In the past two years, we have significantly expanded our network utility in California, adding 21 new routes and nearly doubling our number of daily flights\. We also have focused our new routes announced for 2019 in those areas which connect our guests to high demand markets in the lower 48 states and Hawaii, including 18 daily departures from Paine Field\-Snohomish County Airport in Everett, Washington to eight West Coast markets expected to launch in March 2019\.

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Generous Mileage Plan*  \-  Our award winning Mileage Plan ^TM^  is another way we build long\-term guest relationships and enable Our Advantage\. We maintain a distance\-based frequent flier program, which rewards all fliers regardless of the price they paid for their tickets\. In 2018, we leveraged our greater network utility to significantly grow our Mileage Plan ^TM^  membership and credit card holders, especially in the state of California\. We also offered promotions like Buy One Get One Free companion fares and new redemption benefits, including using miles for hotel redemptions (with access to over 400,000 hotels worldwide), redeeming miles on Finnair flights and adding Aer Lingus as a new global partner\. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *West Coast Vibe*  \-  In 2018, we tailored many of our amenities to highlight our West Coast roots\. We relaunched our First Class and Main Cabin food menus featuring fresh and local West Coast items, as well as local craft beers and wines\. To keep up to speed with the evolving needs and preferences of our West Coast guests, we continue to expand and enhance our on\-board amenities, including seat\-back power, free movies, TV content and texting\. In 2018, we also began installation of next\-generation satellite\-based Wi\-Fi on all of our Mainline aircraft, which will provide our guests with greatly improved on\-board internet speed and connectivity\. Finally, we continue to connect with West Coast guests through key sponsorships including Russell Wilson, Kevin Durant, the San Jose Sharks, San Francisco Giants, Seattle Mariners, Portland Timbers and more\.  |

*Being One Team*

Our success depends on our more than 23,000 employees living our values every day to deliver superior customer service as a single team\. We know engaged employees deliver higher productivity, superior execution and better guest experiences, which is why investing in our people is imperative to our future success\.

In 2018, we focused on our culture to ensure every employee feels valued, informed and engaged\. It is a top priority to ensure our employees know where we are, where we are going and how we will get there\. To this end, we have implemented new and enhanced communication vehicles, including weekly Leader Look Ahead and periodic live\-streamed webcasts, to provide employees better information and a stronger connection to organizational priorities\. Additionally, we launched Flight Path \- a program that brings employees together through leader\-led sessions to inform, engage and set the course for our business and culture\. Our efforts were recognized by Forbes Magazine in 2018, who recognized Alaska as one of America's Best Employers for the fourth year in a row\.

Aligning our employees' goals with Air Group's goals has been an important contributor to our strong track record of accomplishments and financial performance\. The majority of Alaska and Horizon employees participate in our Performance\-Based Pay (PBP) and Operational Performance Rewards (OPR) programs, which encourage employees to work together to achieve metrics related to the Company's strategy, including safety, profitability, on\-time performance, low costs, customer loyalty, and customer satisfaction\. Over the last five years, our incentive programs have paid out on average more than one month's pay for most employees\. In 2018, we rewarded our employees with $147 million under these incentive programs\.

 6


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

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

Employees

As of  December 31, 2019 , UAL, including its subsidiaries, had approximately  96,000  employees\. Approximately  84%  of the Company's employees were represented by various U\.S\. labor organizations\.

Collective bargaining agreements between the Company and its represented employee groups are negotiated under the RLA\. Such agreements typically do not contain an expiration date and instead specify an amendable date, upon which the agreement is considered "open for amendment\."

On February 1, 2019, the collective bargaining agreement with the Air Line Pilots Association ("ALPA"), the labor union representing United's pilots, became amendable\. The Company and ALPA are in negotiations for an amended agreement\. The Company and UNITE HERE, the labor union representing United's Catering employees, started negotiations for a first collective bargaining agreement in March 2019\.

