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

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

***Benefit Plan Assets Measured at Fair Value on a Recurring Basis***

The fair value of American’s pension plan assets at December 31, 2018 and 2017, by asset category, are as follows (in millions):

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

**Active Markets**

**for Identical Assets**

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

**Observable**

**Inputs**

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

**Unobservable**

**Inputs**

**(Level 3)** | **Total**                                           |
| Cash and cash equivalents                                                                    | $23                                                                                | $—                                                                           | $—                                                                             | $23                                                 |
| Equity securities:                                                                           |                                                                                |                                                                              |                                                                                |                                                     |
| International markets  ^(a) (b)^                                                             | 3,181                                                                                | —                                                                            | —                                                                              | 3,181                                               |
| Large\-cap companies  ^(b)^                                                                  | 2,021                                                                                | —                                                                            | —                                                                              | 2,021                                               |
| Mid\-cap companies  ^(b)^                                                                    | 583                                                                                | —                                                                            | —                                                                              | 583                                                 |
| Small\-cap companies  ^(b)^                                                                  | 122                                                                                | —                                                                            | —                                                                              | 122                                                 |
| Fixed income:                                                                                |                                                                                |                                                                              |                                                                                |                                                     |
| Corporate debt  ^(c)^                                                                        | —                                                                                | 2,116                                                                        | —                                                                              | 2,116                                               |
| Government securities  ^(d)^                                                                 | —                                                                                | 228                                                                          | —                                                                              | 228                                                 |
| U\.S\. municipal securities                                                                  | —                                                                                | 40                                                                           | —                                                                              | 40                                                  |
| Alternative instruments:                                                                     |                                                                                |                                                                              |                                                                                |                                                     |
| Private market partnerships  ^(e)^                                                           | —                                                                                | —                                                                            | 7                                                                              | 7                                                   |
| Private market partnerships measured at net asset value  ^(e) (g)^                           | —                                                                                | —                                                                            | —                                                                              | 1,188                                               |
| Common/collective trusts  ^(f)^                                                              | —                                                                                | 218                                                                          | —                                                                              | 218                                                 |
| Common/collective trusts and 103\-12 Investment Trust measured at net asset value  ^(f) (g)^ | —                                                                                | —                                                                            | —                                                                              | 227                                                 |
| Insurance group annuity contracts                                                            | —                                                                                | —                                                                            | 2                                                                              | 2                                                   |
| Dividend and interest receivable                                                             | 47                                                                                | —                                                                            | —                                                                              | 47                                                  |
| Due to/from brokers for sale of securities – net                                             | 5                                                                                | —                                                                            | —                                                                              | 5                                                   |
| Other liabilities – net                                                                      | (7)                                                                                | —                                                                            | —                                                                              | (7)                                                 |
| Total                                                                                | $5,975                                                                                | $2,602                                                                       | $9                                                                             | $10,001                                             |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(a)^ | Holdings are diversified as follows:  17%  United Kingdom,  10%  Japan,  8%  France,  7%  Switzerland,  6%  Ireland,  17%  emerging markets and the remaining  35%  with no concentration greater than 5% in any one country\. |

|       |                                                                              |
| ----- | ---------------------------------------------------------------------------- |
| ^(b)^ | There are no significant concentrations of holdings by company or industry\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(c)^ | Includes approximately  77%  investments in corporate debt with a S&P rating lower than A and  23%  investments in corporate debt with a S&P rating A or higher\. Holdings include  85%  U\.S\. companies,  12%  international companies and  3%  emerging market companies\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(d)^ | Includes approximately  32%  investments in U\.S\. domestic government securities,  37%  in emerging market government securities and  31%  in international government securities\. There are no significant foreign currency risks within this classification\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(e)^ | Includes limited partnerships that invest primarily in U\.S\. ( 94% ) and European ( 6% ) buyout opportunities of a range of privately held companies\. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated\. It is estimated that the underlying assets of these funds will be gradually liquidated over the next  one  to  ten years \. Additionally, the pension plan’s master trust has future funding commitments of approximately  $1\.0 billion  over the next  ten years \.  |

162


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

benefit obligation and the interest and service cost\. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions\.

Pension liability and future pension expense decrease as the discount rate used for the obligation increases\. We discounted future pension obligations using rates between 3\.69% and 3\.78% at December 31, 2017 and between 4\.29% and 4\.50% at December 31, 2016\. The discount rates were determined using current rates earned on high\-quality, long\-term bonds with maturities that correspond with the estimated cash distributions from each one of the defined\-benefit pension plans\. The discount rates we use are based on a yield curve that uses a pool of higher\-yielding bonds estimated to be more in line with settlement rates, as we have taken steps to ultimately terminate or settle plans that are frozen and move toward freezing benefits in active plans in the future\. If the discount rate decreased by 0\.5%, our projected benefit obligation at December 31, 2017 would increase by approximately $163 million\.

Pension expense normally increases as the expected rate of return on pension plan assets decreases\. As of December 31, 2017, we estimate that the pension plan assets will generate long\-term rates of return between 4\.25% and 5\.50%, which compares to 5\.5% and 6\.00% at December 31, 2016\. We regularly review the actual asset allocation and periodically rebalance investments as appropriate\. This expected long\-term rate of return on plan assets at December 31, 2017 is based on an allocation of U\.S\. and non\-U\.S\. equities, U\.S\. fixed\-income securities, and real estate\. A decrease in the expected long\-term rate of return of 0\.5% would increase our estimated 2018 pension expense by approximately $10 million\.

All of our defined\-benefit pension plans are now closed to new entrants\. Additionally, benefits in our non\-union defined\-benefit plans were frozen January 1, 2014\.

Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our pension plans will impact our future pension expense and liabilities\. We cannot predict what these factors will be in the future\.

See further discussion below for the impact to the accounting of pension plans due to the new retirement benefits accounting standard\.

