Annual Report of Southwest Airlines Co\. for year 2018

airlines to reduce their capacity\. When this occurs, certain fixed airport costs are allocated among a fewer number of total flights,which can result in increased landing fees and other costs for the Company\. The Company is also reliant upon third party vendors and service providers, in particular with respect to its fleet and technology initiatives and performance, and the Company's low\-cost advantage is also dependent in part on its ability to obtain and maintain commercially reasonable terms with those parties\.

As discussed above under "Business \- Insurance," the Company carries insurance of types customary in the airline industry\. Although the Company has been able to purchase aviation, property, liability, and professional insurance via the commercial insurance marketplace, available commercial insurance could be more expensive in the future and/or have material differences in coverage than insurance that has historically been provided and may not be adequate to protect against the Company's risk of loss from future events, including acts of terrorism\. Further, available cyber\-security insurance with regards to data protection and business interruption could be more expensive in the future and/or have material differences in coverage than insurance that has historically been provided and may not be adequate to protect the Company's risk of loss\. With respect to any insurance claims, policy coverages and claims are subject to acceptance by the many insurers involved and may require arbitration and/or mediation to effectively settle the claims over prolonged periods of time\. In addition, an accident or other incident involving Southwest aircraft could result in costs in excess of its related insurance coverage, which costs could be substantial\. Any aircraft accident or other incident, even if fully insured, could also have a material adverse effect on the public's perception of the Company, which could harm its reputation and business\.

The Company cannot guarantee it will be able to maintain or improve upon its current level of low\-cost advantage over many of its airline competitors\. ULCCs, which have increased capacity in the Company's markets, have surpassed the Company's cost advantage\. When competitors grow their fleets and expand their networks, they are potentially able to better control costs per available seat mile\. In addition, like Southwest, some competitors have added a significant number of new and different aircraft to their fleets, which could potentially decrease their operating costs through better fuel efficiencies and lower maintenance costs\.

***The Company is increasingly dependent on technology to operate its business and continues to implement substantial changes to its information systems; any failure, disruption, breach, or delay in implementation of the Company's information systems could materially adversely affect its operations\.***

The Company is increasingly dependent on the use of complex technology and systems to run its ongoing operations and support its strategic objectives\.

Implementation and integration of complex systems and technology presents significant challenges in terms of costs, human resources, and development of effective internal controls\. Implementation and integration require a balancing between the introduction of new capabilities and the managing of existing systems, and present the risk of operational or security inadequacy or interruption, which could materially affect the Company's ability to effectively operate its business and/or could negatively impact the Company's results of operations\. The Company is also reliant upon the performance of its third party vendors for timely and effective completion of many of its technology initiatives and for maintaining adequate information security measures\.

In the ordinary course of business, the Company's systems will continue to require modification and refinements to address growth and changing business requirements\. In addition, the Company's systems may require modification to enable the Company to comply with changing regulatory requirements\. Modifications and refinements to the Company's systems have been and are expected to continue to be expensive to implement and can divert management’s attention from other matters\. In addition, the Company's operations could be adversely affected, or it could face imposition of regulatory penalties, if it were unable to timely or effectively modify its systems as necessary or appropriately balance the introduction of new capabilities with the management of existing systems\.

The Company has experienced system interruptions and delays that make its websites and operational systems unavailable or slow to respond, which can prevent the Company from efficiently processing Customer transactions or providing services, and these could occur again in the future\. These system interruptions and delays can reduce the Company's operating revenues and the attractiveness of its services, as well as increase the Company's costs\. The Company's computer and communications systems and functions could be damaged or interrupted by catastrophic events such as fires, floods, earthquakes, tornadoes and hurricanes, power loss, computer and telecommunications failures, acts of war or terrorism, computer viruses, security breaches, and similar events or disruptions\. Any of these

23


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

The following table summarizes information about outstanding stock awards:

|                                |                                |                                |                      |                      |  |  |  |                                         |  |  |  |                                                            |                                                            |                                                            |  |  |  |                                                        |
|:------------------------------ |:------------------------------ |:------------------------------ | --------------------:| --------------------:|:- |:- |:- | ---------------------------------------:|:- |:- |:- | ----------------------------------------------------------:| ----------------------------------------------------------:| ----------------------------------------------------------:|:- |:- |:- | ------------------------------------------------------:|
|                                |                                |                                | Number
of Units | Number
of Units |  |  |  | Weighted\-Average Grant Date Fair Value |  |  |  | Weighted\-
Average
Contractual
Life (Years) | Weighted\-
Average
Contractual
Life (Years) | Weighted\-
Average
Contractual
Life (Years) |  |  |  | Aggregate
Intrinsic
Value (in
millions) |
| Non\-vested, December 31, 2018 | Non\-vested, December 31, 2018 | Non\-vested, December 31, 2018 |              511,813 |              511,813 |  |  |  |                                $ 78\.75 |  |  |  |                                                       1\.5 |                                                       1\.5 |                                                       1\.5 |  |  |  |                                                   $ 31 |
| Granted                        | Granted                        | Granted                        |              402,816 |              402,816 |  |  |  |                                  66\.35 |  |  |  |                                                            |                                                            |                                                            |  |  |  |                                                        |
| Vested                         | Vested                         | Vested                         |            (270,802) |            (270,802) |  |  |  |                                  74\.61 |  |  |  |                                                            |                                                            |                                                            |  |  |  |                                                        |
| Forfeited                      | Forfeited                      | Forfeited                      |            (102,214) |            (102,214) |  |  |  |                                  75\.21 |  |  |  |                                                            |                                                            |                                                            |  |  |  |                                                        |
| Non\-vested, December 31, 2019 | Non\-vested, December 31, 2019 | Non\-vested, December 31, 2019 |              541,613 |              541,613 |  |  |  |                                $ 71\.82 |  |  |  |                                                       1\.4 |                                                       1\.4 |                                                       1\.4 |  |  |  |                                                   $ 37 |

Deferred Stock Awards

Deferred Stock Units (DSUs) are awarded to members of the Board of Directors as part of their retainers\. The underlying common shares are issued upon retirement from the Board, but require no future service period\. As a result, the entire intrinsic value of the awards is expensed on the date of grant\.