The following table reflects the Company's represented employee groups, the number of employees per represented group, union representation for each employee group, and the amendable date for each employee group's collective bargaining agreement as of  December 31, 2019 :

|                                                        |                         |                                                                           |                                       |
| ------------------------------------------------------ | ----------------------- | ------------------------------------------------------------------------- | ------------------------------------- |
| **Employee**

**Group**                         | **Number of Employees** | **Union**                                                                 | **Agreement Open for**  **Amendment** |
| **Flight Attendants**                                  | 24,203                  | Association of Flight Attendants (the "AFA")                              | August 2021                           |
| **Fleet Service**                                      | 13,803                  | International Association of Machinists and Aerospace Workers (the "IAM") | December 2021                         |
| **Passenger Service**                                  | 12,135                  | IAM                                                                       | December 2021                         |
| **Pilots**                                             | 12,251                  | ALPA                                                                      | January 2019                          |
| **Technicians**                                        | 9,318                   | International Brotherhood of Teamsters (the "IBT")                        | December 2022 (a)                     |
| **Passenger Service \- United Ground Express, Inc\.**  | 4,155                   | IAM                                                                       | March 2025                            |
| **Catering**                                           | 2,577                   | UNITE HERE                                                                | N/A                                   |
| **Storekeepers**                                       | 989                     | IAM                                                                       | December 2021                         |
| **Dispatchers**                                        | 412                     | Professional Airline Flight Control Association                           | December 2021                         |
| **Fleet Tech Instructors**                             | 130                     | IAM                                                                       | December 2021                         |
| **Load Planners**                                      | 62                      | IAM                                                                       | December 2021                         |
| **Security Officers**                                  | 45                      | IAM                                                                       | December 2021                         |
| **Maintenance Instructors**                            | 40                      | IAM                                                                       | December 2021                         |

(a) The collective bargaining agreement with the IBT contains provisions that require the Company to align contract terms with other airlines' workgroups under certain conditions\.

Information about Our Executive Officers

Kate Gebo\.  Age 51\. Ms\. Gebo has served as Executive Vice President Human Resources and Labor Relations of UAL and United since December 2017\. From November 2016 to November 2017, Ms\. Gebo served as Senior Vice President, Global Customer Service Delivery and Chief Customer Officer of United\. From October 2015 to November 2016, Ms\. Gebo served as Vice President of the Office of the Chief Executive Officer\. From November 2009 to October 2015, Ms\. Gebo served as Vice President of Corporate Real Estate of United\.

Brett J\. Hart\.  Age 50\. Mr\. Hart has served as Executive Vice President and Chief Administrative Officer of UAL and United since March 2019\. From May 2017 to March 2019, he served as Executive Vice President, Chief Administrative Officer and General Counsel of UAL and United\. From February 2012 to May 2017, he served as Executive Vice President and General Counsel of UAL and United\. Mr\. Hart served as acting Chief Executive Officer and principal executive officer of the Company, on an interim basis, from October 2015 to March 2016\. From December 2010 to February 2012, he served as Senior Vice President, General Counsel and Secretary of UAL, United and Continental Airlines, Inc\. ("Continental")\. From June 2009 to December 2010, Mr\. Hart served as Executive Vice President, General Counsel and Corporate Secretary at Sara Lee Corporation, a consumer food and beverage company\. From March 2005 to May 2009, Mr\. Hart served as Deputy General Counsel and Chief Global Compliance Officer of Sara Lee Corporation\.

Gregory L\. Hart\.  Age 54\. Mr\. Hart has served as Executive Vice President and Chief Operations Officer of UAL and United since February 2014\. From December 2013 to February 2014, he served as Senior Vice President Operations of UAL and United\. From September 2012 to December 2013, Mr\. Hart served as Senior Vice President Technical Operations of United\. From October 2010 to September 2012, Mr\. Hart served as Senior Vice President Network of United and Continental\. From

8


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

Aircraft Maintenance Materials and Outside Repairs\.  Aircraft maintenance materials and outside repairs consist of costs associated with the maintenance of aircraft used in our operations\. The increase in aircraft maintenance materials and outside repairs expense primarily relates to an increase in maintenance activity in order to enhance service reliability of certain aircraft\.

Ancillary Businesses and Refinery\.  Ancillary businesses and refinery includes expenses associated with aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties\. Expenses related to refinery sales to third parties, which are at or near cost, increased  $268 million  compared to the prior year, primarily resulting from higher sales volume\.