**BUSINESS COMBINATION ACCOUNTING, GOODWILL AND INTANGIBLES**

To record the value of assets acquired and liabilities assumed as a result of our acquisition of Virgin America on December 14, 2016, we have performed a purchase price allocation utilizing the best information available to management\. The purchase price allocation is final as of December 14, 2017\. The fair values of the assets acquired and liabilities assumed were determined using market, income or cost methods\. Our consolidated balance sheet reflects goodwill in the amount of $1\.9 billion at December 31, 2017, representing the excess of the purchase price over the fair value of Virgin America’s tangible and identifiable intangible assets and liabilities\. Identifiable intangible assets recorded totaled approximately $141 million at December 31, 2017 and consisted of customer relationships, airport slots and gates\. With the exception of airport slots, all of the identified intangible assets are finite\-lived and are being amortized over their estimated economic useful lives\. Goodwill and indefinite\-lived intangible assets are not amortized, but will be tested for impairment at least annually (in the fourth quarter), or more frequently if events or circumstances indicate that an impairment may exist\.

Our impairment analysis may include a qualitative assessment to determine whether it is more likely than not that a reporting unit or intangible asset group is impaired\. If we do not perform a qualitative assessment, or if we determine it is more likely than not that the fair value of the reporting unit or intangible asset group exceeds its carrying amount, we will calculate the estimated fair value of the reporting unit or intangible asset group and an impairment charge would be recorded to reduce the carrying value to the estimated fair value\.

Qualitative factors that might indicate a need to perform an impairment analysis outside of the regular annual assessment could include, but are not limited to: 1) reduced passenger demand as a result of domestic or global economic conditions; 2) significantly ongoing higher prices for jet fuel; 3) significant ongoing lower fares or passenger yields as a result of increased competition or lower demand; 4) a significant increase in future capital expenditure commitments; and 5) significant disruptions to our operations as a result of both internal and external events such as terrorist activities, actual or threatened war, labor actions by employees, or further industry regulation\.

Our business combination accounting, as well as future impairment analyses, require management to make assumptions and apply judgment\. Key assumptions include, but are not limited to, estimating future cash flows, selecting discount rates and selecting valuation methodologies\. These estimates and assumptions are highly subjective and our ability to realize the future cash flows used in our fair value calculations may be affected by changes in economic condition, our economic performance or business strategies\.

 57


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

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

As of  December 31, 2019 , UAL and United were in compliance with their respective debt covenants\. The collateral, covenants and cross default provisions of the Company's principal debt instruments that contain such provisions are summarized in the table below:

|                                                                                |                                                                                |
| --------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Debt Instrument**                                                                                | **Collateral, Covenants and Cross Default Provisions**                                                                                |
| Various equipment notes and other notes payable                                                                                | Secured by certain aircraft\. The indentures contain events of default that are customary for aircraft financing, including in certain cases cross default to other related aircraft\.                                                                                |
| Credit Agreement

                                                                                | Secured by certain of United's international route authorities, specified take\-off and landing slots at certain airports and certain other assets\.

The Credit Agreement requires the Company to maintain at least $2\.0 billion of unrestricted liquidity at all times, which includes unrestricted cash, short\-term investments and any undrawn amounts under any revolving credit facility, and to maintain a minimum ratio of appraised value of collateral to the outstanding obligations under the Credit Agreement of 1\.6 to 1\.0 at all times\. The Credit Agreement contains covenants that, among other things, restrict the ability of UAL and its restricted subsidiaries (as defined in the Credit Agreement) to incur additional indebtedness and to pay dividends on or repurchase stock, although, as of December 31, 2019, the Company had ample ability under these restrictions to repurchase stock under the Company's share repurchase programs\.

The Credit Agreement contains events of default customary for this type of financing, including a cross default and cross acceleration provision to certain other material indebtedness of the Company\. |
| 6% Senior Notes due 2020

4\.25% Senior Notes due 2022

5% Senior Notes due 2024

4\.875% Senior Notes due 2025 | The indentures for these notes contain covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries (as defined in the indentures) to incur additional indebtedness and pay dividends on or repurchase stock, although the Company currently has ample ability under these restrictions to repurchase stock under the Company's share repurchase programs\.                                                                                |

NOTE 11 \- LEASES AND CAPACITY PURCHASE AGREEMENTS

United leases aircraft, airport passenger terminal space, aircraft hangars and related maintenance facilities, cargo terminals, other airport facilities, other commercial real estate, office and computer equipment and vehicles, among other items\. Certain of these leases include provisions for variable lease payments which are based on several factors, including, but not limited to, relative leased square footage, available seat miles, enplaned passengers, passenger facility charges, terminal equipment usage fees, departures, and airports' annual operating budgets\. Due to the variable nature of the rates, these leases are not recorded on our balance sheet as a right\-of\-use asset and lease liability\.

For leases with terms greater than 12 months, we record the related right\-of\-use asset and lease liability at the present value of fixed lease payments over the lease term\. To the extent a lease agreement includes an extension option that is reasonably certain to be exercised, we have recognized those amounts as part of our right\-of\-use assets and lease liabilities\. Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the balance sheet; we recognize lease expense for these leases on a straight\-line basis over the term of the lease\. We combine lease and non\-lease components, such as common area maintenance costs, in calculating the right\-of\-use assets and lease liabilities for all asset groups except for our CPAs, which contain embedded leases for regional aircraft\. In addition to the lease component cost for regional aircraft, our CPAs also include non\-lease components primarily related to the regional carriers' operating costs incurred in providing regional aircraft services\. We allocate consideration for the lease components and non\-lease components of each CPA based on their relative standalone values\.

79


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

Global Network

International Alliances

Our international alliance relationships are an important part of our business as they improve our access to international markets and enable us to market globally integrated air transportation services\. The most significant of these arrangements are commercial joint ventures that include joint sales and marketing coordination, co\-location of airport facilities and other commercial cooperation arrangements\. Our alliance arrangements also include reciprocal codesharing and reciprocal loyalty program participation and airport lounge access arrangements\. These alliance relationships also may present opportunities in other areas, such as airport ground handling arrangements, aircraft maintenance insourcing and joint procurement\.