Employee Stock Purchase Plan

The ESPP allows employees to purchase common stock at 85% of the stock price on the first day of the offering period or the specified purchase date, whichever is lower\. Employees may contribute up to 10% of their base earnings during the offering period to purchase stock\. Employees purchased 784,786, 632,145 and 406,628 shares in 2019, 2018 and 2017 under the ESPP\.

NOTE 13\. OPERATING SEGMENT INFORMATION

Alaska Air Group has two operating airlines—Alaska and Horizon\. Each is a regulated airline by the U\.S\. Department of Transportation’s Federal Aviation Administration\. Alaska has CPAs for regional capacity with Horizon, as well as with third\-party carriers SkyWest and PenAir, under which Alaska receives all passenger revenues\.

Under U\.S\. General Accepted Accounting Principles, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions\. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:

• Mainline  \- includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U\.S\., and in parts of Canada, Mexico, and Costa Rica\.

• Regional  \- includes Horizon's and other third\-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U\.S\. under CPAs\. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations\.

• Horizon  \- includes the capacity sold to Alaska under CPA\. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs\.

The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information\.

The "Consolidating and Other" column reflects parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company\. The “Air Group Adjusted” column represents a non\-GAAP measure that is used by the Company CODM to evaluate performance and allocate resources\. Adjustments are further explained below in reconciling to consolidated GAAP results\.

81


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

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

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (p) | **Retirement of Leased Aircraft—**The Company accrues for estimated lease costs over the remaining term of the lease at the present value of future minimum lease payments, net of estimated sublease rentals (if any), in the period that aircraft are permanently removed from service\. When reasonably estimable and probable, the Company estimates maintenance lease return condition obligations for items such as minimum aircraft and engine conditions specified in leases and accrues these amounts over the lease term while the aircraft are operating, and any remaining unrecognized estimated obligations are accrued in the period that an aircraft is removed from service\. |

|      |                                                                                |
| ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (q)  | **Uncertain Income Tax Positions—**The Company has recorded reserves for income taxes and associated interest that may become payable in future years\. Although management believes that its positions taken on income tax matters are reasonable, the Company nevertheless has established tax and interest reserves in recognition that various taxing authorities may challenge certain of the positions taken by the Company, potentially resulting in additional liabilities for taxes and interest\. The Company’s uncertain tax position reserves are reviewed periodically and are adjusted as events occur that affect its estimates, such as the availability of new information, the lapsing of applicable statutes of limitation, the conclusion of tax audits, the measurement of additional estimated liability, the identification of new tax matters, the release of administrative tax guidance affecting its estimates of tax liabilities, or the rendering of relevant court decisions\. The Company records penalties and interest relating to uncertain tax positions as part of income tax expense in its consolidated statements of operations\. The Company has not recorded any material expense or liabilities related to interest or penalties in its consolidated financial statements\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (r) | **Labor Costs—**The Company records expenses associated with amendable labor agreements when the amounts are probable and estimable\. These include costs associated with lump sum cash payments that would be made in conjunction with the ratification of labor agreements\. To the extent these upfront costs are in lieu of future pay increases, they would be capitalized and amortized over the term of the labor agreements\. If not, these amounts would be expensed\. |

|      |                                                                                |
| ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (s)  | **Third\-Party Business—**The Company has third\-party business revenue that includes fuel sales, catering, ground handling, maintenance services and frequent flyer award  non\-air redemptions\. Third\-party business revenue is recorded in Other operating revenue\. The Company also incurs third\-party business expenses, such as maintenance, ground handling and catering services for third parties, fuel sales and  non\-air mileage redemptions\. The third\-party business expenses are recorded in Other operating expenses\. |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| (t)  | **Recently Issued Accounting Standards—** In 2014,the Financial Accounting Standards Board (“FASB”) amended the FASB Accounting Standards Codification and created a new Topic 606, *Revenue from Contracts with Customers* (“Topic 606”)*\.* This amendment prescribes that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services\. The amendment supersedes the revenue recognition requirements in Topic 605, *Revenue Recognition*, and most industry\-specific guidance throughout the Industry Topics of the Accounting Standards Codification\. The Company used the full\-retrospective approach in adopting this standard on January 1, 2018\. The standard impacts the classification of certain revenue streams and affects the timing of revenue and expense recognition for others\. For the Company, the most significant impact of this standard is the reclassification of certain ancillary fees from other operating revenue into passenger revenue on the statement of consolidated operations\. These ancillary fees are directly related to passenger travel, such as ticket change fees and baggage fees, and will no longer be considered distinct performance obligations separate from the passenger travel component\. In addition, the ticket change fees, which were previously recognized when received, will be recognized when transportation is provided\. While the classification of certain transactions within operating revenue and between operating revenue and operating expenses will change, the adoption of the standard will not have a material impact on our earnings\. Further, adoption of the standard will have no impact on cash provided by or used in  |

66


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

passenger service employees, and mechanics and related craft employees\. The Company uses a December 31 measurement date for these plans\.

***Weighted average assumptions used to determine benefit obligations:***

The rates below vary by plan and related work group\.

|                                |                      |                  |
| ------------------------------ | -------------------- | ---------------- |
|                                | **2017**             | **2016**         |
| Discount rates                 | **3\.69% to 3\.78%** | 4\.29% to 4\.50% |
| Rate of compensation increases | **2\.11% to 3\.00%** | 2\.12% to 2\.59% |

***Weighted average assumptions used to determine net periodic benefit cost:***

The rates below vary by plan and related work group\.

|                                |                      |                  |                  |
| ------------------------------ | -------------------- | ---------------- | ---------------- |
|                                | **2017**             | **2016**         | **2015**         |
| Discount rates                 | **4\.29% to 4\.50%** | 4\.55% to 4\.69% | 4\.20%           |
| Expected return on plan assets | **5\.50% to 6\.00%** | 6\.00% to 6\.50% | 6\.50%           |
| Rate of compensation increases | **2\.12% to 2\.59%** | 2\.06% to 2\.65% | 2\.85% to 3\.91% |

The discount rates are determined using current interest rates earned on high\-quality, long\-term bonds with maturities that correspond with the estimated cash distributions from the pension plans\. At December 31, 2017, the Company selected discount rates for each of the plans using a pool of higher\-yielding bonds estimated to be more reflective of settlement rates, as management has taken steps to ultimately terminate or settle plans that are frozen and move toward freezing benefits in active plans in the future\. In determining the expected return on plan assets, the Company assesses the current level of expected returns on risk\-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class\. The expected return for each asset class is then weighted based on the target asset allocation to develop the expected long\-term rate of return on assets assumption for the portfolio\.

