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

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

|                                            |                                                                                |
| ------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|                                            | ***Frequent Flyer Deferred Revenue Estimate of Miles not Expected to be Redeemed***                                                                                |
| *Description of the Matter*                | At December 31, 2019, the Company's frequent flyer deferred revenue liability was $5\.3 billion\. As described in Note 1 of the consolidated financial statements, members of the Company's MileagePlus program earn miles through the Company's flights, purchases with other airlines or non\-airline partners or through co\-branded credit card partnerships\. Consideration is attributed to the miles earned or sold and deferred until the miles are redeemed and air travel is completed, or non\-air awards are shipped\. Miles can be redeemed for air travel and non\-travel awards\.                                                                                |
| *Description of the Matter*                |  Auditing management's breakage estimate (the estimate of miles earned that will not be redeemed) was complex and highly judgmental due to the significant assumptions used in the estimate\. Breakage is estimated annually using prior years' data and a regression analysis to estimate future breakage, which can be impacted by changes in customer behavior driven by program changes or redemption opportunities that would not be reflected in historical redemption data\.                                                                                |
| *How We Addressed the Matter in Our Audit* | We tested the Company's design and operating effectiveness of internal controls that address the risk of material misstatement relating to the breakage estimate\. This included testing controls over management's review of the significant assumptions and other inputs used in the estimate, including redemption patterns of various customer groups\.                                                                                |
| *How We Addressed the Matter in Our Audit* | Our audit procedures included, among others, testing the methodology and assumptions used to develop the breakage estimate, including testing the completeness and accuracy of the underlying data used to develop these assumptions\. In addition, we assessed the trending of the breakage rate over time to ensure changes were in line with expectations\. We involved a valuation specialist to test management's statistical analysis supporting the breakage assumption\.                                                                                |
|                                            | ***BRW Term Loan Impairment Analysis***                                                                                |
| *Description of the Matter*                | At December 31, 2019, the Company had a term loan agreement with, among others, BRW Aviation Holdings LLC and BRW Aviation LLC, dated as of November 29, 2018 (the "BRW Term Loan"), which had a carrying value of $499 million\. The BRW Term Loan is collateralized by common shares of Avianca Holdings S\.A\. ("AVH") and the equity of BRW (such shares and equity, collectively, the "BRW Loan Collateral")\. As discussed in Note 8 of the consolidated financial statements, the fair market value of the BRW Loan Collateral is estimated using an income approach and a market approach, with equal weight applied to each approach\. Under the income approach, the value was estimated by discounting expected future cash flows to a single present value amount\. Under the market approach, the value was estimated by reference to multiples of enterprise value to earnings before interest, taxes, depreciation, amortization and rent ("EBITDAR") for a group of publicly\-traded market comparable companies, along with AVH's own EBITDAR levels\. |
| *Description of the Matter*                | Auditing management's valuation of the BRW Loan Collateral was highly judgmental due to the significant estimation required in determining the fair value\. The fair value estimate was sensitive to significant assumptions such as multiples of enterprise value to EBITDAR, revenue and cost growth rates and the discount rate, each of which is affected by expectations about future market or economic conditions\. As a result of the subjectivity of the assumptions, adverse changes to management's estimates could reduce the underlying cash flows used to estimate fair value and trigger impairment of the loan\.                                                                                |
| *How We Addressed the Matter in Our Audit* | We tested the Company's design and operating effectiveness of internal controls that address the risk of material misstatement relating to the fair market value of the BRW Loan Collateral\. This included testing controls over management's review of the significant assumptions used in the income approach and market approach such as multiples of enterprise value to EBITDAR, revenue growth rates, costs per available seat kilometer and the discount rate, which is affected by expectations about future market or economic conditions\.                                                                                |
| *How We Addressed the Matter in Our Audit* | To test the estimated fair value of the BRW Loan Collateral, we performed audit procedures that included, among others, assessing the fair value methodology used by management and evaluating the significant assumptions used in the valuation model\. We compared significant assumptions to current industry, market and economic trends, and to AVH's historical results and/or other guideline companies within the same industry\. We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the BRW Loan Collateral that would result from changes in assumptions\. We also involved a valuation specialist to assist in our evaluation of the Company's valuation methodology and discount rate\.                                                                                |

40


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

|                                                                   |                                  |                          |                                  |
| ----------------------------------------------------------------- | -------------------------------- | ------------------------ | -------------------------------- |
| **Union**                                                         | **Class or Craft**               | **Employees**  **^(1)^** | **Contract
Amendable Date** |
| **Piedmont:**                                                     |                                  |                          |                                  |
| ALPA                                                              | Pilots                           | 630                      | 2024                             |
| AFA                                                               | Flight Attendants                | 300                      | 2019                             |
| International Brotherhood of Teamsters (IBT)                      | Mechanics                        | 375                      | 2021                             |
| IBT                                                               | Stock Clerks                     | 60                       | 2021                             |
| CWA                                                               | Fleet and Passenger Service      | 3,650                    | 2023                             |
| IBT                                                               | Dispatchers                      | 30                       | 2019                             |
| ALPA                                                              | Flight Crew Training Instructors | 40                       | 2024                             |
| **PSA:**                                                          |                                  |                          |                                  |
| ALPA                                                              | Pilots                           | 1,650                    | 2023                             |
| AFA                                                               | Flight Attendants                | 1,250                    | 2017                             |
| International Association of Machinists & Aerospace Workers (IAM) | Mechanics                        | 470                      | 2022                             |
| TWU                                                               | Dispatchers                      | 60                       | 2022                             |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------- |
| ^(1)^ | Approximate number of active full\-time equivalent employees as of  December 31, 2018 \. |

Joint collective bargaining agreements (JCBAs) have been reached with post\-Merger employee groups, except for contracts with the TWU\-IAM Association which represents the maintenance, fleet service, stock clerks, maintenance control technicians and maintenance training instructors whose contracts became amendable in the third quarter of 2018\. Negotiations designed to reach JCBAs involving all of these workgroups continue\. Additionally, the post\-Merger JCBAs covering our pilots and flight attendants, while not yet amendable, provide the unions with the right to elect to commence negotiations for new collective bargaining agreements in advance of each JCBA’s amendable date\. Both of the unions have exercised these rights and negotiations are underway for new agreements\.