Joint Venture Agreements\.  We have implemented five separate joint venture arrangements with foreign carriers, each of which has been granted antitrust immunity from the U\.S\. Department of Transportation ("DOT")\. Each of our joint venture arrangements provides for joint commercial cooperation with the relevant partner within the geographic scope of the arrangement, including the sharing of revenues and/or profits and losses generated by the parties on the joint venture routes, as well as joint marketing and sales, coordinated pricing and revenue management, network and schedule planning and other coordinated activities with respect to the parties' operations on joint venture routes\. Our implemented commercial joint ventures consist of the following:

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | A joint venture with Virgin Atlantic with respect to operations on non\-stop routes between the United Kingdom and North America\. In addition to the joint venture, we own a non\-controlling 49% equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways\.  |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | A transatlantic joint venture with Air France and KLM, both of which are subsidiaries of the same holding company, and Alitalia\. In addition to the joint venture, we own a non\-controlling 9% ownership stake in the parent company of Air France and KLM\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | A joint venture with Aeroméxico with respect to trans\-border operations on flights between the U\.S\. and Mexico\. In addition to the joint venture, we own a non\-controlling 51% equity stake in Grupo Aeroméxico, S\.A\.B\. de C\.V\., the parent company of Aeroméxico\.  In addition, we and Aeroméxico have established a joint venture relating to an airframe maintenance, repair and overhaul operation located in Queretaro, Mexico\. |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | A joint venture with Virgin Australia and its affiliated carriers with respect to operations on transpacific routes between North America and Australia/New Zealand\. |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | In 2018, we launched a joint venture with Korean Air Lines with respect to operations on transpacific routes between the United States and certain countries in Asia\.  |

In 2018, we entered into a joint venture agreement with WestJet with respect to trans\-border routes between the U\.S\. and Canada, as well as an agreement with Air France\-KLM and Virgin Atlantic to combine our separate existing transatlantic joint ventures into a single three\-party transatlantic joint venture\. Both of these agreements remain subject to required regulatory approvals\.

Enhanced Commercial Agreements with Foreign Carriers\.  We have a 9% non\-controlling ownership stake in GOL Linhas Aéreas Inteligentes, S\.A\., the parent company of Gol Linhas Aéreas (a Brazilian air carrier), with whom we have a strategic joint marketing and commercial cooperation arrangement, which includes reciprocal codesharing, loyalty program participation, airport lounge access and joint sales cooperation\.

We also own a 3% equity interest in China Eastern, with whom we have a strategic joint marketing and commercial cooperation arrangement, which also includes reciprocal codesharing, loyalty program participation, airport lounge access and joint sales cooperation\.

 3


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

governmental or regulatory actions taken by the United Kingdom or the EU in connection with or subsequent to Brexit, cannot be predicted, including whether or not regulators will continue to approve or impose material conditions on our business activities\. Any of these effects, and others we cannot anticipate, could materially adversely affect our business, results of operations and financial condition\.

***We are subject to many forms of environmental and noise regulation and may incur substantial costs as a result\.***

We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise reduction, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials\. Compliance with environmental laws and regulations can require significant expenditures, and violations can lead to significant fines and penalties\.

We are also subject to other environmental laws and regulations, including those that require us to investigate and remediate soil or groundwater to meet certain remediation standards\. Under federal law, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions\. Liability under these laws may be strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of waste directly attributable to us\. We have liability for investigation and remediation costs at various sites, although such costs currently are not expected to have a material adverse effect on our business\.

We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators\. Under these leases and agreements, we have agreed to indemnify the lessor or operator against environmental liabilities associated with the real property or operations described under the agreement, in some cases even if we are not the party responsible for the initial event that caused the environmental damage\. We also participate in leases with other airlines in fuel consortiums and fuel committees at airports, where such indemnities are generally joint and several among the participating airlines\.

Governmental authorities in several U\.S\. and foreign cities are also considering, or have already implemented, aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take offs and landings\. We have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if locally\-imposed regulations become more restrictive or widespread\.

***Our intellectual property rights, particularly our branding rights, are valuable, and any inability to protect them may adversely affect our business and financial results\.***

We consider our intellectual property rights, particularly our branding rights such as our trademarks applicable to our airline and AAdvantage loyalty program, to be a significant and valuable aspect of our business\. We protect our intellectual property rights through a combination of trademark, copyright and other forms of legal protection, contractual agreements and policing of third\-party misuses of our intellectual property\. Our failure to obtain or adequately protect our intellectual property or any change in law that lessens or removes the current legal protections of our intellectual property may diminish our competitiveness and adversely affect our business and financial results\. Any litigation or disputes regarding intellectual property may be costly and time\-consuming and may divert the attention of our management and key personnel from our business operations, either of which may adversely affect our business and financial results\.

***We are subject to risks associated with climate change, including increased regulation to reduce emissions of greenhouse gases\.***

There is increasing global regulatory focus on climate change and GHG emissions\. Efforts by the EU in 2009 to regulate flights arriving from or departing for airports outside of the EU have been postponed as members of ICAO are negotiating a global agreement on GHG emissions from the aviation sector\. In 2016, ICAO passed a resolution adopting CORSIA, which is a global, market\-based emissions offset program intended to encourage carbon\-neutral growth beyond 2020\. CORSIA was supported by the board of Airlines for America (the principal U\.S\. airline trade association) and IATA (the principal international airline trade association), and by American and many other U\.S\. and foreign airlines\. In March 2017, ICAO also adopted new aircraft certification standards to reduce carbon dioxide emissions from aircraft, which will apply to new aircraft type designs in 2020, and to aircraft type designs already in production as of 2023\. On June 27, 2018, ICAO adopted standards pertaining to the collection and sharing of information on international aviation emissions beginning in 2019\. Airline operators must prepare GHG monitoring plans by February 2019\. CORSIA will increase operating costs for American and most other airlines, including other U\.S\. airlines that operate internationally, but the implementation of a global program, as compared to regional emission reduction schemes, should ensure that these costs will be more evenly applied to American and its

28


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

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

We are managing this project and have legal title to the assets during their construction\. As each phase is completed, the assets will be sold and transferred to LAWA, including the site improvements and non\-proprietary improvements\. As we control the assets during construction, they are recognized on our balance sheet until legal title has transferred\. For 2018, we incurred approximately $7 million in costs relating to the LAX modernization project, which are included within operating property and equipment on our consolidated balance sheet as of December 31, 2018\.