Plan assets are invested in common commingled trust funds invested in equity and fixed income securities and in certain real estate assets\. The target and actual asset allocation of the funds in the qualified defined\-benefit plans, by asset category, are as follows:

|                               |                |          |          |
| ----------------------------- | -------------- | -------- | -------- |
|                               | **Target**     | **2017** | **2016** |
| Asset category:               |                |          |          |
| Domestic equity securities    | **5% \- 33%**  | **25%**  | 30%      |
| Non\-U\.S\. equity securities | **1% \- 16%**  | **11%**  | 12%      |
| Fixed income securities       | **48% \- 95%** | **59%**  | 53%      |
| Real estate                   | **2% \- 8%**   | **4%**   | 5%       |
| Cash equivalents              | **0%**         | **1%**   | —%       |
| Plan assets                   |                | **100%** | 100%     |

The Company’s investment policy focuses on achieving maximum returns at a reasonable risk for pension assets over a full market cycle\. The Company determines the strategic allocation between equities, fixed income and real estate based on current funded status and other characteristics of the plans\. As the funded status improves, the Company increases the fixed income allocation of the portfolio and decreases the equity allocation\. Actual asset allocations are reviewed regularly and periodically rebalanced as appropriate\.

Plan assets invested in common commingled trust funds are fair valued using the net asset values of these funds to determine fair value as allowed using the practical expediency method outlined in the accounting standards\. Fair value estimates for real estate are calculated using the present value of expected future cash flows based on independent appraisals, local market conditions and current and projected operating performance\.

 83


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

engaged in an unlawful work action which adversely affected our operation\. Additionally, some of our unions have brought and may continue to bring grievances to binding arbitration, including those related to wages\. If successful, there is a risk these arbitral avenues could result in material additional costs that we did not anticipate\. See also Part I, Item 1\. Business – “ Employees and Labor Relations \.”

As of  December 31, 2019 , approximately  85%  of our employees were represented for collective bargaining purposes by labor unions\. Currently, we believe our labor costs are competitive relative to the other large network carriers\. However, we cannot provide assurance that labor costs going forward will remain competitive because we are in negotiations for several important new labor agreements now and other agreements are scheduled to become amendable, competitors may significantly reduce their labor costs or we may agree to higher\-cost provisions unilaterally or in connection with our current or future labor negotiations\.

We have significant pension and other postretirement benefit funding obligations, which may adversely affect our liquidity, results of operations and financial condition\.

Our pension funding obligations are significant\. The amount of these obligations will depend on the performance of investments held in trust by the pension plans, interest rates for determining liabilities and actuarial experience\. The minimum funding obligation applicable to our pension plans was subject to favorable temporary funding rules that expired at the end of 2017 and, as a result, our minimum pension funding obligations increased materially beginning in 2019\. In addition, we have significant obligations for retiree medical and other postretirement benefits\. Additionally, we participate in the International Association of Machinists & Aerospace Workers (IAM) National Pension Fund (the IAM Pension Fund)\. The funding status of the IAM Pension Fund is subject to the risk that other employers may not meet their obligations, which under certain circumstances could cause our obligations to increase\. Furthermore, if we were to withdraw from the IAM Pension Fund, if the IAM Pension fund were to terminate, or if the IAM Pension Fund were to undergo a mass withdrawal, we could be subject to liability as imposed by law\.

Any damage to our reputation or brand image could adversely affect our business or financial results\.

Maintaining a good reputation globally is critical to our business\. Our reputation or brand image could be adversely impacted by, among other things, any failure to maintain high ethical, social and environmental sustainability practices for all of our operations and activities, our impact on the environment, public pressure from investors or policy groups to change our policies, such as movements to institute a “living wage,” customer perceptions of our advertising campaigns, sponsorship arrangements or marketing programs, customer perceptions of our use of social media, or customer perceptions of statements made by us, our employees and executives, agents or other third parties\. Damage to our reputation or brand image or loss of customer confidence in our services could adversely affect our business and financial results, as well as require additional resources to rebuild our reputation\.

We are at risk of losses and adverse publicity stemming from any public incident involving our company, our people or our brand, including any accident or other public incident involving our personnel or aircraft, or the personnel or aircraft of our regional, codeshare or joint business operators\.

In a modern world where news can be captured and travel rapidly, we are at risk of adverse publicity stemming from any public incident involving our company, our people or our brand\. Such an incident could involve the actual or alleged behavior of any of our more than  133,000  employees\. Further, if our personnel, one of our aircraft, a type of aircraft in our fleet, or personnel of, or an aircraft that is operated under our brand by, one of our regional operators or an airline with which we have a marketing alliance, joint business or codeshare relationship, were to be involved in a public incident, accident, catastrophe or regulatory enforcement action, we could be exposed to significant reputational harm and potential legal liability\. The insurance we carry may be inapplicable or inadequate to cover any such incident, accident, catastrophe or action\. In the event that our insurance is inapplicable or inadequate, we may be forced to bear substantial losses from an incident or accident\. In addition, any such incident, accident, catastrophe or action involving our personnel, one of our aircraft (or personnel and aircraft of our regional operators and our codeshare partners), or a type of aircraft fleet could create an adverse public perception, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft or those of our regional operators or codeshare partners, and adversely impact our business, results of operations and financial condition\.

21


Annual Report of Southwest Airlines Co\. for year 2019

QUARTERLY FINANCIAL DATA

(unaudited)

|                                            |                        |                        |                        |                        |     |
| ------------------------------------------ | ---------------------- | ---------------------- | ---------------------- | ---------------------- | --- |
|                                            | **Three months ended** | **Three months ended** | **Three months ended** | **Three months ended** |     |
| **(in millions except per share amounts)** | **March 31**           | **June 30**            | **Sept\. 30**          | **Dec\. 31**           |     |
| **2019**                                   |                        |                        |                        |                        |     |
| Operating revenues                         | $5,149                 | $5,909                 | $5,639                 | $5,729                 |     |
| Operating income                           | 505                    | 968                    | 819                    | 665                    |     |
| Income before income taxes                 | 504                    | 968                    | 819                    | 666                    |     |
| Net income                                 | 387                    | 741                    | 659                    | 514                    | (a) |
| Net income per share, basic                | 0\.70                  | 1\.37                  | 1\.24                  | 0\.98                  | (a) |
| Net income per share, diluted              | 0\.70                  | 1\.37                  | 1\.23                  | 0\.98                  | (a) |
|                                            | **March 31**           | **June 30**            | **Sept\. 30**          | **Dec\. 31**           |     |
| **2018**                                   |                        |                        |                        |                        |     |
| Operating revenues                         | $4,944                 | $5,742                 | $5,575                 | $5,704                 |     |
| Operating income                           | 616                    | 972                    | 798                    | 820                    |     |
| Income before income taxes                 | 602                    | 960                    | 786                    | 817                    |     |
| Net income                                 | 463                    | 733                    | 615                    | 654                    |     |
| Net income per share, basic                | 0\.79                  | 1\.27                  | 1\.08                  | 1\.17                  |     |
| Net income per share, diluted              | 0\.79                  | 1\.27                  | 1\.08                  | 1\.17                  |     |