Among our wholly\-owned regional subsidiaries, the PSA flight attendants have an agreement that is now amendable and are engaged in traditional RLA negotiations\. In January 2019, the Envoy passenger service employees reached a tentative seven\-year labor agreement subject to membership ratification\.

For more discussion, see Part I, Item 1A\. Risk Factors – “*Union disputes, employee strikes and other labor\-related disruptions, or our inability to otherwise maintain labor costs at competitive levels may adversely affect our operations and financial performance*\.”

**Aircraft Fuel**

Our operations and financial results are significantly affected by the availability and price of jet fuel, which is our second largest expense\. Based on our 2019 forecasted mainline and regional fuel consumption, we estimate that a one cent per gallon increase in aviation fuel price would increase our 2019 annual fuel expense by $45 million\.

The following table shows annual aircraft fuel consumption and costs, including taxes, for our mainline and regional operations for 2018, 2017 and 2016 (gallons and aircraft fuel expense in millions)\.

|          |             |                                         |                                      |                                                    |
| -------- | ----------- | --------------------------------------- | ------------------------------------ | -------------------------------------------------- |
| **Year** | **Gallons** | **Average Price**

**per Gallon** | **Aircraft Fuel**

**Expense** | **Percent of Total**

**Operating Expenses** |
| 2018     | 4,447       | $2\.23                                  | $9,896                               | 23\.6%                                             |
| 2017     | 4,352       |  1\.73                                  |  7,510                               | 19\.6%                                             |
| 2016     | 4,347       |  1\.42                                  |  6,180                               | 17\.6%                                             |

As of December 31, 2018, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption\. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully

10


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

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

**Employees**

As of December 31, 2018, UAL, including its subsidiaries, had approximately 92,000 employees\. Approximately 83% of the Company's employees were represented by various U\.S\. labor organizations\.

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

The following table reflects the Company's represented employee groups, the number of employees per represented group, union representation for each of United's employee groups, and the amendable date for each employee group's collective bargaining agreement as of December 31, 2018:

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

**Group**                             | **Number of**  **Employees** | **Union**                                                                 | **Agreement Open for**  **Amendment** |
| **Flight Attendants**                                      | 23,193                       | Association of Flight Attendants (the "AFA")                              | August 2021                           |
| **Fleet Service**                                          | 13,077                       | International Association of Machinists and Aerospace Workers (the "IAM") | December 2021                         |
| **Passenger Service**                                      | 11,932                       | IAM                                                                       | December 2021                         |
| **Pilots**                                                 | 11,742                       | Air Line Pilots Association, International                                | January 2019                          |
| **Technicians and Related & Flight Simulator Technicians** | 9,236                        | International Brotherhood of Teamsters (the "IBT")                        | December 2022                         |
| **Passenger Service \- United Ground Express, Inc\.**      | 2,923                        | IAM                                                                       | March 2025                            |
| **Catering Operations**                                    | 2,668                        | UNITE HERE                                                                | (a)                                   |
| **Storekeeper Employees**                                  | 1,012                        | IAM                                                                       | December 2021                         |
| **Dispatchers**                                            | 399                          | Professional Airline Flight Control Association                           | December 2021                         |
| **Fleet Tech Instructors**                                 | 131                          | IAM                                                                       | December 2021                         |
| **Load Planners**                                          | 64                           | IAM                                                                       | December 2021                         |
| **Security Officers**                                      | 48                           | IAM                                                                       | December 2021                         |
| **Maintenance Instructors**                                | 41                           | IAM                                                                       | December 2021                         |

(a) On October 23, 2018, United's Catering Operations employees voted to unionize under the RLA\. In an election overseen by the National Mediation Board, UNITE HERE received the majority of the votes and was officially certified to represent United's frontline Catering Operations employees\. The Company expects contract negotiations to begin in 2019\.

|               |                    |
| ------------- | ------------------ |
| **ITEM 1A\.** | **RISK FACTORS\.** |

*The following risk factors should be read carefully when evaluating the Company's business and the forward\-looking statements contained in this report and other statements the Company or its representatives make from time to time\. Any of the following risks could materially and adversely affect the Company's business, operating results, financial condition and the actual outcome of matters as to which forward\-looking statements are made in this report\.*

***If we do not successfully execute our strategic operating plan, or if our strategic operating plan is unsuccessful, our business, operating results and financial condition could be materially and adversely affected\.***

We have announced several strategic plans in recent years, including several revenue\-generating initiatives and plans to optimize our revenue, such as our plans to add capacity, including international expansion and new or increased service to mid\-size airports, and initiatives and plans to optimize and control our costs\. We also continue to explore opportunities to enhance our segmentation, including the introduction of Polaris, Basic Economy and United Premium Plus, and are implementing many programs and policies to improve the customer experience at all points in air travel\. In developing our strategic operating plan, we make certain assumptions including, but not limited to, those related to customer demand, competition, market consolidation and the global economy\. Actual economic, market and other conditions may be different from our assumptions and we may not be able to successfully execute our strategic operating plan\. If we do not successfully execute our strategic operating plan, or if actual results vary significantly from our assumptions, our business, operating results and financial condition could be materially and adversely impacted\.

8


Annual Report of Southwest Airlines Co\. for year 2019

Stock Performance Graph

The following Performance Graph and related information shall not be deemed "soliciting material" or "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934\.