***(d) Off\-Balance Sheet Arrangements***

*Aircraft*

American currently operates 389 owned aircraft and 88 leased aircraft which were financed with EETCs issued by pass\-through trusts\. These trusts are off\-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment\. Rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allow American to raise the financing for a number of aircraft at one time and, if applicable, place such funds in escrow pending a future purchase, delivery or refinancing of the relevant aircraft\. The trusts were also structured to provide for certain credit enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to American\.

Each trust covers a set number of aircraft scheduled to be delivered or refinanced upon the issuance of the EETC or within a specific period of time thereafter\. At the time of each covered aircraft financing, the relevant trust used the proceeds of the issuance of the EETC (which may have been available at the time of issuance thereof or held in escrow until financing of the applicable aircraft following its delivery) to purchase equipment notes relating to the financed aircraft\. The equipment notes are issued, at American’s election, in connection with a mortgage financing of the aircraft or, in certain cases, by a separate owner trust in connection with a leveraged lease financing of the aircraft\. In the case of a leveraged lease financing, the owner trust then leases the aircraft to American\. In both cases, the equipment notes are secured by a security interest in the aircraft\. The pass\-through trust certificates are not direct obligations of, nor are they guaranteed by, AAG or American\. However, in the case of mortgage financings, the equipment notes issued to the trusts are direct obligations of American and, in certain instances, have been guaranteed by AAG\. As of December 31, 2018, $11\.6 billion associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet\.

With respect to leveraged leases, American evaluated whether the leases had characteristics of a variable interest entity\. American concluded the leasing entities met the criteria for variable interest entities\. American generally is not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed\-price purchase option or similar feature that obligates American to absorb decreases in value or entitles American to participate in increases in the value of the aircraft\. American does not provide residual value guarantees to the bondholders or equity participants in the trusts\. Some leases have a fair market value or a fixed price purchase option that allows American to purchase the aircraft at or near the end of the lease term\. However, the option price approximates an estimate of the aircraft’s fair value at the option date\. Under this feature, American does not participate in any increases in the value of the aircraft\. American concluded it is not the primary beneficiary under these arrangements\. Therefore, American accounts for the majority of its EETC leveraged lease financings as operating leases\. American’s total future payments to the trusts of each of the relevant EETCs under these leveraged lease financings are$352 million as of December 31, 2018, which are reflected in the operating lease obligations in Note 6\.

*Letters of Credit and Other*

We provide financial assurance, such as letters of credit, surety bonds or restricted cash and investments, primarily to support projected workers’ compensation obligations and airport commitments\. As of December 31, 2018, we had $460 million of letters of credit and surety bonds securing various obligations\. The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2022\.

***(e) Legal Proceedings***

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

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed

122


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

Stock Options\.  Stock options are granted with an exercise price equal to the closing price of Delta common stock on the grant date and generally have a 10\-year term\. We determine the fair value of stock options at the grant date using an option pricing model\. As of  December 31, 2018 , there were   2\.5 million  outstanding stock option awards with a weighted average exercise price of   $48\.99  and   616,000  were exercisable\.

Performance Awards\.  Performance awards are long\-term incentive opportunities, which are payable in common stock or cash, and are generally contingent upon our achieving certain financial goals\.

Other\.  During  2018  and  2017 , we recognized   $7 million  and   $21 million , respectively, of excess tax benefits in our income tax provision\.

NOTE 14 \. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table shows the components of accumulated other comprehensive loss:

|                                                                           |                                                      |                                    |                                      |                          |
| ------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------- | ------------------------------------ | ------------------------ |
| **(in millions)**                                                         | **Pension and Other Benefits Liabilities** **^(3)^** | **Derivative Contracts and Other** | **Available\-for\-Sale Investments** | **Total**                |
| Balance at January 1, 2016 (net of tax effect of $1,222)                  | $

(7,354

)                             | $151                               | $

(72

)                | $

(7,275

) |
| Changes in value (net of tax effect of $293)                              | (482

)                                        | (13

)                       | 36                                   | (459

)            |
| Reclassifications into earnings (net of tax effect of $57) ^(1)^          | 122                                                  | (24

)                       | —                                    | 98                       |
| Balance at December 31, 2016 (net of tax effect of $1,458)                | (7,714

)                                      | 114                                | (36

)                         | (7,636

)          |
| Changes in value (net of tax effect of $32)                               | (264

)                                        | (23

)                       | 150                                  | (137

)            |
| Reclassifications into earnings (net of tax effect of $90) ^(1)^          | 166                                                  | (6

)                        | (8

)                          | 152                      |
| Balance at December 31, 2017 (net of tax effect of $1,400)                | (7,812

)                                      | 85                                 | 106                                  | (7,621

)          |
| Changes in value (net of tax effect of $88)                               | (294

)                                        | 7                                  | —                                    | (287

)            |
| Reclassifications into retained earnings (net of tax effect of $61) ^(2)^ | —                                                    | —                                  | (106

)                        | (106

)            |
| Reclassifications into earnings (net of tax effect of $57)**^(1)^**      | 181                                                  | 8                                  | —                                    | 189                      |
| Balance at December 31, 2018 (net of tax effect of $1,492)                | $