(a) In addition to the ongoing impact of the Boeing 737 MAX aircraft ("MAX") grounding that impacted all four quarters of 2019, fourth quarter 2019 also included the impact of the pre\-tax   $124 million  discretionary, special profitsharing award accrual authorized by the Company's Board of Directors during fourth quarter 2019 for compensation received from Boeing related to the Company's estimated 2019 financial damages related to the grounding of the Boeing 737 MAX\. See Note  16  to the Consolidated Financial Statements for further information on the MAX groundings\. The impact of this accrual resulted in a decrease to Net income of approximately   $97 million  and reduced Basic and Diluted net income per share by approximately   $\.18  for the fourth quarter 2019\.

114


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

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\.

*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 Officer of both entities in 2014\. Effective February 2019, he was elected Treasurer of Alaska Air Group and Alaska Airlines\. He was Chief Financial Officer of Virgin America Inc\. from December 2016 to July 2018, when Virgin America was merged into Alaska\. He is a member of Air Group's Management Executive Committee\.

*Mr\. Levine* was elected Vice President Legal and General Counsel of Alaska Air Group and Alaska Airlines in January 2016 and is a member of Air Group’s Management Executive Committee\. He was elected Corporate Secretary of Alaska Air Group and Alaska Airlines in August 2017\. Mr\. Levine joined Alaska Airlines in February 2006 as a Senior Attorney\. He also served as Associate General Counsel and Managing Director Commercial Law and General Litigation from July 2009 to February 2011 and, subsequently, as Deputy General Counsel and Managing Director of Legal at Alaska Airlines from February 2011 to January 2016\. He was appointed Assistant Corporate Secretary of Horizon Air in August 2017 and was Assistant Corporate Secretary of Virgin America from November 2017 to July 2018, when Virgin America was merged into Alaska\.

*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\. He was Chief Executive Officer of Virgin America Inc\. from December 2016 to July 2018, when Virgin America was merged into Alaska\. He is a member of Air Group’s Management Executive Committee\.

*Mr\. Beck* was elected President and CEO of Horizon Air effective January 15, 2018 and is a member of Air Group’s Management Executive Committee\. Mr\. Beck previously served as Vice President, Flight Operations at Alaska Airlines, Inc\. until retiring in June 2015\. Following that date, he provided consulting services to Alaska Airlines, Inc\. in connection with the integration to a single operating certificate with Virgin America Inc\.

*Mr\. Harrison* joined Alaska Airlines in 2003 as the Managing Director of Internal Audit and was elected Vice President of Planning and Revenue Management in 2008\. He was elected Senior Vice President of Planning and Revenue Management in 2014\. He was elected Executive Vice President and Chief Revenue Officer in February 2015 and named Executive Vice President and Chief Commercial Officer in August 2015\. He is a member of Air Group's Management Executive Committee\.

*Mr\. Tackett* was elected Executive Vice President of Planning and Strategy in September 2018 and is a member of Air Group’s Management Executive Committee\. Mr\. Tackett previously served as Senior Vice President of Revenue and E\-commerce from August 2017 to September 2018 and has served a number of capacities since joining Alaska Airlines in 2000, including Managing Director Financial Planning and Analysis, (2008\-2010), Vice President Labor Relations (2010\-2015) and Vice President Revenue Management in 2016\.

*Ms\. Schneider* was elected Vice President of People at Alaska Airlines in August 2017 and became a member of Air Group’s Management Executive Committee at that time\. Ms\. Schneider was previously Vice President of Inflight Services at Alaska (2011\-2017), later also taking responsibility for Call Centers at Alaska (February 2017)\. She began her career at Alaska as Manager of Financial Accounting in 1989\. Since that time, she has held a number of positions, including Senior Vice President of People and Customer Services at Horizon Air Industries (2009\-2011)\.

*Ms\. Birkett\-Rakow* was elected Vice President of External Relations at Alaska Airlines in September 2017 and became a member of Air Group’s Management Executive Committee at that time\.

**REGULATION**

**GENERAL**

The airline industry is highly regulated, most notably by the federal government\. The Department of Transportation (DOT), the the Transportation Security Administration (TSA) and the FAA exercise significant regulatory authority over air carriers\.

 16


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

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

Unless otherwise indicated, the terms "Delta," "we," "us," and "our" refer to Delta Air Lines, Inc\. and its subsidiaries\.

FORWARD\-LOOKING STATEMENTS

Statements in this Form 10\-K, including in the letter to shareholders included in the front of this Form 10\-K, (or otherwise made by us or on our behalf) that are not historical facts, including statements about our estimates, expectations, beliefs, intentions, projections or strategies for the future, may be "forward\-looking statements" as defined in the Private Securities Litigation Reform Act of 1995\. Forward\-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations\. Known material risk factors applicable to Delta are described in "Risk Factors Relating to Delta" and "Risk Factors Relating to the Airline Industry" in "Item 1A\. Risk Factors" of this Form 10\-K, other than risks that could apply to any issuer or offering\. All forward\-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward\-looking statements to reflect events or circumstances that may arise after the date of this report\.