The following graph compares the cumulative total shareholder return on the Company’s common stock over the five\-year period ended  December 31, 2019 , with the cumulative total return during such period of the Standard and Poor’s 500 Stock Index and the NYSE ARCA Airline Index\. The comparison assumes $100 was invested on December 31,  2014 , in the Company’s common stock and in each of the foregoing indices and assumes reinvestment of dividends\. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance\.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG SOUTHWEST AIRLINES CO\., S&P 500 INDEX, AND NYSE ARCA AIRLINE INDEX

![chart\-1\.jpg](https://www.example.com/chart-1.jpg)

|                             |                |                |                |                |                |                |
| --------------------------- | -------------- | -------------- | -------------- | -------------- | -------------- | -------------- |
|                             | **12/31/2014** | **12/31/2015** | **12/31/2016** | **12/31/2017** | **12/31/2018** | **12/31/2019** |
| **Southwest Airlines Co\.** | $100           | $102           | $120           | $158           | $114           | $134           |
| **S&P 500**                 | $100           | $101           | $113           | $138           | $132           | $174           |
| **NYSE ARCA Airline**       | $100           | $85            | $109           | $116           | $91            | $112           |

36


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

In addition, several joint ventures among U\.S\. and foreign carriers, including our transatlantic and transpacific joint ventures, have received grants of antitrust immunity allowing the participating carriers to coordinate schedules, pricing, sales and inventory\. Other joint ventures that have received antitrust immunity include a transatlantic alliance among United Airlines, Air Canada and Lufthansa German Airlines, a transpacific joint venture between United Airlines and All Nippon Airways, a transatlantic joint venture among American Airlines, British Airways and Iberia and a transpacific joint venture between American Airlines and Japan Air Lines\.

Regulatory Matters

The DOT and the Federal Aviation Administration (the "FAA") exercise regulatory authority over air transportation in the U\.S\. The DOT has authority to issue certificates of public convenience and necessity required for airlines to provide domestic air transportation\. An air carrier that the DOT finds fit to operate is given authority to operate domestic and international air transportation (including the carriage of passengers and cargo)\. Except for constraints imposed by regulations regarding "Essential Air Services," which are applicable to certain small communities, airlines may terminate service to a city without restriction\.

The DOT has jurisdiction over certain economic and consumer protection matters, such as unfair or deceptive practices and methods of competition, advertising, denied boarding compensation, baggage liability and disabled passenger transportation\. The DOT also has authority to review certain joint venture agreements between domestic and international carriers and engages in regulation of economic matters such as transactions involving allocation of "slots" or similar regulatory mechanisms which limit the rights of carriers to conduct operations at those airports\. The FAA has primary responsibility for matters relating to the safety of air carrier flight operations, including airline operating certificates, control of navigable air space, flight personnel, aircraft certification and maintenance and other matters affecting air safety\.

Authority to operate international routes and international codesharing arrangements is regulated by the DOT and by the governments of the foreign countries involved\. International certificate authorities are also subject to the approval of the U\.S\. President for conformance with national defense and foreign policy objectives\.

The Transportation Security Administration and the U\.S\. Customs and Border Protection, each a division of the Department of Homeland Security, are responsible for certain civil aviation security matters, including passenger and baggage screening at U\.S\. airports and international passenger prescreening prior to entry into or departure from the U\.S\.

Airlines are also subject to various other federal, state, local and foreign laws and regulations\. For example, the U\.S\. Department of Justice has jurisdiction over airline competition matters\. The U\.S\. Postal Service has authority over certain aspects of the transportation of mail\. Labor relations in the airline industry, as discussed below, are generally governed by the Railway Labor Act with oversight by the National Mediation Board\. Environmental matters are regulated by various federal, state, local and foreign governmental entities\. Privacy of passenger and employee data is regulated by domestic and foreign laws and regulations\.

Fares and Rates

Airlines set ticket prices in all domestic and most international city pairs with minimal governmental regulation, and the industry is characterized by significant price competition\. Certain international fares and rates are subject to the jurisdiction of the DOT and the governments of the foreign countries involved\. Many of our tickets are sold by travel agents, and fares are subject to commissions, overrides and discounts paid to travel agents, brokers and wholesalers\.

Route Authority

Our flight operations are authorized by certificates of public convenience and necessity and also by exemptions and limited\-entry frequency awards issued by the DOT\. The requisite approvals of other governments for international operations are controlled by bilateral agreements (and a multilateral agreement in the case of the U\.S\. and the European Union) with, or permits or approvals issued by, foreign countries\. Because international air transportation is governed by bilateral or other agreements between the U\.S\. and the foreign country or countries involved, changes in U\.S\. or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of our international route authorities or otherwise affect our international operations\. Bilateral agreements between the U\.S\. and various foreign countries served by us are subject to renegotiation from time to time\. The U\.S\. government has negotiated "Open Skies" agreements with many countries, which allow unrestricted access between the U\.S\. and the foreign markets\. These agreements include separate agreements with the European Union and Japan\.

 7


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

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

**Accrual Activity**

Activity related to the accruals for severance and medical costs and future lease payments on permanently grounded aircraft is as follows (in millions):

|                                 |                              |                                   |
| ------------------------------- | ---------------------------- | --------------------------------- |
|                                 | **Severance/ Benefit Costs** | **Permanently Grounded Aircraft** |
| Balance at December 31, 2015    | $27                          | $78                               |
| Accrual and related adjustments | 37                           | (17)                              |
| Payments                        | (50)                         | (20)                              |
| Balance at December 31, 2016    | 14                           | 41                                |
| Accrual                         | 116                          | (4)                               |
| Payments                        | (93)                         | (15)                              |
| Balance at December 31, 2017    | 37                           | 22                                |
| Accrual                         | 41                           | (7)                               |
| Payments                        | (53)                         | (3)                               |
| Balance at December 31, 2018    | $25                          | $12                               |

**NOTE 15 \- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

|                                             |                   |                   |                   |                   |
| ------------------------------------------- | ----------------- | ----------------- | ----------------- | ----------------- |
| **UAL**                                     | **Quarter Ended** | **Quarter Ended** | **Quarter Ended** | **Quarter Ended** |
| **(In millions, except per share amounts)** | **March 31**      | **June 30**       | **September 30**  | **December 31**   |
| **2018**                                    |                   |                   |                   |                   |
| Operating revenue                           | $9,032            | $10,777           | $11,003           | $10,491           |
| Income from operations                      | 276               | 1,161             | 1,203             | 652               |
| Net income                                  | 147               | 684               | 836               | 462               |
| Basic earnings per share                    | 0\.52             | 2\.49             | 3\.07             | 1\.71             |
| Diluted earnings per share                  | 0\.52             | 2\.48             | 3\.06             | 1\.70             |
| **2017 (a)**                                |                   |                   |                   |                   |
| Operating revenue                           | $8,426            | $10,008           | $9,899            | $9,451            |
| Income from operations                      | 320               | 1,437             | 1,138             | 776               |
| Net income                                  | 99                | 821               | 645               | 579               |
| Basic earnings per share                    | 0\.32             | 2\.67             | 2\.15             | 1\.99             |
| Diluted earnings per share                  | 0\.32             | 2\.67             | 2\.15             | 1\.98             |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2014\-09, *Revenue from Contracts with Customers (Topic 606)* andAccounting Standards Update No\. 2017\-07, *Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost\.* See Note 1 to the financial statements contained in Part II, Item 8 of this report for additional information\.