Passenger Service\.  Passenger service expense includes the costs of onboard food and beverage, cleaning and supplies\. The increase in passenger service expense predominantly relates to costs associated with enhancements to our onboard product offering and higher traffic\.

Aircraft Rent\.  The increase in aircraft rent primarily results from new leased aircraft deliveries since 2016, including B\-737\-900ER and A321\-200 aircraft\.

 35


Annual Report of Southwest Airlines Co\. for year 2017

the airline industry generally, and the risk that higher fares will drive a decrease in demand\. The Company attempts to manage its risk associated with volatile jet fuel prices by utilizing over\-the\-counter fuel derivative instruments to hedge a portion of its future jet fuel purchases\. However, energy prices can fluctuate significantly in a relatively short amount of time\. Because the Company uses a variety of different derivative instruments at different price points, the Company is subject to the risk that the fuel derivatives it uses will not provide adequate protection against significant increases in fuel prices and could in fact result in hedging losses, and the Company effectively paying higher than market prices for fuel, thus creating additional volatility in the Company's earnings\. The Company is also subject to the risk that cash collateral may be required to be posted to fuel hedge counterparties, which could have a significant impact on the Company's financial position and liquidity\.

In addition, the Company is subject to the risk that its fuel derivatives will not be effective or that they will no longer qualify for hedge accounting under applicable accounting standards, which can create additional earnings volatility\. Adjustments in the Company's overall fuel hedging strategy, as well as the ability of the commodities used in fuel hedging to qualify for special hedge accounting, are likely to continue to affect the Company's results of operations\. In addition, there can be no assurance that the Company will be able to cost\-effectively hedge against increases in fuel prices\. Also, see Note 2 to the Consolidated Financial Statements for information on future changes in applicable standards for hedge accounting\.

The Company's fuel hedging arrangements and the various potential impacts of hedge accounting on the Company's financial position, cash flows, and results of operations are discussed in more detail under "Management’s Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk," and in Note 1 and Note 10 to the Consolidated Financial Statements\.

The Company is also reliant upon the readily available supply and timely delivery of jet fuel to the airports that it serves\. A disruption in that supply could present significant challenges to the Company's operations and could ultimately cause the cancellation of flights and/or the inability of the Company to provide service to a particular airport\.

***The Company's low\-cost structure has historically been one of its primary competitive advantages, and many factors have affected and could continue to affect the Company's ability to control its costs\.***

The Company's low\-cost structure has historically been one of its primary competitive advantages, as it has enabled it to offer low fares, drive traffic volume, grow market share, and protect profits\. The Company's low\-cost position has become even more significant with the increased presence of ULCCs and changes to the legacy fare offerings discussed above; however, it has become increasingly difficult for the Company to improve upon its industry cost position\. For example, labor and fuel costs, as well as other costs such as regulatory compliance costs, can negatively affect the Company's ability to control its costs\. Furthermore, the Company has limited control over many of these costs\.

Jet fuel and oil constituted approximately 22 percent of the Company's operating expenses during 2017, and the Company's ability to control the cost of fuel is subject to the external factors discussed in the second Risk Factor above\.

Salaries, wages, and benefits constituted approximately 41 percent of the Company's operating expenses during 2017\. The Company's ability to control labor costs is limited by the terms of its collective\-bargaining agreements, and increased labor costs have negatively impacted the Company's low\-cost competitive position\. As discussed further under "Management’s Discussion and Analysis of Financial Condition and Results of Operations," the Company's unionized workforce, which makes up approximately 83 percent of its Employees, has had pay scale increases as a result of contractual rate increases\. Additionally, the majority of Southwest's unionized Employees, including its Pilots; Flight Attendants; Ramp, Operations, Provisioning, and Freight Agents; Aircraft Appearance Technicians; and Flight Crew Training Instructors, ratified new collective\-bargaining agreements during 2016, which have put pressure on the Company's low\-cost structure\. Furthermore, as indicated above under "Business \- Employees," other Southwest unionized Employees, including its Mechanics and Material Specialists, are in unions currently in negotiations for labor agreements, which could result in additional pressure on the Company's low\-cost structure\.