 1


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

*Mainline Operating Expenses*

|                                    |                                              |                                              |                                              |                                                       |
| ---------------------------------- | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- | ----------------------------------------------------- |
|                                    | **Year Ended December 31,**                  | **Year Ended December 31,**                  | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                                    | **2016**                                     | **2015**                                     | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                                    | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Aircraft fuel and related taxes    | $5,071                                       | $6,226                                       | $(1,155)                                     | (18\.5)                                               |
| Salaries, wages and benefits       | 10,890                                       | 9,524                                        | 1,366                                        | 14\.4                                                 |
| Maintenance, materials and repairs | 1,834                                        | 1,889                                        | (55)                                         | (2\.9)                                                |
| Other rent and landing fees        | 1,772                                        | 1,731                                        | 41                                           | 2\.4                                                  |
| Aircraft rent                      | 1,203                                        | 1,250                                        | (47)                                         | (3\.8)                                                |
| Selling expenses                   | 1,323                                        | 1,394                                        | (71)                                         | (5\.0)                                                |
| Depreciation and amortization      | 1,525                                        | 1,364                                        | 161                                          | 11\.8                                                 |
| Special items, net                 | 709                                          | 1,051                                        | (342)                                        | (32\.6)                                               |
| Other                              | 4,525                                        | 4,374                                        | 151                                          | 3\.4                                                  |
| Total mainline operating expenses  | $28,852                                      | $28,803                                      | $49                                          | 0\.2                                                  |

Mainline operating expenses increased $49 million, or 0\.2%, in 2016 from 2015\. The increase in operating expenses was primarily driven by higher wage rates resulting from new labor contracts and the addition of an employee profit sharing program; however, these costs were substantially offset by a year\-over\-year decline in fuel costs\. See detailed explanations below relating to changes in mainline CASM\.

*Mainline CASM*

We sometimes use financial measures that are derived from the consolidated financial statements but that are not presented in accordance with GAAP to understand and evaluate our current operating performance to allow for period\-to\-period comparisons\. We believe these non\-GAAP financial measures may also provide useful information to investors and others\. These non\-GAAP measures may not be comparable to similarly titled non\-GAAP measures of other companies, and should be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flow or liquidity prepared in accordance with GAAP\. We are providing a reconciliation of reported non\-GAAP financial measures to their comparable financial measures on a GAAP basis\.

The table below presents the reconciliation of mainline operating expenses (GAAP measure) to mainline operating costs excluding special items and fuel (non\-GAAP measure)\. Management uses mainline operating costs excluding special items and fuel to evaluate our current operating performance and for period\-to\-period comparisons\. The price of fuel, over which we have no control, impacts the comparability of period\-to\-period financial performance\. The adjustment to exclude aircraft fuel and special items allows management an additional tool to better understand and analyze our non\-fuel costs and core operating performance\.

56


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

|                                       |                                       |                                       |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|:------------------------------------- |:------------------------------------- |:------------------------------------- | ----------------------------:|:----------------------------:|:----------------------------:|:----------------------------:| ----------------------------:|:----------------------------:|:----------------------------:|:----------------------------:| ----------------------------:|:----------------------------:|:----------------------------:|:----------------------------:| ----------------------------:|:----------------------------:|:----------------------------:|:----------------------------:| ----------------------------:|:----------------------------:|:----------------------------:|:----------------------------:| ----------------------------:|:----------------------------:|:----------------------------:|:----------------------------:| ----------------------------:|:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |
|                                       |                                       |                                       | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 | Year Ended December 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                                       |                                       |                                       |                     Mainline |                              |                              |                              |                     Regional |                              |                              |                              |                      Horizon |                              |                              |                              |   Consolidating & Other^(a)^ |                              |                              |                              |      Air Group Adjusted^(b)^ |                              |                              |                              |           Special Items^(c)^ |                              |                              |                              |                 Consolidated |
| Operating Revenues                    | Operating Revenues                    | Operating Revenues                    |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |
| Passenger revenues                    | Passenger revenues                    | Passenger revenues                    |                        6,278 |                              |                              |                              |                        1,023 |                              |                              |                              |                            — |                              |                              |                              |                            — |                              |                              |                              |                        7,301 |                              |                              |                              |                            — |                              |                              |                              |                        7,301 |
| CPA revenues                          | CPA revenues                          | CPA revenues                          |                            — |                              |                              |                              |                            — |                              |                              |                              |                          426 |                              |                              |                              |                        (426) |                              |                              |                              |                            — |                              |                              |                              |                            — |                              |                              |                              |                            — |
| Mileage Plan other revenue            | Mileage Plan other revenue            | Mileage Plan other revenue            |                          387 |                              |                              |                              |                           31 |                              |                              |                              |                            — |                              |                              |                              |                            — |                              |                              |                              |                          418 |                              |                              |                              |                            — |                              |                              |                              |                          418 |
| Cargo and other                       | Cargo and other                       | Cargo and other                       |                          167 |                              |                              |                              |                            4 |                              |                              |                              |                            4 |                              |                              |                              |                            — |                              |                              |                              |                          175 |                              |                              |                              |                            — |                              |                              |                              |                          175 |
| Total Operating Revenues              | Total Operating Revenues              | Total Operating Revenues              |                        6,832 |                              |                              |                              |                        1,058 |                              |                              |                              |                          430 |                              |                              |                              |                        (426) |                              |                              |                              |                        7,894 |                              |                              |                              |                            — |                              |                              |                              |                        7,894 |
| Operating Expenses                    | Operating Expenses                    | Operating Expenses                    |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |
| Non\-fuel operating expenses          | Non\-fuel operating expenses          | Non\-fuel operating expenses          |                        4,271 |                              |                              |                              |                          852 |                              |                              |                              |                          427 |                              |                              |                              |                        (427) |                              |                              |                              |                        5,123 |                              |                              |                              |                          116 |                              |                              |                              |                        5,239 |
| Fuel expense                          | Fuel expense                          | Fuel expense                          |                        1,282 |                              |                              |                              |                          172 |                              |                              |                              |                            — |                              |                              |                              |                            — |                              |                              |                              |                        1,454 |                              |                              |                              |                          (7) |                              |                              |                              |                        1,447 |
| Total Operating Expenses              | Total Operating Expenses              | Total Operating Expenses              |                        5,553 |                              |                              |                              |                        1,024 |                              |                              |                              |                          427 |                              |                              |                              |                        (427) |                              |                              |                              |                        6,577 |                              |                              |                              |                          109 |                              |                              |                              |                        6,686 |
| Non\-operating Income (Expense)       | Non\-operating Income (Expense)       | Non\-operating Income (Expense)       |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |                              |
| Interest income                       | Interest income                       | Interest income                       |                           39 |                              |                              |                              |                            — |                              |                              |                              |                            — |                              |                              |                              |                          (5) |                              |                              |                              |                           34 |                              |                              |                              |                            — |                              |                              |                              |                           34 |
| Interest expense                      | Interest expense                      | Interest expense                      |                         (92) |                              |                              |                              |                            — |                              |                              |                              |                         (13) |                              |                              |                              |                            2 |                              |                              |                              |                        (103) |                              |                              |                              |                            — |                              |                              |                              |                        (103) |
| Interest capitalized                  | Interest capitalized                  | Interest capitalized                  |                           15 |                              |                              |                              |                            — |                              |                              |                              |                            2 |                              |                              |                              |                            — |                              |                              |                              |                           17 |                              |                              |                              |                            — |                              |                              |                              |                           17 |
| Other                                 | Other                                 | Other                                 |                            3 |                              |                              |                              |                            — |                              |                              |                              |                            — |                              |                              |                              |                            — |                              |                              |                              |                            3 |                              |                              |                              |                            — |                              |                              |                              |                            3 |
| Total Non\-operating Income (Expense) | Total Non\-operating Income (Expense) | Total Non\-operating Income (Expense) |                         (35) |                              |                              |                              |                            — |                              |                              |                              |                         (11) |                              |                              |                              |                          (3) |                              |                              |                              |                         (49) |                              |                              |                              |                            — |                              |                              |                              |                         (49) |
| Income (Loss) Before Income Tax       | Income (Loss) Before Income Tax       | Income (Loss) Before Income Tax       |                      $ 1,244 |                              |                              |                              |                         $ 34 |                              |                              |                              |                        $ (8) |                              |                              |                              |                        $ (2) |                              |                              |                              |                      $ 1,268 |                              |                              |                              |                      $ (109) |                              |                              |                              |                      $ 1,159 |