UAL's quarterly financial data is subject to seasonal fluctuations and historically its second and third quarter financial results, which reflect higher travel demand, are better than its first and fourth quarter financial results\. UAL's quarterly results were

88


Annual Report of Southwest Airlines Co\. for year 2017

**Report of Independent Registered Public Accounting Firm**

To the Shareholders and the Board of Directors of Southwest Airlines Co\.

**Opinion on the Financial Statements**

We have audited the accompanying consolidated balance sheets of Southwest Airlines Co\. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”)\. In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U\.S\. generally accepted accounting principles\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control\-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 7, 2018 expressed an unqualified opinion thereon\.

**Adoption of ASU No\. 2009\-13**

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for its co\-brand credit card agreement in 2015 due to the adoption of ASU No\. 2009\-13, *Multiple Deliverable Revenue Arrangements*\.

**Basis for Opinion**

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

We conducted our audits in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud\. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to fraud or error, and performing procedures that respond to those risks\. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements\. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements\. We believe that our audits provide a reasonable basis for our opinion\.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1971\.

Dallas, Texas

February 7, 2018

109


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

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

Various taxes and fees assessed on the sale of tickets to end customers are collected by American as an agent and remitted to taxing authorities\. These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority\.

Loyalty Revenue

American currently operates the loyalty program, AAdvantage\. This program awards mileage credits to passengers who fly on American, any  one world airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclaycard US co\-branded credit cards, and certain hotels and car rental companies\. Mileage credits can be redeemed for travel on American and other participating partner airlines, as well as other non\-air travel awards such as hotels and rental cars\. For mileage credits earned by AAdvantage loyalty program members, American applies the deferred revenue method\.

Mileage credits earned through travel

For mileage credits earned through travel, American applies a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned\. The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided\. The estimated selling price of mileage credits is determined using an equivalent ticket value approach, which uses historical data, including award redemption patterns by geographic region and class of service, as well as similar fares as those used to settle award redemptions\. The estimated selling price of miles is adjusted for an estimate of miles that will not be redeemed based on historical redemption patterns\.

Mileage credits sold to co\-branded credit cards and other partners

American sells mileage credits to participating airline partners and non\-airline business partners, including American’s co\-branded credit card partners, under contracts with terms extending generally for   one to seven  years\. Consideration received from the sale of mileage credits is variable and payment terms typically are within   30 days  subsequent to the month of mileage sale\. Sales of mileage credits to non\-airline business partners are comprised of   two  components, transportation and marketing\. American allocates the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered\.

American’s most significant partner agreements are its co\-branded credit card agreements with Citi and Barclaycard US that American entered into in 2016\. American identified the following revenue elements in these co\-branded credit card agreements: the transportation component; and the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component)\. Accordingly, American recognizes the marketing component in other revenue in the period of the mileage sale following the sales\-based royalty method\.

The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above\. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided\.

For the portion of American’s outstanding mileage credits that it estimates will not be redeemed, American recognizes the associated value proportionally as the remaining mileage credits are redeemed\. American’s estimates are based on analysis of historical redemptions\.

Cargo Revenue

Cargo revenue is recognized when American provides the transportation\.

Other Revenue

Other revenue includes revenue associated with American’s loyalty program, which is comprised principally of the marketing component of mileage sales to co\-branded credit card and other partners and other marketing related payments\. Loyalty revenue included in other revenue was   $2\.4 billion  for both years ended  December 31, 2019  and  2018  and   $2\.1 billion  for  2017 \. The accounting and recognition for the loyalty program marketing services are discussed above in “ Loyalty Revenue \.” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation\-related services\.

127


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

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

Various taxes and fees assessed on the sale of tickets to end customers are collected by us as an agent and remitted to taxing authorities\. These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority\.

Loyalty Revenue

We currently operate the loyalty program, AAdvantage\. This program awards mileage credits to passengers who fly on American, any  one world airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclaycard US co\-branded credit cards, and certain hotels and car rental companies\. Mileage credits can be redeemed for travel on American and other participating partner airlines, as well as other non\-air travel awards such as hotels and rental cars\. For mileage credits earned by AAdvantage loyalty program members, we apply the deferred revenue method\.

Mileage credits earned through travel

For mileage credits earned through travel, we apply a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned\. The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided\. The estimated selling price of mileage credits is determined using an equivalent ticket value approach, which uses historical data, including award redemption patterns by geographic region and class of service, as well as similar fares as those used to settle award redemptions\. The estimated selling price of miles is adjusted for an estimate of miles that will not be redeemed based on historical redemption patterns\.

Mileage credits sold to co\-branded credit cards and other partners

We sell mileage credits to participating airline partners and non\-airline business partners, including our co\-branded credit card partners, under contracts with terms extending generally for   one to seven  years\. Consideration received from the sale of mileage credits is variable and payment terms typically are within   30  days subsequent to the month of mileage sale\. Sales of mileage credits to non\-airline business partners are comprised of   two  components, transportation and marketing\. We allocate the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered\.

Our most significant partner agreements are our co\-branded credit card agreements with Citi and Barclaycard US that we entered into in 2016\. We identified the following revenue elements in these co\-branded credit card agreements: the transportation component; and the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component)\. Accordingly, we recognize the marketing component in other revenue in the period of the mileage sale following the sales\-based royalty method\.

The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above\. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided\.

For the portion of our outstanding mileage credits that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining mileage credits are redeemed\. Our estimates are based on analysis of historical redemptions\.

Cargo Revenue

Cargo revenue is recognized when we provide the transportation\.

Other Revenue

Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage sales to co\-branded credit card and other partners and other marketing related payments\. Loyalty revenue included in other revenue was   $2\.4 billion  for both years ended  December 31, 2019  and  2018  and   $2\.1 billion  for  2017 \. The accounting and recognition for the loyalty program marketing services are discussed above in “ Loyalty Revenue \.” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation\-related services\.