As discussed above under "Business \- Regulation," the airline industry is heavily regulated, and the Company's regulatory compliance costs are subject to potentially significant increases from time to time based on actions by regulatory agencies that are out of the Company's control\. Additionally, the Company cannot control decisions by other airlines to reduce their capacity\. When this occurs, airport costs are allocated among a fewer number of total flights,

22


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

**AGREEMENTS WITH OTHER AIRLINES**

Our agreements fall into three different categories: Frequent Flyer, Codeshare and Interline agreements\. Frequent Flyer agreements enable our Mileage Plan^TM^ members to earn mileage credits and make redemptions on one of our 17 domestic and international partner airlines\.

Codeshare agreements allow one or more marketing carriers to sell seats on a single operating carrier that services passengers under multiple flight numbers\. The sale of codeshare seats can vary depending on the sale arrangement\. For example, in a free\-sale arrangement, the marketing carrier sells the operating carrier's inventory without any restriction; whereas in a block space arrangement, a fixed amount of seats are sold to the marketing carrier by the operating carrier\. The interchangeability of the flight code between carriers provides a greater selection of flights for customers, along with increased flexibility for mileage accrual and redemption\.

Interline agreements allow airlines to jointly offer a competitive, single\-fare itinerary to customers traveling via multiple carriers to a final destination\. An interline itinerary offered by one airline may not necessarily be offered by the other, and the fares collected from passengers are prorated and distributed to interline partners according to preexisting agreements between the carriers\. Frequent flyer, codeshare and interline agreements help increase our traffic and revenue by providing more route choices to our guests\.

Alaska has marketing alliances with a number of airlines that provide frequent flyer and codesharing opportunities\. Alliances are an important part of our strategy and enhance our revenues by:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | offering our guests more travel destinations and better mileage credit/redemption opportunities, including elite qualifying miles on U\.S\. and international airline partners; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | giving our Mileage Plan ^TM^  program a competitive advantage because of our partnership with both unaffiliated international carriers and carriers from all three major worldwide alliances; |

|   |                                                                      |
| - | -------------------------------------------------------------------- |
| • | giving us access to more connecting traffic from other airlines; and |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | providing members of our alliance partners’ frequent flyer programs an opportunity to travel on Alaska and our regional partners while earning mileage credit in our partners’ programs\. |

Most of our codeshare relationships are free\-sale codeshares, where the marketing carrier sells seats on the operating carrier’s flights from the operating carrier’s inventory, but takes no inventory risk\. Our marketing agreements have various termination dates, and one or more may be in the process of renegotiation at any time\. Our codeshare and interline agreements generated 5%, 6%, and 8% of our total marketed revenues as of December 31, 2018, 2017 and 2016, respectively\.

 9


Annual Report of Southwest Airlines Co\. for year 2018

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 2\. | A noncash impairment charge related to leased slots at Newark Liberty International Airport as a result of the FAA announcement in April 2016 that this airport was being changed to a Level 2 schedule\-facilitated airport from its previous designation as Level 3; |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| 3\. | Lease termination costs recorded as a result of the Company acquiring 13 of its Boeing 737\-300 aircraft off operating leases as part of the Company’s strategic effort to remove its Classic aircraft from operations on or before September 29, 2017, in the most economically advantageous manner possible\. The Company had not budgeted for these early lease termination costs, as they were subject to negotiations being concluded with the third party lessors\. The Company recorded the fair value of the aircraft acquired off operating leases, as well as any associated remaining obligations to the balance sheet as debt; |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 4\. | An Aircraft grounding charge recorded in third quarter 2017, as a result of the Company grounding its remaining Boeing 737\-300 aircraft on September 29, 2017\. The loss was a result of the remaining net lease payments due and certain lease return requirements that could have to be performed on these leased aircraft prior to their return to the lessors as of the cease\-use date\. The Company had not budgeted for the lease return requirements, as they were subject to negotiation with third party lessors; |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 5\. | A gain recognized in first quarter 2018, associated with the sale of 39 owned Boeing 737\-300 aircraft and a number of spare engines to a third party\. These aircraft were previously retired as part of the Company's exit of its Classic fleet\. The gain was not anticipated, and the Company associates it with the grounding charge recorded in third quarter 2017; and |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 6\. | An adjustment to Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re\-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21 percent\. This adjustment was a non\-cash item and was treated as a special item\. |