(a) Includes consolidating entries, Parent Company, McGee Air Services, and other immaterial business units\.

(b) The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and excludes certain income and charges\.

(c) Includes merger\-related costs, mark\-to\-market fuel\-hedge accounting adjustments, and other special items\.

|                                |                                |                                |          |  |  |  |          |  |  |  |         |
|:------------------------------ |:------------------------------ |:------------------------------ | --------:|:- |:- |:- | --------:|:- |:- |:- | -------:|
|                                |                                |                                |     2019 |  |  |  |     2018 |  |  |  |    2017 |
| Depreciation and amortization: | Depreciation and amortization: | Depreciation and amortization: |          |  |  |  |          |  |  |  |         |
| Mainline                       | Mainline                       | Mainline                       |    $ 337 |  |  |  |    $ 316 |  |  |  |   $ 308 |
| Horizon                        | Horizon                        | Horizon                        |       86 |  |  |  |       82 |  |  |  |      64 |
| Consolidated                   | Consolidated                   | Consolidated                   |    $ 423 |  |  |  |    $ 398 |  |  |  |   $ 372 |
| Capital expenditures:          | Capital expenditures:          | Capital expenditures:          |          |  |  |  |          |  |  |  |         |
| Mainline                       | Mainline                       | Mainline                       |    $ 605 |  |  |  |    $ 571 |  |  |  |   $ 734 |
| Horizon                        | Horizon                        | Horizon                        |       91 |  |  |  |      389 |  |  |  |     292 |
| Consolidated                   | Consolidated                   | Consolidated                   |    $ 696 |  |  |  |    $ 960 |  |  |  | $ 1,026 |
| Total assets at end of period: | Total assets at end of period: | Total assets at end of period: |          |  |  |  |          |  |  |  |         |
| Mainline                       | Mainline                       | Mainline                       | $ 19,207 |  |  |  | $ 16,853 |  |  |  |         |
| Horizon                        | Horizon                        | Horizon                        |    1,266 |  |  |  |    1,229 |  |  |  |         |
| Consolidating & Other          | Consolidating & Other          | Consolidating & Other          |  (7,480) |  |  |  |  (7,170) |  |  |  |         |
| Consolidated                   | Consolidated                   | Consolidated                   | $ 12,993 |  |  |  | $ 10,912 |  |  |  |         |

|                                                                                |                                                                                |                                                                                |
| --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |
| ITEM 9\. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | ITEM 9\. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | ITEM 9\. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |

None\.

83


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

|   |                                                                           |
| - | ------------------------------------------------------------------------- |
| • | changes in financial estimates or recommendations by securities analysts; |

|   |                                                                         |
| - | ----------------------------------------------------------------------- |
| • | changes in our level of outstanding indebtedness and other obligations; |

|   |                               |
| - | ----------------------------- |
| • | changes in our credit rating; |

|   |                                                  |
| - | ------------------------------------------------ |
| • | material announcements by us or our competitors; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | expectations regarding our capital deployment program, including any existing or potential future share repurchase programs and any future dividend payments that may be declared by our Board of Directors, or any determination to cease repurchasing stock or paying dividends; |

|   |                                                                     |
| - | ------------------------------------------------------------------- |
| • | new regulatory pronouncements and changes in regulatory guidelines; |

|   |                                                     |
| - | --------------------------------------------------- |
| • | general and industry\-specific economic conditions; |

|   |                               |
| - | ----------------------------- |
| • | changes in our key personnel; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | distributions of shares of AAG common stock pursuant to the Plan, including distributions from the Disputed Claims Reserve established under the Plan; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | public sales of a substantial number of shares of AAG common stock or issuances of AAG common stock upon the exercise or conversion of restricted stock unit awards, stock appreciation rights, or other securities that may be issued from time to time; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------- |
| • | increases or decreases in reported holdings by insiders or other significant stockholders; and |

|   |                                  |
| - | -------------------------------- |
| • | fluctuations in trading volume\. |

***We cannot guarantee that we will continue to repurchase our common stock or pay dividends on our common stock or that our capital deployment program will enhance long\-term stockholder value\. Our capital deployment program could increase the volatility of the price of our common stock and diminish our cash reserves\.***

Since July 2014, as part of our capital deployment program, our Board of Directors has approved seven share repurchase programs aggregating $13\.0 billion of authority\. As of December 31, 2018, there was $1\.7 billion remaining authority to repurchase shares under our share repurchase programs\. Share repurchases under our repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions\. These share repurchase programs do not obligate us to acquire any specific number of shares or to repurchase any specific number of shares for any fixed period, and may be suspended at any time at our discretion and without prior notice\. The timing and amount of repurchases, if any, will be subject to market and economic conditions, applicable legal requirements and other relevant factors\. Our repurchase of AAG common stock may be limited, suspended or discontinued at any time at our discretion and without prior notice\.