(7,925

)                             | $100                               | $—                                   | $

(7,825

) |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Amounts reclassified from AOCI for pension and other benefits liabilities and for derivative contracts designated as foreign currency cash flow hedges are recorded in miscellaneous and in passenger revenue, respectively, in the income statement\. The 2017 reclassification into earnings for available\-for\-sale investments relates to our investment in Grupo Aeroméxico and the related conversion to accounting under the equity method\. The reclassification of the unrealized gain was recorded to non\-operating expense in our income statement\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | The reclassification into retained earnings relates to our investments in GOL, China Eastern and other previously designated available\-for\-sale investments, and the related conversion to accounting for changes in fair value of these investments from AOCI to the income statement\. See Note 1, "Summary of Significant Accounting Policies," for more information\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | Includes   $688 million  of deferred income tax expense primarily related to pension and other benefit obligations that will not be recognized in net income until these obligations are fully extinguished\. We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations\. |

 93


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

***We rely on third\-party vendors for certain critical activities, which could expose us to disruptions in our operation or unexpected cost increases\.***

We rely on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, regional flying, ground handling, fueling, computer reservation system hosting, telecommunication systems, information technology infrastructure and services, and deicing, among others\.

Even though we strive to formalize agreements with these vendors that define expected service levels, our use of outside vendors increases our exposure to several risks\. In the event that one or more vendors go into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all\. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline\. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms\. These events could result in disruptions in our operations or increases in our cost structure\.

***Completion of remaining Virgin America integration activities may continue to incur substantial expenses\.***

Although the majority of our integration efforts have been completed, we continue to devote management attention, resources, and costs to integrating the business practices and operations of Virgin America\. Certain milestones must still be completed, which will lead to additional costs\. Any failure to complete these milestones in a seamless manner may create adverse impacts on guests, suppliers, employees, and other constituents\.

Success of the merger is also dependent on cultivating a united culture with cohesive values and goals\. Much of our continued success is tied to our guest loyalty\. Failure to maintain and grow the Alaska culture could strain our ability to maintain relationships with guests, suppliers, employees and other constituencies\. As part of this process, we may continue to incur substantial costs for employee programs\.

***Our plans to discontinue use of the Virgin America brand in 2019 are subject to an agreement with certain entities affiliated with the Virgin Group\.***

We are in the process of discontinuing all uses of the Virgin America brand in our operations, and anticipate the process will be complete in 2019\. The Virgin Group licensor may terminate the agreement upon the occurrence of a number of specified events, including if we commit a material breach of our obligations under the agreement that is uncured for more than 10 business days\. If we lose our rights to use the Virgin America brand before we have discontinued all uses of the brand, our current plan would need to be accelerated, which could have an adverse impact on our financial condition\.

***STRATEGY***

***The airline industry is highly competitive and susceptible to price discounting and changes in capacity, which could have a material adverse effect on our business\. If we cannot successfully compete in the marketplace, our business, financial condition, and operating results will be materially adversely affected\.***

The U\.S\. airline industry is characterized by substantial price competition\. In recent years, the market share held by low\-cost carriers and ultra low\-cost carriers has increased significantly and is expected to continue to increase\. Airlines also compete for market share by increasing or decreasing their capacity, route systems, and the number of markets served\. Several of our competitors have increased their capacity in markets we serve, particularly in our key West Coast markets\. The resulting increased competition in both domestic and international markets may have a material adverse effect on our results of operations, financial condition, or liquidity\.

We continue to strive toward maintaining and improving our competitive cost structure by setting aggressive unit cost\-reduction goals\. This is an important part of our business strategy of offering the best value to our guests through low fares while achieving acceptable profit margins and return on capital\. If we are unable to maintain our cost advantage over the long\-term and achieve sustained targeted returns on invested capital, we will likely not be able to grow our business in the future or weather industry downturns\. Therefore, our financial results may suffer\.

 21


Annual Report of Southwest Airlines Co\. for year 2018

is estimated to be completed during 2020\. The Company has determined that due to its agreed upon role in overseeing and managing these projects, it is considered the owner of these projects for accounting purposes\. LAWA is reimbursing the Company (through the RAIC credit facilities) for the site improvements and non\-proprietary improvements, while proprietary improvements will not be reimbursed\. As a result, the costs incurred to fund these projects are included within ACFO and all amounts that have been or will be reimbursed will be included within Construction obligation on the accompanying Consolidated Balance Sheet\. This transaction has no impact on the Company's Consolidated Statement of Cash Flows\.

**Dallas Love Field**

During 2008, the City of Dallas approved the Love Field Modernization Program (the "LFMP"), a project to reconstruct Dallas Love Field with modern, convenient air travel facilities\. Pursuant to a Program Development Agreement with the City of Dallas and the Love Field Airport Modernization Corporation (or the "LFAMC," a Texas non\-profit "local government corporation" established by the City of Dallas to act on the City of Dallas' behalf to facilitate the development of the LFMP), the Company managed this project\.

Although the City of Dallas received commitments from various sources that helped to fund portions of the LFMP project, including the Federal Aviation Administration, the Transportation Security Administration, and the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds\. The Company guaranteed principal and interest payments on $456 million of such bonds issued by the LFAMC\. As of December 31, 2018, $416 million of principal remained outstanding\. The Company utilized the accounting guidance provided for lessees involved in asset construction\. Upon completion of different phases of the LFMP project, the Company has placed the associated assets in service and has begun depreciating the assets over their estimated useful lives\. The corresponding LFMP liabilities are being reduced primarily through the Company's airport rental payments to the City of Dallas, as the construction costs of this project are passed through to the Company via recurring airport rates and charges\. Major construction was effectively completed by December 31, 2014\. During second quarter 2017, the City of Dallas approved using the remaining bond funds for additional terminal construction projects which were effectively completed in 2018\.