82


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

Interest expense, net increased in 2016 primarily due to higher outstanding debt as a result of aircraft financings associated with our fleet renewal program\.

In 2016, other nonoperating expense, net primarily included $49 million of net special charges associated with debt refinancings and extinguishments\.

In 2015, other nonoperating expense, net primarily included a $592 million special charge to write off all of the value of Venezuelan bolivars held by us due to continued lack of repatriations and deterioration of economic conditions in Venezuela\. We also incurred $159 million of net foreign currency losses\. The foreign currency losses in 2015 were driven primarily by the strengthening of the U\.S\. dollar relative to other currencies, principally in Latin American and European markets\.

*Income Taxes*

In 2016, we recorded an income tax provision of $1\.6 billion at an effective rate of approximately 38%, which was substantially non\-cash due to our utilization of NOLs\. Substantially all of our income before income taxes was attributable to the United States\.

In 2015, we reversed $3\.0 billion of the valuation allowance on our deferred tax assets, which resulted in a special non\-cash tax benefit recorded in our consolidated statement of operations\.

See Note 6 to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information on income taxes\.

**American’s Results of Operations**

***Results of Operations –*** ***2017*** ***Compared to*** ***2016***

American realized pre\-tax income of $3\.2 billion and net income of $1\.9 billion in 2017\. This compares to 2016 pre\-tax income of $4\.4 billion and net income of $2\.8 billion\.

The year\-over\-year decline in American’s pre\-tax income was principally driven by higher fuel costs and wage rates\.

*Operating Revenues*

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

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

**Increase**

**(Decrease)** |
|                          | **2017**                                     | **2016**                                     | **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)**          |
| Mainline passenger       | $29,238                                      | $27,909                                      | $1,329                                       | 4\.8                                                  |
| Regional passenger       | 6,895                                        | 6,670                                        | 225                                          | 3\.4                                                  |
| Cargo                    | 800                                          | 700                                          | 100                                          | 14\.3                                                 |
| Other                    | 5,262                                        | 4,884                                        | 378                                          | 7\.7                                                  |
| Total operating revenues | $42,195                                      | $40,163                                      | $2,032                                       | 5\.1                                                  |

Total passenger revenues increased $1\.6 billion, or 4\.5%, in 2017 from 2016 primarily due to a year\-over\-year increase in consolidated passenger yields driven by strong demand\.

Cargo revenue increased $100 million, or 14\.3%, in 2017 from 2016 primarily driven by an increase in freight volume\.

Other revenue primarily includes revenue associated with American’s loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services\. Other revenue increased $378 million, or 7\.7%, in 2017 from 2016 primarily driven by higher revenues associated with American’s loyalty program\. In 2017 and 2016, loyalty program revenue was $2\.4 billion and $2\.1 billion, respectively\. Of this, $2\.2 billion and $1\.9 billion related to the marketing component of mileage sales and other marketing related payments, respectively\.

Total operating revenues in 2017increased $2\.0 billion, or 5\.1%, from 2016 driven principally by a 4\.5% increase in total passenger revenues as described above\.

59


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

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

|            |                 |                                                                                |
| ----------:|:--------------- |:---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|  \*10\.215 | UAL
United | [Second Amendment to Credit and Guaranty Agreement, dated as of July 25, 2014 (filed as Exhibit 10\.1 to UAL’s Form  8\-K filed September 19, 2014, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000095015514000039/e64788095ex10_1.htm)                                                                                |
|  \*10\.216 | UAL
United | [Third Amendment to Credit and Guaranty Agreement, dated as of September 15, 2014 (filed as Exhibit 10\.2 to UAL’s Form  8\-K filed September 19, 2014, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000095015514000039/e64788095ex10_2.htm)                                                                                |
|  \*10\.217 | UAL
United | [Fourth Amendment to Credit and Guaranty Agreement, dated as of May 24, 2016 (filed as Exhibit 10\.4 to UAL’s Form  10\-Q for the quarter ended June 30, 2016, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312516651221/d188420dex104.htm)                                                                                |
|  \*10\.218 | UAL
United | [Amended and Restated Credit and Guaranty Agreement, dated as of March 29, 2017, among United Airlines, Inc\., as borrower, United Continental Holdings, Inc\., as parent and a guarantor, the subsidiaries of United Continental Holdings, Inc\. from time to time party thereto other than the borrower party thereto from time to time, as guarantors, the lenders from time to time party thereto and JPMorgan Chase Bank, N\.A\., as administrative agent (filed as Exhibit 10\.1 to UAL’s Form  8\-K filed April 3, 2017, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000095015517000006/e77015399ex10_1.htm) |
|    10\.219 | UAL
United | [First Amendment, dated as of November 15, 2017, to Amended and Restated Credit Guaranty Agreement ](https://www.example.com/d471340dex10219.htm)                                                                                |
|            |                 | **Computation of Ratios**                                                                                |
|      12\.1 | UAL             | [United Continental Holdings, Inc\. and Subsidiary Companies Computation of Ratio of Earnings to Fixed Charges ](https://www.example.com/d471340dex121.htm)                                                                                |
|      12\.2 | United          | [United Airlines, Inc\. and Subsidiary Companies Computation of Ratio of Earnings to Fixed Charges ](https://www.example.com/d471340dex122.htm)                                                                                |
|            |                 | **List of Subsidiaries**                                                                                |
|         21 | UAL United      | [List of United Continental Holdings, Inc\. and United Airlines, Inc\. Subsidiaries ](https://www.example.com/d471340dex211.htm)                                                                                |
|            |                 | **Consents of Experts and Counsel**                                                                                |
|      23\.1 | UAL             | [Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for United Continental Holdings, Inc\. ](https://www.example.com/d471340dex231.htm)                                                                                |
|      23\.2 | United          | [Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for United Airlines, Inc\. ](https://www.example.com/d471340dex232.htm)                                                                                |
|            |                 | **Rule   13a\-14(a)/15d\-14(a) Certifications**                                                                                |
|      31\.1 | UAL             | [Certification of the Principal Executive Officer of United Continental Holdings, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002) ](https://www.example.com/d471340dex311.htm)                                                                                |
|      31\.2 | UAL             | [Certification of the Principal Financial Officer of United Continental Holdings, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002) ](https://www.example.com/d471340dex312.htm)                                                                                |
|      31\.3 | United          | [Certification of the Principal Executive Officer of United Airlines, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002) ](https://www.example.com/d471340dex313.htm)                                                                                |
|      31\.4 | United          | [Certification of the Principal Financial Officer of United Airlines, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002) ](https://www.example.com/d471340dex314.htm)                                                                                |

130


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

Our high level of debt and other obligations may limit our ability to fund general corporate requirements and obtain additional financing, may limit our flexibility in responding to competitive developments and cause our business to be vulnerable to adverse economic and industry conditions\.