Our Board of Directors commenced declaring quarterly cash dividends in July 2014 as part of our capital deployment program\. However, any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors\. We are not obligated to continue a dividend for any fixed period, and the payment of dividends may be suspended or discontinued at any time at our discretion and without prior notice\. We will continue to retain future earnings to develop our business, as opportunities arise, and evaluate on a quarterly basis the amount and timing of future dividends based on our operating results, financial condition, capital requirements and general business conditions\. The amount and timing of any future dividends may vary, and the payment of any dividend does not assure that we will pay dividends in the future\.

In addition, any future repurchases of AAG common stock or payment of dividends, or any determination to cease repurchasing stock or paying dividends, could affect our stock price and increase its volatility\. The existence of a share repurchase program and any future dividends could cause our stock price to be higher than it would otherwise be and could potentially reduce the market liquidity for our stock\. Additionally, any future repurchases of AAG common stock or payment of dividends will diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions\. Further, our repurchase of AAG common stock may fluctuate such that our cash flow may be insufficient to fully cover our share repurchases\. Although our share repurchase programs are intended to enhance long\-term stockholder value, there is no assurance that it will do so because the market price of our common stock may decline below the levels at which we repurchased shares of stock and short\-term stock price fluctuations could reduce the program’s effectiveness\.

34


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

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

acquisition accounting adjustments related to the Company’s merger transaction in 2010, lease valuation adjustments for operating leases were initially recorded in the consolidated balance sheet, representing the net present value of the differences between contractual lease rates and the fair market lease rates for similar leased assets at the time\. An asset (liability) results when the contractual lease rates are more (less) favorable than market lease terms at the valuation date\. The lease valuation adjustment is amortized on a straight\-line basis as an increase (decrease) to rent expense over the individual applicable remaining lease terms, resulting in recognition of rent expense as if United had entered into the leases at market rates\. The related remaining lease terms, primarily related to aircraft which make up the majority of the fair value lease adjustment balance, are one to seven years for United\. The lease valuation adjustments are classified within other noncurrent liabilities and the net accretion amounts are $79 million, $82 million and $107 million for the years ended December 31, 2017, 2016 and 2015, respectively\.

**Regional CPAs**

United has contractual relationships with various regional carriers to provide regional aircraft service branded as United Express\. Under these CPAs, the Company pays the regional carriers contractually agreed fees (carrier costs) for operating these flights plus a variable reimbursement (incentive payment for operational performance) based on agreed performance metrics, subject to annual inflation adjustments\. The fees for carrier costs are based on specific rates for various operating expenses of the regional carriers, such as crew expenses, maintenance and aircraft ownership, some of which are multiplied by specific operating statistics (e\.g\., block hours, departures), while others are fixed monthly amounts\. Under these CPAs, the Company is responsible for all fuel costs incurred, as well as landing fees and other costs, which are either passed through by the regional carrier to the Company without any markup or directly incurred by the Company\. United’s CPAs are for 518 regional aircraft as of December 31, 2017, and the CPAs have terms expiring through 2029\. Aircraft operated under CPAs include aircraft leased directly from the regional carriers and those owned by United or leased from third\-party lessors and operated by the regional carriers\. See Part I, Item 2, Properties, of this report for additional information\.

In 2017, United entered into a five\-year CPA with Air Wisconsin Airlines for regional service under the United Express brand to operate up to 65 CRJ200 aircraft\. In addition, United extended the term of its existing CPA with ExpressJet Airlines to operate up to approximately 125 aircraft through December 31, 2022\. In January 2018, United removed all Bombardier Q200 turboprop aircraft and Embraer ERJ 135 aircraft from service\.

United holds a minority equity interest in two of its regional carriers, Champlain Enterprises, Inc\. and Republic Airways Holdings, Inc\. The contracts with these related parties are executed in the ordinary course of business\. United recorded approximately $538 million, $486 million and $366 million in expenses related to its capacity purchase agreements with these regional carriers for the years ended December 31, 2017, 2016 and 2015, respectively\. There were approximately $24 million and $32 million in accounts payable due to these companies as of December 31, 2017 and December 31, 2016, respectively\. There were no material accounts receivable due from these companies as of December 31, 2017 and December 31, 2016\.

Our future commitments under our CPAs are dependent on numerous variables, and are, therefore, difficult to predict\. The most important of these variables is the number of scheduled block hours\. Although we are not required to purchase a minimum number of block hours under certain of our CPAs, we have set forth below estimates of our future payments under the CPAs based on our assumptions\. United’s estimates of its future payments under all of the CPAs do not include the portion of the underlying obligation for any aircraft leased to a regional carrier or deemed to be leased from other regional carriers and facility rent that are disclosed as part of aircraft and nonaircraft operating leases\. For purposes of calculating these estimates, we have assumed (1) the number of block hours flown is based on our anticipated level of flight activity or at any contractual minimum utilization levels if applicable, whichever is higher, (2) that we will reduce the fleet as rapidly as contractually allowed under each CPA, (3) that aircraft utilization, stage length and load factors will remain constant, (4) that each carrier’s operational performance will remain at historic levels and (5) an annual projected inflation rate\. These amounts exclude variable pass\-through costs such as fuel and landing fees, among others\. Based on these

92


Annual Report of Southwest Airlines Co\. for year 2017

The Company also has agreements with each of its counterparties associated with its outstanding interest rate swap agreements in which cash collateral may be required based on the fair value of outstanding derivative instruments, as well as the Company’s and its counterparty’s credit ratings\. As of December 31, 2017, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements\.

Due to the significance of the Company’s fuel hedging program and the emphasis that the Company places on utilizing fuel derivatives to reduce its fuel price risk, the Company has created a system of governance and management oversight and has put in place a number of internal controls designed so that procedures are properly followed and accountability is present at the appropriate levels\. For example, the Company has put in place controls designed to: (i) create and maintain a comprehensive risk management policy; (ii) provide for proper authorization by the appropriate levels of management; (iii) provide for proper segregation of duties; (iv) maintain an appropriate level of knowledge regarding the execution of and the accounting for derivative instruments; and (v) have key performance indicators in place in order to adequately measure the performance of its hedging activities\. The Company believes the governance structure that it has in place is adequate given the size and sophistication of its hedging program\.