During 2015, the City of Dallas issued additional bonds for the construction of a new parking garage at Dallas Love Field, which was completed and operational in fourth quarter 2018\. The Company has not guaranteed the principal or interest payments on these bonds, but remains the accounting owner of this project\.

Construction costs recorded in ACFO for the Company's various projects as of December 31, 2018, and December 31, 2017, were as follows:

|                            |     |                       |                              |                                 |                       |                              |                                 |
| -------------------------- | --- | --------------------- | ---------------------------- | ------------------------------- | --------------------- | ---------------------------- | ------------------------------- |
|                            |     | **December 31, 2018** | **December 31, 2018**        | **December 31, 2018**           | **December 31, 2017** | **December 31, 2017**        | **December 31, 2017**           |
| (in millions)              |     | **ACFO**              | **ACFO,**

**Net (a)** | **Construction Obligation (b)** | **ACFO**              | **ACFO,**

**Net (a)** | **Construction Obligation (b)** |
| FLL Terminal               |     | $313                  | $304                         | $308                            | $258                  | $256                         | $258                            |
| LAX Terminal 1             |     | 485                   | 459                          | 476                             | 433                   | 417                          | 433                             |
| LAX Terminal 1\.5          | (c) | 99                    | 99                           | 99                              | 31                    | 31                           | 31                              |
| LFMP \- Terminal           |     | 545                   | 460                          | 502                             | 543                   | 474                          | 516                             |
| LFMP \- Parking Garage     |     | 200                   | 200                          | 200                             | 152                   | 152                          | 152                             |
| HOU International Terminal | (d) | 126                   | 115                          | 116                             | 126                   | 118                          | —                               |
|                            |     | $1,768                | $1,637                       | $1,701                          | $1,543                | $1,448                       | $1,390                          |

(a) Net of accumulated depreciation\.

(b) Construction obligation will be reduced through future facility rent payments\. These future payments are not fixed per the lease agreement, but are variable and fluctuate based on various market and other factors outside the control of the Company\.

(c) Project still in progress\.

(d) Project completed in 2015 at Houston William P\. Hobby Airport ("HOU")\.

85


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

Economic Fuel  \- best estimate of the cash cost of fuel, net of the impact of our fuel\-hedging program

Free Cash Flow \-  total operating cash flow generated less cash paid for capital expenditures

Free Cash Flow Conversion  \- free cash flow as a percentage of adjusted net income

Load Factor  \- RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline  \- represents flying Boeing 737, Airbus 320 family and Airbus 321neo jets and all associated revenues and costs

Net adjusted debt  \- long\-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities

Net adjusted debt to EBITDAR  \- represents net adjusted debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)

Productivity  \- number of revenue passengers per full\-time equivalent employee

RASM  \- operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™ and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional  \- represents capacity purchased by Alaska from Horizon, SkyWest and PenAir\. In this segment, Regional records actual on\-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPA)\. Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska and on behalf of Horizon

RPMs  \- revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield  \- passenger revenue per RPM; represents the average revenue for flying one passenger one mile

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

If any of the following occurs, our business, financial condition and results of operations could be harmed\. The trading price of our common stock could also decline\. We operate in a continually changing business environment\. In this environment, new risks may emerge, and already identified risks may vary significantly in terms of impact and likelihood of occurrence\. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward\-looking statements\.

We have adopted an enterprise\-wide risk analysis and oversight program designed to identify the various risks faced by the organization, assign responsibility for managing those risks to individual executives as well as align these risks with Board oversight\. These enterprise\-wide risks have been aligned to the risk factors discussed below\.

19


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

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

**SIGNATURES**

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

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

UNITED AIRLINES, INC\.

(Registrants) |
|  By: | /s/ Gerald Laderman                                                                   |
|      | Gerald Laderman                                                                       |
|      | Executive Vice President and Chief Financial Officer                                  |

Date: February 28, 2019

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

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

109


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

We believe that the following principal competitive factors are important to our guests:

|   |                              |
| - | ---------------------------- |
| • | Fares and ancillary services |

Ticket and other fee pricing is a significant competitive factor in the airline industry, and the increased availability of fare information on the Internet allows travelers to easily compare fares and identify competitor promotions and discounts\. Pricing is driven by a variety of factors including, but not limited to, market\-specific capacity, market share per route/geographic area, cost structure, fare vs\. ancillary revenue strategies, and demand\.

For example, airlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors\. In addition, traditional network carriers have been able to reduce their operating costs through bankruptcies and mergers, while low\-cost carriers have continued to grow their fleets and expand their networks, potentially enabling them to better control costs per available seat mile (the average cost to fly an aircraft seat one mile), which in turn may enable them to lower their fares\. These factors can reduce our pricing power and that of the airline industry as a whole\.

Domestic airline capacity is dominated by four large carriers, representing over 80% of total seats\. One of our advantages is our low fare with high value position in the industry\. However, given the large concentration of industry capacity, some carriers in our markets may discount their fares substantially to develop or increase market share\. Fares that are substantially below our cost to operate can be harmful if sustained over a long period of time\. We will defend our core markets and, if necessary, redeploy capacity to better match supply with demand\. We believe our strong financial position and low cost advantage enables us to offer competitive fares while still earning returns for our shareholders\.

|   |        |
| - | ------ |
| • | Safety |

Safety is our top priority and is at the core of everything we do\. In 2018, we were again ranked by AirlineRatings\.com as one of only two U\.S\. airlines in the Top 20 safest airlines in the world\. We also received our 17th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon aircraft technicians for their commitment to training\.

|   |                                 |
| - | ------------------------------- |
| • | Customer service and reputation |

We compete with other airlines in areas of customer service such as on\-time performance, guest amenities—including first class and other premium seating, quality of on\-board products, aircraft type and comfort\. In 2018, Alaska Airlines ranked highest in customer satisfaction among traditional network carriers by J\.D\. Power and Associates for the 11th year in a row\. Additionally, in 2018 we completed installation of Premium Class service on our B737 aircraft which provides extra legroom, early boarding, premium snacks and a complimentary alcoholic beverage\.