Because management believes each of these items can distort the trends associated with the Company’s ongoing performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of these items in order to enhance consistency and comparativeness with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods\. The following measures are often provided, excluding special items, and utilized by the Company’s management, analysts, and investors to enhance comparability of year\-over\-year results, as well as to industry trends: Total operating expenses, non\-GAAP; Operating income, non\-GAAP; Adjusted operating income, non\-GAAP; Income tax rate, non\-GAAP; Provision for income taxes, non\-GAAP; Net income, non\-GAAP; Net income per share, diluted, non\-GAAP; and Operating expenses per ASM, non\-GAAP, excluding profitsharing and Fuel and oil expense\.

The Company has also provided its calculation of return on invested capital, which is a measure of financial performance used by management to evaluate its investment returns on capital\. Return on invested capital is not a substitute for financial results as reported in accordance with GAAP, and should not be utilized in place of such GAAP results\. Although return on invested capital is not a measure defined by GAAP, it is calculated by the Company, in part, using non\-GAAP financial measures\. Those non\-GAAP financial measures are utilized for the same reasons as those noted above for Net income, non\-GAAP and Operating income, non\-GAAP\. The comparable GAAP measures include charges or benefits that are deemed "special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends, and the Company’s profitability targets and estimates, both internally and externally, are based on non\-GAAP results since in the vast majority of cases the "special items" cannot be reliably predicted or estimated\. The Company believes non\-GAAP return on invested capital is a meaningful measure because it quantifies the Company's effectiveness in generating returns relative to the capital it has invested in its business\. Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital differ; therefore, the Company is providing an explanation of its calculation for non\-GAAP return on invested capital in the accompanying reconciliation in order to allow investors to compare and contrast its calculation to the calculations provided by other companies\.

**Liquidity and Capital Resources**

53


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

**NOTE 5\. LONG\-TERM DEBT**

Long\-term debt obligations (in millions):

|                                               |            |          |
| --------------------------------------------- | ---------- | -------- |
|                                               | **2017**   | **2016** |
| Fixed\-rate notes payable due through 2028    | **$959**   | $1,179   |
| Variable\-rate notes payable due through 2028 | **1,625**  | 1,803    |
| Less debt issuance costs                      | **(15)**   | (18)     |
| **Total debt**                                | **2,569**  | 2,964    |
| Less current portion                          | **307**    | 319      |
| **Long\-term debt, less current portion**     | **$2,262** | $2,645   |
| Weighted\-average fixed\-interest rate        | **4\.2%**  | 4\.4%    |
| Weighted\-average variable\-interest rate     | **2\.8%**  | 2\.4%    |

During 2017, the Company's total debt decreased$395 million, primarily due to payments of $397 million in 2017, including the prepayment of $74 million of debt\. Approximately $2\.2 billion of the loans are secured by a total of 113 aircraft and two spare engines\. An additional $392 million is secured by Air Group's interest in certain aircraft purchase deposits\.

The Company's variable\-rate debt bears interest at a floating rate per annum equal to a margin plus the three or six\-month LIBOR in effect at the commencement of each semi\-annual or three\-month period, as applicable\. As of December 31, 2017, none of the Company's borrowings were restricted by financial covenants\.

Long\-term debt principal payments for the next five years and thereafter (in millions):

|                          |           |
| ------------------------ | --------- |
|                          | **Total** |
| 2018                     | $310      |
| 2019                     | 393       |
| 2020                     | 449       |
| 2021                     | 414       |
| 2022                     | 247       |
| Thereafter               | 768       |
| Total principal payments | $2,581    |

***Bank Line of Credit***

The Company has three credit facilities with availability totaling $475 million\. All three facilities have variable interest rates based on LIBOR plus a specified margin\. One credit facility increased from $100 million to $250 million in June 2017\. It expires in June 2021 and is secured by aircraft\. A second credit facility increased from $52 million to $75 million in September 2017\. It expires in September 2018, has a mechanism for annual renewal, and is secured by aircraft\. A third credit facility increased from $100 million to $150 million in March 2017\. It expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment\. The Company has secured letters of credit against the $75 million facility, but has no plans to borrow using either of the two other facilities\. All three credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million\. The Company was in compliance with this covenant at December 31, 2017\.