***Financial Market Risk***

The vast majority of the Company’s tangible assets are aircraft, which are long\-lived\. The Company’s strategy is to maintain a conservative balance sheet and grow capacity steadily and profitably under the right conditions\. While the Company uses financial leverage, it strives to maintain a strong balance sheet and has a "BBB\+" rating with Fitch, a "BBB\+" rating with Standard & Poor’s, and an "A3" credit rating with Moody’s as of December 31, 2017, all of which are considered "investment grade\." The Company’s French Credit Agreements due 2018 do not give rise to significant fair value risk but do give rise to interest rate risk because this borrowing was originally issued as floating\-rate debt\. In addition, as disclosed in Note 10 to the Consolidated Financial Statements, the Company has converted certain of its long\-term debt to floating rate debt by entering into an interest rate swap agreement\. Although there is interest rate risk associated with these floating rate borrowings, the risk of the French Credit Agreements due 2018 is somewhat mitigated by the fact that the Company may prepay this debt under certain conditions\. See Note 6 to the Consolidated Financial Statements for more information on the material terms of the Company’s short\-term and long\-term debt\.

As of December 31, 2017, excluding the notes or debentures that have been converted to a floating rate, the Company’s fixed\-rate senior unsecured notes outstanding included its $300 million2\.75% senior unsecured notes due 2022, its $300 million3\.00% senior unsecured notes due 2026, its $100 million7\.375% senior unsecured notes due 2027, and its $300 million3\.45% senior unsecured notes due 2027\. The $100 million7\.375% senior unsecured notes due 2027 had at one point been converted to a floating rate, but the Company subsequently terminated the fixed\-to\-floating interest rate swap agreements related to it\. The effect of this termination was that the interest associated with this debt prospectively reverted back to its original fixed rate\. As a result of the gain realized on this transaction, which is being amortized over the remaining term of the corresponding notes, and based on projected interest rates at the date of termination, the Company does not believe its future interest expense, based on projected future interest rates at the date of termination, associated with these notes will significantly differ from the expense it would have recorded had the notes remained at floating rates\. The following table displays the characteristics of the Company’s secured fixed rate debt as of December 31, 2017:

|                     |                                                            |                                       |                                 |                                       |
| ------------------- | ---------------------------------------------------------- | ------------------------------------- | ------------------------------- | ------------------------------------- |
|                     | **Principal**

**amount**

 **(in millions)**  | **Effective**

 **fixed rate**  | **Final**

 **maturity**  | **Underlying collateral**             |
| Term Loan Agreement | $66                                                        | 6\.315%                               | 5/6/2019                        | 14 specified Boeing 737\-700 aircraft |
| Term Loan Agreement | 19                                                         | 4\.84%                                | 7/1/2019                        | 4 specified Boeing 737\-700 aircraft  |
| Term Loan Agreement | 237                                                        | 5\.223%                               | 5/9/2020                        | 21 specified Boeing 737\-700 aircraft |

The carrying value of the Company’s floating rate debt totaled $1\.0 billion, and this debt had a weighted\-average maturity of 3\.04 years at floating rates averaging 2\.42 percent for the year ended December 31, 2017\. In total, the Company’s fixed\-rate debt and floating rate debt represented 13 percent and 5 percent, respectively, of consolidated noncurrent assets at December 31, 2017\.

68


Annual Report of Southwest Airlines Co\. for year 2019

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

**active markets**

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

**other observable**

**inputs** | **Significant**

**unobservable**

**inputs** |
| **Description**                         | **December 31, 2018** | **(Level 1)**                                                                  | **(Level 2)**                                                 | **(Level 3)**                                             |
| **Assets**                              | (in millions)         | (in millions)                                                                  | (in millions)                                                 | (in millions)                                             |
| Cash equivalents                        |                       |                                                                                |                                                               |                                                           |
| Cash equivalents (a)                    | $1,392                | $1,392                                                                         | $—                                                            | $—                                                        |
| Commercial paper                        | 454                   | —                                                                              | 454                                                           | —                                                         |
| Certificates of deposit                 | 8                     | —                                                                              | 8                                                             | —                                                         |
| Short\-term investments:                |                       |                                                                                |                                                               |                                                           |
| Treasury bills                          | 1,582                 | 1,582                                                                          | —                                                             | —                                                         |
| Certificates of deposit                 | 228                   | —                                                                              | 228                                                           | —                                                         |
| Time deposits                           | 25                    | —                                                                              | 25                                                            | —                                                         |
| Fuel derivatives:                       |                       |                                                                                |                                                               |                                                           |
| Option contracts (b)                    | 138                   | —                                                                              | —                                                             | 138                                                       |
| Other available\-for\-sale securities   | 127                   | 127                                                                            | —                                                             | —                                                         |
| **Total assets**                        | $3,954                | $3,101                                                                         | $715                                                          | $138                                                      |
| **Liabilities**                         |                       |                                                                                |                                                               |                                                           |
| Interest rate derivatives (see Note 10) | $

(14

) | $—                                                                             | $

(14

)                                         | $—                                                        |

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

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

The Company had no transfers of assets or liabilities between any of the above levels during the years ended  December 31, 2019  or  2018 \. The Company did not have any assets or liabilities measured at fair value on a nonrecurring basis as of  December 31, 2019  or  2018 \. The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for  2019  and  2018 :

|                                                                              |                                                                             |                                                                             |
| ---------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------------- |
| **Fair value measurements using significant unobservable inputs (Level 3)**  | **Fair value measurements using significant unobservable inputs (Level 3)** | **Fair value measurements using significant unobservable inputs (Level 3)** |
| (in millions)                                                                | **Fuel derivatives**                                                        |                                                                             |
| Balance at December 31, 2018                                                 | $138                                                                        |                                                                             |
| Total losses (realized or unrealized) included in other comprehensive income | (112

)                                                               |                                                                             |
| Purchases                                                                    | 133                                                                         | (a)                                                                         |
| Sales                                                                        | (2

)                                                                 | (a)                                                                         |
| Settlements                                                                  | (47

)                                                                |                                                                             |
| Balance at December 31, 2019                                                 | $110                                                                        |                                                                             |

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

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

101