We have significant amounts of indebtedness and other obligations, including pension obligations, obligations to make future payments on flight equipment and property leases related to airport and other facilities, and substantial non\-cancelable obligations under aircraft and related spare engine purchase agreements\. Moreover, currently a substantial portion of our assets are pledged to secure our indebtedness\. Our substantial indebtedness and other obligations, which are generally greater than the indebtedness and other obligations of our competitors, could have important consequences\. For example, they:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------ |
| • | may make it more difficult for us to satisfy our obligations under our indebtedness; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | may limit our ability to obtain additional funding for working capital, capital expenditures, acquisitions, investments, integration costs and general corporate purposes, and adversely affect the terms on which such funding can be obtained; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and other obligations, thereby reducing the funds available for other purposes; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | make us more vulnerable to economic downturns, industry conditions and catastrophic external events, particularly relative to competitors with lower relative levels of financial leverage; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | significantly constrain our ability to respond, or respond quickly, to unexpected disruptions in our own operations, the U\.S\. or global economies, or the businesses in which we operate, or to take advantage of opportunities that would improve our business, operations, or competitive position versus other airlines; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------- |
| • | limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | contain covenants requiring us to maintain an aggregate of at least $2\.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities; and |

|   |                                                               |
| - | ------------------------------------------------------------- |
| • | contain restrictive covenants that could, among other things: |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------- |
| ◦ | limit our ability to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make investments and pay dividends; and |

|   |                                                                     |
| - | ------------------------------------------------------------------- |
| ◦ | if breached, result in an event of default under our indebtedness\. |

These obligations could also impact our ability to obtain additional financing, if needed, and our flexibility in the conduct of our business, and could materially adversely affect our liquidity, results of operations and financial condition\.

Further, a substantial portion of our long\-term indebtedness bears interest at fluctuating interest rates, primarily based on the London interbank offered rate (LIBOR) for deposits of U\.S\. dollars\. LIBOR tends to fluctuate based on general short\-term interest rates, rates set by the U\.S\. Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions\. We have not hedged our interest rate exposure with respect to our floating rate debt\. Accordingly, our interest expense for any particular period will fluctuate based on LIBOR and other variable interest rates\. To the extent the interest rates applicable to our floating rate debt increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected\.

On July 27, 2017, the U\.K\. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021\. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021\. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR\-linked financial instruments\. While the U\.S\. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U\.S\. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by treasury securities, we cannot currently predict whether this index will gain widespread acceptance as a replacement for LIBOR\. It is not possible to predict the effect of these changes, other reforms or the establishment

19


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

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

Assumptions

The following actuarial assumptions were used to determine American’s benefit obligations and net periodic benefit cost (income) for the periods presented:

|                                |                      |                      |                                                                  |                                                                  |
| ------------------------------ | -------------------- | -------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- |
|                                | **Pension Benefits** | **Pension Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** |
|                                | **2019**             | **2018**             | **2019**                                                         | **2018**                                                         |
| Benefit obligations:           |                      |                      |                                                                  |                                                                  |
| Weighted average discount rate | 3\.4%                | 4\.4%                | 3\.3%                                                            | 4\.3%                                                            |

|                                                                           |                      |                      |                      |                                                                  |                                                                  |                                                                  |
| ------------------------------------------------------------------------- | -------------------- | -------------------- | -------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- |
|                                                                           | **Pension Benefits** | **Pension Benefits** | **Pension Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** | **Retiree Medical and**

**Other Postretirement Benefits** |
|                                                                           | **2019**             | **2018**             | **2017**             | **2019**                                                         | **2018**                                                         | **2017**                                                         |
| Net periodic benefit cost (income):                                       |                      |                      |                      |                                                                  |                                                                  |                                                                  |
| Weighted average discount rate                                            | 4\.4%                | 3\.8%                | 4\.3%                | 4\.3%                                                            | 3\.6%                                                            | 4\.1%                                                            |
| Weighted average expected rate of return on plan assets                   | 8\.0%                | 8\.0%                | 8\.0%                | 8\.0%                                                            | 8\.0%                                                            | 8\.0%                                                            |
| Weighted average health care cost trend rate assumed for next year  ^(1)^ | N/A                  | N/A                  | N/A                  | 3\.7%                                                            | 3\.9%                                                            | 4\.2%                                                            |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | The weighted average health care cost trend rate at  December 31, 2019  is assumed to decline gradually to   3\.3%  by 2027 and remain level thereafter\. |

As of  December 31, 2019 , American’s estimate of the long\-term rate of return on plan assets was   8\.0%  based on the target asset allocation\. Expected returns on long duration bonds are based on yields to maturity of the bonds held at year\-end\. Expected returns on other assets are based on a combination of long\-term historical returns, actual returns on plan assets achieved over the last ten years, current and expected market conditions, and expected value to be generated through active management and securities lending programs\.

A one percentage point change in the assumed health care cost trend rates would have the following approximate effects on American’s retiree medical and other postretirement benefits plans (in millions):

|                                                                   |                 |                      |
| ----------------------------------------------------------------- | --------------- | -------------------- |
|                                                                   | **1% Increase** | **1% Decrease**      |
| Increase (decrease) on 2019 service and interest cost             | $1              | $

(1

) |
| Increase (decrease) on benefit obligation as of December 31, 2019 | 40              | (40

)         |

Minimum Contributions

American is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and various other laws for U\.S\. based plans as well as underfunding rules specific to countries where American maintains defined benefit plans\. Based on current funding assumptions, American has minimum required contributions of   $193 million  for  2020 \. American’s funding obligations will depend on the performance of American’s investments held in trust by the pension plans, interest rates for determining liabilities, the amount of and timing of any supplemental contributions and American’s actuarial experience\.