**NOTE 6\. INCOME TAXES**

***Deferred Income Taxes***

Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes\. The Company has a net deferred tax liability, primarily due to differences in depreciation rates for federal income tax purposes and for financial reporting purposes\.

 79


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

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

primarily sold using global distribution systems (“GDS”)\. United has developed capabilities to sell certain ancillary products through the GDS channel to provide an enhanced buying experience for customers who purchase in that channel\. To increase the Company’s opportunities to sell its full range of products and services and lower distribution costs, the Company will continue to develop new selling capabilities in third\-party channels and expand the capabilities of its website and mobile applications\.

**Industry Conditions**

***Domestic Competition\.*** The domestic airline industry is highly competitive and dynamic\. The Company’s competitors consist primarily of other airlines and, to a certain extent, other forms of transportation\. Currently, any U\.S\. carrier deemed fit by the DOT is largely free to operate scheduled passenger service between any two points within the United States\. Competition can be direct, in the form of another carrier flying the exact non\-stop route, or indirect, where a carrier serves the same two cities non\-stop from an alternative airport in that city or via an itinerary requiring a connection at another airport\. Air carriers’ cost structures are not uniform and there are numerous factors influencing cost structure\. Carriers with lower costs may offer lower fares to passengers, which could have a potential negative impact on the Company’s revenues\. Decisions on domestic pricing are based on intense competitive pressure exerted on the Company by other U\.S\. airlines\. In order to remain competitive and maintain passenger traffic levels, we often find it necessary to match competitors’ discounted fares\. Since we compete in a dynamic marketplace, attempts to generate additional revenue through increased fares oftentimes fail\.

***International Competition\.*** Internationally, the Company competes not only with U\.S\. airlines, but also with foreign carriers\. International competition has increased and may continue to increase in the future as a result of airline mergers and acquisitions, joint ventures, alliances, restructurings, liberalization of aviation bilateral agreements and new or increased service by competitors, including government subsidized competitors from certain Middle East countries\. Competition on international routes is subject to varying degrees of governmental regulation\. The Company’s ability to compete successfully with non\-U\.S\. carriers on international routes depends in part on its ability to generate traffic to and from the entire United States via its integrated domestic route network and its ability to overcome business and operational challenges across its network worldwide\. Foreign carriers currently are prohibited by U\.S\. law from carrying local passengers between two points in the United States and the Company generally experiences comparable restrictions in foreign countries\. Separately, “fifth freedom rights” allow the Company to operate between points in two different foreign countries and foreign carriers may also have fifth freedom rights between the U\.S\. and another foreign country\. In the absence of fifth freedom rights, or some other extra\-bilateral right to conduct operations between two foreign countries, U\.S\. carriers are constrained from carrying passengers to points beyond designated international gateway cities\. To compensate partially for these structural limitations, U\.S\. and foreign carriers have entered into alliances, joint ventures and marketing arrangements that enable these carriers to exchange traffic between each other’s flights and route networks\. See *Alliances,* above, for additional information\.

***Seasonality\.*** The air travel business is subject to seasonal fluctuations\. Historically, demand for air travel is higher in the second and third quarters, driving higher revenues, than in the first and fourth quarters, which are periods of lower travel demand\.

**Industry Regulation**

***Domestic Regulation***

All carriers engaged in air transportation in the United States are subject to regulation by the DOT\. Absent an exemption, no air carrier may provide air transportation of passengers or property without first being issued a DOT certificate of public convenience and necessity\. The DOT also grants international route authority, approves international codeshare arrangements and regulates methods of competition\. The DOT regulates consumer protection and maintains jurisdiction over advertising, denied boarding compensation, tarmac delays, baggage liability and other areas and may add additional expensive regulatory burdens in the future\. The DOT has

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