We also began reconfiguring the interior and livery of our Airbus fleet in 2018\. The new livery and interior reconfiguration will provide guests with one consistent brand experience across the Mainline fleet\. Airbus livery updates are expected to be complete in 2019, while the interior reconfiguration is expected to wrap up in early 2020\. We also began installation of next\-generation Gogo inflight satellite based Wi\-Fi on our entire Boeing and Airbus fleets, which is also planned to be complete in 2020\.

Our employees are a key element of our product\. We have a highly engaged workforce that strives to provide genuine and caring service to our guests both at the airport and onboard\. We heavily emphasize our service standards with our employees through training and education programs and monetary incentives related to operational performance and guest surveys\.

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------- |
| • | Routes served, flight schedules, codesharing and interline relationships, and frequent flyer programs |

We also compete with other airlines based on markets served, the frequency of service to those markets and frequent flyer opportunities\. Some airlines have more extensive route structures than we do and they offer significantly more international routes\. In order to expand opportunities for our guests, we enter into codesharing and interline relationships with other airlines that provide reciprocal frequent flyer mileage credit and redemption privileges\. These relationships allow us to offer our guests access to more destinations than we can on our own, gain exposure in markets we do not serve and allow our guests more opportunities to earn and redeem frequent flyer miles\. Our Mileage Plan™ offers some of the most comprehensive benefits to our members with the ability to earn and redeem miles on 17 partner carriers\. In 2018, we added Finnair to our list of codeshare partners, and a number of new interline partners\.

 12


Annual Report of Southwest Airlines Co\. for year 2019

Plan (ProfitSharing Plan) is a defined contribution plan to which the Company may contribute a percentage of its eligible pre\-tax profits, as defined, on an annual basis\. No Employee contributions to the ProfitSharing Plan are allowed\.

Amounts associated with the Company's defined contribution plans expensed in  2019 ,  2018 , and  2017 , reflected as a component of Salaries, wages, and benefits, were   $1\.2 billion ,   $1\.0 billion , and   $1\.0 billion , respectively\.

Postretirement Benefit Plans

The Company provides postretirement benefits to qualified retirees in the form of medical and dental coverage\. Employees must meet minimum levels of service and age requirements as set forth by the Company, or as specified in collective\-bargaining agreements with specific workgroups\. Employees meeting these requirements, as defined, may use accrued unused sick time to pay for medical and dental premiums from the age of retirement until age   65 \.

The following table shows the change in the accumulated postretirement benefit obligation ("APBO") for the years ended  December 31, 2019  and  2018 :

|                             |             |              |
| --------------------------- | ----------- | ------------ |
| **(in millions)**           | **2019**    | **2018**     |
| APBO at beginning of period | $232        | $275         |
| Service cost                | 17          | 18           |
| Interest cost               | 10          | 9            |
| Benefits paid               | (9

) | (5

)  |
| Actuarial (gain)/loss       | 38          | (69

) |
|  Plan amendments            | —           | 4            |
| APBO at end of period       | $288        | $232         |

During  2019 , the Company recorded a   $38 million  actuarial loss as an increase to the APBO with an offset to AOCI\. This actuarial loss is reflected above and resulted from changes in certain key assumptions used to determine the Company’s year\-end obligation\. The assumption change that resulted in the largest portion of the actuarial loss was the change in the discount rate used\.

All plans are unfunded, and benefits are paid as they become due\. Estimated future benefit payments expected to be paid are   $9 million  in  2020 ,   $10 million  in  2021 ,   $12 million  in  2022 ,   $13 million  in  2023 ,   $15 million  in  2024 , and   $107 million  for the next five years thereafter\.

The funded status (the difference between the fair value of plan assets and the projected benefit obligations) of the Company’s consolidated benefit plans are recognized in the Consolidated Balance Sheet, with a corresponding adjustment to AOCI\. The following table reconciles the funded status of the plans to the accrued postretirement benefit cost recognized in Other non\-current liabilities on the Company’s Consolidated Balance Sheet at  December 31, 2019  and  2018 \.

|                                               |                        |                        |
| --------------------------------------------- | ---------------------- | ---------------------- |
| **(in millions)**                             | **2019**               | **2018**               |
| Funded status                                 | $

(288

) | $

(232

) |
| Unrecognized net actuarial gain               | (24

)           | (64

)           |
| Unrecognized prior service cost               | 4                      | 5                      |
| Accumulated other comprehensive income        | 20                     | 59                     |
| Cost recognized on Consolidated Balance Sheet | $

(288

) | $

(232

) |

104


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

exposed to fluctuations in fuel prices\. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors\.

Fuel prices have fluctuated substantially over the past several years\. We cannot predict the future availability, price volatility or cost of aircraft fuel\. Natural disasters (including hurricanes or similar events in the U\.S\. Southeast and on the Gulf Coast where a significant portion of domestic refining capacity is located), political disruptions or wars involving oil\-producing countries, economic sanctions imposed against oil\-producing countries or specific industry participants, changes in fuel\-related governmental policy, the strength of the U\.S\. dollar against foreign currencies, changes in the cost to transport or store petroleum products, changes in access to petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, distribution challenges, additional fuel price volatility and cost increases in the future\. See Part I, Item 1A\. Risk Factors – “*Our business is very dependent on the price and availability of aircraft fuel\. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity*\.”

**Seasonality and Other Factors**

Due to the greater demand for air travel during the summer months, revenues in the airline industry in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year\. General economic conditions, fears of terrorism or war, fare initiatives, fluctuations in fuel prices, labor actions, weather, natural disasters, outbreaks of disease and other factors could impact this seasonal pattern\. Therefore, our quarterly results of operations are not necessarily indicative of operating results for the entire year, and historical operating results in a quarterly or annual period are not necessarily indicative of future operating results\.