Benefit Payments

The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (approximately, in millions):

|                                                   |          |          |          |          |          |                |
| ------------------------------------------------- | -------- | -------- | -------- | -------- | -------- | -------------- |
|                                                   | **2020** | **2021** | **2022** | **2023** | **2024** | **2025\-2029** |
| Pension benefits                                  | $749     | $788     | $827     | $869     | $910     | $5,017         |
| Retiree medical and other postretirement benefits | 80       | 71       | 66       | 64       | 61       | 265            |

144


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

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

Hedge Position as of  December 31, 2017

|                                     |                                |                                           |                         |                             |                             |                                 |                                  |                            |
| ----------------------------------- | ------------------------------ | ----------------------------------------- | ----------------------- | --------------------------- | --------------------------- | ------------------------------- | -------------------------------- | -------------------------- |
| **(in millions)**                   | **Volume**                     | **Volume**                                | **Final Maturity Date** | **Hedge Derivatives Asset** | **Other Noncurrent Assets** | **Hedge Derivatives Liability** | **Other Noncurrent Liabilities** | **Hedge Derivatives, net** |
| ***Designated as hedges***          | ***Designated as hedges***     |                                           |                         |                             |                             |                                 |                                  |                            |
| Foreign currency exchange contracts | 23,512                         | Japanese yen                              | November 2019           | 1                           | 1                           | (13

)                    | (6

)                      | (17

)               |
| Foreign currency exchange contracts | 490                            | Canadian dollars                          | May 2020                | 1                           | 1                           | (13

)                    | (6

)                      | (17

)               |
| ***Not designated as hedges***      | ***Not designated as hedges*** |                                           |                         |                             |                             |                                 |                                  |                            |
| Fuel hedge contracts                | 249                            | gallons \- crude oil and refined products | May 2019                | 638                         | 8                           | (694

)                   | (18

)                     | (66

)               |
| Total derivative contracts          | Total derivative contracts     |                                           |                         | $639                        | $9                          | $

(707

)          | $

(24

)            | $

(83

)      |

Hedge Position as of  December 31, 2016

|                                     |                                |                                           |                         |                             |                             |                                 |                                  |                            |
| ----------------------------------- | ------------------------------ | ----------------------------------------- | ----------------------- | --------------------------- | --------------------------- | ------------------------------- | -------------------------------- | -------------------------- |
| **(in millions)**                   | **Volume**                     | **Volume**                                | **Final Maturity Date** | **Hedge Derivatives Asset** | **Other Noncurrent Assets** | **Hedge Derivatives Liability** | **Other Noncurrent Liabilities** | **Hedge Derivatives, net** |
| ***Designated as hedges***          | ***Designated as hedges***     |                                           |                         |                             |                             |                                 |                                  |                            |
| Foreign currency exchange contracts | 54,853                         | Japanese yen                              | February 2019           | 31                          | 3                           | (4

)                     | (3

)                      | 27                         |
| Foreign currency exchange contracts | 335                            | Canadian dollars                          | January 2019            | 31                          | 3                           | (4

)                     | (3

)                      | 27                         |
| ***Not designated as hedges***      | ***Not designated as hedges*** |                                           |                         |                             |                             |                                 |                                  |                            |
| Fuel hedge contracts  ^(1)^         | 197                            | gallons \- crude oil and refined products | January 2018            | 360                         | —                           | (684

)                   | —                                | (324

)              |
| Total derivative contracts          | Total derivative contracts     |                                           |                         | $391                        | $3                          | $

(688

)          | $

(3

)             | $

(297

)     |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | As discussed above, we early settled   $455 million  of our airline segment's 2016 fuel hedge positions and entered into hedges designed to offset and effectively neutralize our 2017 airline segment hedge positions\. The dollar amounts shown above primarily represent the offsetting derivatives that were used to neutralize the 2016 and 2017 airline segment hedge portfolio\. |

Offsetting Assets and Liabilities

We have master netting arrangements with our counterparties giving us the right to offset hedge assets and liabilities\. However, we have elected not to offset the fair value positions recorded on our Consolidated Balance Sheets\. The following table shows the net fair value of our counterparty positions had we elected to offset\.

|                          |                             |                             |                                 |                                  |                            |
| ------------------------ | --------------------------- | --------------------------- | ------------------------------- | -------------------------------- | -------------------------- |
| **(in millions)**        | **Hedge Derivatives Asset** | **Other Noncurrent Assets** | **Hedge Derivatives Liability** | **Other Noncurrent Liabilities** | **Hedge Derivatives, Net** |
| **December 31, 2017**    |                             |                             |                                 |                                  |                            |
| Net derivative contracts | $—                          | $1                          | $

(68

)           | $

(16

)            | $

(83

)      |
| **December 31, 2016**    |                             |                             |                                 |                                  |                            |
| Net derivative contracts | $29                         | $2                          | $

(326

)          | $

(2

)             | $

(297

)     |

Designated Hedge Gains (Losses)

Gains (losses) related to our designated hedge contracts during the years ended December 31,  2017 ,  2016  and  2015  are as follows:

|                                     |                                                          |                                                          |                                                          |                                                                       |                                                                       |                                                                       |
| ----------------------------------- | -------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------------------------- |
|                                     | **Effective Portion Reclassified from AOCI to Earnings** | **Effective Portion Reclassified from AOCI to Earnings** | **Effective Portion Reclassified from AOCI to Earnings** | **Effective Portion Recognized in Other Comprehensive (Loss) Income** | **Effective Portion Recognized in Other Comprehensive (Loss) Income** | **Effective Portion Recognized in Other Comprehensive (Loss) Income** |
| **(in millions)**                   | **2017**                                                 | **2016**                                                 | **2015**                                                 | **2017**                                                              | **2016**                                                              | **2015**                                                              |
| Foreign currency exchange contracts | 10                                                       | 37                                                       | 198                                                      | (43

)                                                          | (68

)                                                          | (130

)                                                         |

 67


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

ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is set forth under the heading "Proposal 3 \- Ratification of the Appointment of Independent Auditors" in our Proxy Statement and is incorporated by reference\.

PART IV

ITEM 15\. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1)\. The following is an index of the financial statements required by this item that are included in this Form 10\-K:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets— December 31, 2018  and  2017

Consolidated Statements of Operations for the years ended  December 31, 2018 ,  2017  and  2016

Consolidated Statements of Comprehensive Income for the years ended  December 31, 2018 ,  2017  and  2016

Consolidated Statements of Cash Flows for the years ended  December 31, 2018 ,  2017  and  2016

Consolidated Statements of Stockholders' Equity for the years ended  December 31, 2018 ,  2017  and  2016

Notes to the Consolidated Financial Statements

(2)\. The schedule required by this item is included in Notes  12  and  16  to the Consolidated Financial Statements\. All other financial statement schedules are not required or are inapplicable and therefore have been omitted\.

(3)\. Exhibit List\.

The exhibits required by this item are listed below\. The management contracts and compensatory plans or arrangements required to be filed as an exhibit to this Form 10\-K are listed as Exhibits 10\.10 through 10\.22\.

Note to Exhibits : Any representations and warranties of a party set forth in any agreement (including all exhibits and schedules thereto) filed with this Annual Report on Form 10\-K have been made solely for the benefit of the other party to the agreement\. Some of those representations and warranties were made only as of the date of the agreement or such other date as specified in the agreement, may be subject to a contractual standard of materiality different from what may be viewed as material to stockholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters as facts\. Such agreements are included with this filing only to provide investors with information regarding the terms of the agreements, and not to provide investors with any other factual or disclosure information regarding the registrant or its business\.

|         |                                                                                |
| ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 3\.1(a) | [Delta's Amended and Restated Certificate of Incorporation (Filed as Exhibit 3\.1 to Delta's Current Report on Form 8\-K as filed on April 30, 2007)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000118811207001266/ex3-1.htm)  |

|          |                                                                                |
| -------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 3\.1 (b) | [Amendment to Amended and Restated Certificate of Incorporation (Filed as Exhibit 3\.1 to Delta's Current Report on Form 8\-K as filed on June 27, 2014)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000101968714002579/delta_8k-ex0301.htm) |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| 3\.2 | [Delta's Bylaws (Filed as Exhibit 3\.1 to Delta's Current Report on Form 8\-K as filed on February 8, 2019)\.\*](http://www.sec.gov/Archives/edgar/data/27904/000168316819000302/delta_8k-ex0301.htm)  |

 101


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

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

flights plus a variable reimbursement (incentive payment for operational performance) based on agreed performance metrics, subject to annual 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, and, in some cases, the Company owns or leases some or all of the aircraft subject to the CPA, and leases or subleases, as applicable, such aircraft to the regional carrier\. United's CPAs are for 559 regional aircraft as of December 31, 2018, 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\.

United recorded approximately $979 million, $907 million and $935 million in expenses related to its CPAs with its regional carriers, in which United is a minority shareholder, for the years ended December 31, 2018, 2017 and 2016, respectively\. There were approximately $53 million and $24 million in accounts payable due to these companies as of December 31, 2018 and December 31, 2017, respectively\. There were no material accounts receivables due from these companies as of December 31, 2018 and December 31, 2017\. The CPAs with these related parties were executed in the ordinary course of business\.

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 assumptions as of December 31, 2018, our future payments through the end of the terms of our CPAs are presented in the table below (in billions):

|            |        |
| ---------- | ------ |
| 2019       | $2\.2  |
| 2020       | 2\.0   |
| 2021       | 1\.8   |
| 2022       | 1\.4   |
| 2023       | 0\.8   |
| After 2023 | 3\.1   |
|            | $11\.3 |

The actual amounts we pay to our regional operators under CPAs could differ materially from these estimates\. For example, a 10% increase or decrease in scheduled block hours for all of United's regional operators (whether as a result of changes in average daily utilization or otherwise) in 2019 would result in a corresponding change in annual cash obligations under the CPAs of approximately $160 million\.

**NOTE 12 \- VARIABLE INTEREST ENTITIES**

Variable interests are contractual, ownership or other monetary interests in an entity that change with fluctuations in the fair value of the entity's net assets exclusive of variable interests\. A VIE can arise from items such as lease agreements, loan arrangements, guarantees or service contracts\. An entity is a VIE if (a) the entity lacks sufficient equity or (b) the entity's equity holders lack power or the obligation and right as equity holders to absorb the entity's expected losses or to receive its expected residual returns\.

If an entity is determined to be a VIE, the entity must be consolidated by the primary beneficiary\. The primary beneficiary is the holder of the variable interests that has the power to direct the activities of a VIE that (i) most significantly impact the VIE's economic performance and (ii) has the obligation to absorb losses of or the right to receive benefits from the VIE that could

82


Annual Report of Southwest Airlines Co\. for year 2018

**Report of Independent Registered Public Accounting Firm**

To the Shareholders and the Board of Directors of Southwest Airlines Co\.

**Opinion on the Financial Statements**

We have audited the accompanying consolidated balance sheets of Southwest Airlines Co\. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”)\. In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U\.S\. generally accepted accounting principles\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control\-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 5, 2019 expressed an unqualified opinion thereon\.

**Adoption of New Accounting Standards**

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for its revenue from contracts with customers, postretirement benefit cost and financial derivatives instruments in 2018 due to the full retrospective adoption of ASU No\. 2014\-09, *Revenue from Contracts with Customers*, retrospective adoption of ASU No\. 2017\-07, *Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost*, and modified retrospective adoption of ASU No\. 2017\-12, T*argeted Improvements to Accounting for Hedging Activities*\.

**Basis for Opinion**

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

We conducted our audits in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud\. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to fraud or error, and performing procedures that respond to those risks\. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements\. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements\. We believe that our audits provide a reasonable basis for our opinion\.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1971\.

Dallas, Texas

February 5, 2019

115


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

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a\-15(f)\. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework)\. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2019\.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis, improve these controls and procedures over time, and correct any deficiencies that we may discover in the future\. While we believe the present design of our disclosure controls and procedures and internal control over financial reporting are effective, future events affecting our business may cause us to modify our controls and procedures\.

The Company's independent registered public accounting firm has issued an attestation report regarding its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019\.

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