**Domestic and Global Regulatory Landscape**

***General***

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

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

The FAA similarly exercises safety oversight and regulates most operational matters of our business, including how we operate and maintain our aircraft\. FAA requirements cover, among other things, required technology and necessary onboard equipment; systems, procedures and training necessary to ensure the continuous airworthiness of our fleet of aircraft; safety measures and equipment; crew scheduling limitations and experience requirements; and many other technical aspects of airline operations\. Additionally, our pilots and other employees are subject to rigorous certification standards, and our pilots and other crew members must adhere to flight time and rest requirements\.

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

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

***Airport Access and Operations***

Domestically, any U\.S\. airline authorized by the DOT is generally free to operate scheduled passenger service between any two points within the U\.S\. and its territories, with the exception of certain airports that require landing and take\-off rights and authorizations (slots) and other facilities, and certain airports that impose geographic limitations on operations or curtail operations based on the time of day\. Operations at three major domestic airports we serve (John F\. Kennedy International Airport (JFK) and La Guardia Airport (LGA) in New York City, and Ronald Reagan Washington National Airport (DCA) in Washington, D\.C\.) and many foreign airports we serve (including LHR) are regulated by governmental entities through allocations of slots or similar regulatory mechanisms that limit the rights of carriers to conduct operations at those airports\. Each slot represents the authorization to land at or take off from the particular airport during a specified time period\. In addition to slot restrictions, operations at LGA and DCA are also limited based on a so\-called “perimeter rule” which generally limits the stage length of the flights that can be operated from those airports to 1,500 and 1,250 miles, respectively\.

11


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

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

**Number** | **Description**                                                                                |
| 10\.51                        | [Amendment No\. 5, dated as of December 20, 2013, to the Amended and Restated Airbus A350 XWB Purchase Agreement dated as of October 2, 2007 between Airbus S\.A\.S\. and American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), including Amended and Restated Letter Agreement No\. 2, Amended and Restated Letter Agreement No\. 4, Third Amended and Restated Letter Agreement No\. 5, Amended and Restated Letter Agreement No\. 6, Amended and Restated Letter Agreement No\. 7, Amended and Restated Letter Agreement No\. 8\-2, Second Amended and Restated Letter Agreement No\. 9, Amended and Restated Letter Agreement No\. 12, Amended and Restated Letter Agreement No\. 13 and Amended and Restated Letter Agreement No\. 14 to the Amended and Restated Airbus A350 XWB Purchase Agreement dated as of October 2, 2007 between Airbus S\.A\.S\. and American Airlines, Inc\. (as successor in interest to US Airways, Inc\.) (incorporated by reference to Exhibit 10\.43 to US Airways Group’s Annual Report on Form 10\-K for the year ended December 31, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312514074631/d671157dex1043.htm) \* |
| 10\.52                        | [Second Amended and Restated Letter Agreement No\. 6, dated as of July 7, 2015 to the Amended and Restated Airbus A350 XWB Purchase Agreement, dated as of October 2, 2007, between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.) and Airbus S\.A\.S\. (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515351246/d14219dex101.htm) \*                                                                                |
| 10\.53                        | [Third Amended and Restated Letter Agreement No\. 9, dated as of April 24, 2017 to the Amended and Restated Airbus A350 XWB Purchase Agreement, dated as of October 2, 2007, by and between American Airlines, Inc\. and Airbus S\.A\.S (incorporated by reference to Exhibit 10\.4 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517239325/d416225dex104.htm) \*                                                                                |
| 10\.54                        | [Amendment No\. 6, dated as of December 15, 2015, to the Amended and Restated Airbus A350 XWB Purchase Agreement dated as of October 2, 2007 between Airbus S\.A\.S\. and American Airlines, Inc\. (as successor in interest to US Airways, Inc\.) (incorporated by reference to Exhibit 10\.97 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516474605/d78287dex1097.htm) \*                                                                                |
| 10\.55                        | [Amendment No\. 7, dated as of February 24, 2016 , to the Amended and Restated Airbus A350 XWB Purchase Agreement dated as of October 2, 2007 between Airbus S\.A\.S\. and American Airlines, Inc\. (as successor in interest to US Airways, Inc\.) (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516551225/d164093dex101.htm) \*                                                                                |
| 10\.56                        | [Amendment No\. 8, dated as of July 18, 2016, to the Amended and Restated Airbus A350 XWB Purchase Agreement, dated as of October 2, 2007, between American Airlines, Inc\. and Airbus S\.A\.S (incorporated by reference to Exhibit 10\.4 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516742263/d247546dex104.htm) \*                                                                                |
| 10\.57                        | [Amendment No\. 9, dated as of April 24, 2017, to the Amended and Restated Airbus A350 XWB Purchase Agreement, dated as of October 2, 2007, by and between American Airlines, Inc\. and Airbus S\.A\.S\. (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517239325/d416225dex103.htm) \*                                                                                |
| 10\.58                        | [Consent Agreement, dated as of October 5, 2015, between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), American Airlines, Inc\. and Airbus S\.A\.S\. (incorporated by reference to Exhibit 10\.98 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516474605/d78287dex1098.htm) \*                                                                                |
| 10\.59                        | [AMR Corporation Amended and Restated Directors Pension Benefits Plan, effective as of January 1, 2005 (incorporated by reference to Exhibit 10\.149 to AMR’s Annual Report on Form 10\-K for the year ended December 31, 2008 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620109000009/0000006201-09-000009-index.htm) †                                                                                |
| 10\.60                        | [Supplemental Executive Retirement Program for Officers of American Airlines, Inc\., as amended and restated as of January 1, 2005 (incorporated by reference to Exhibit 10\.127 to AMR’s Annual Report on Form 10\-K for the year ended December 31, 2008 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620109000009/ex10127.htm) †                                                                                |
| 10\.61                        | [Trust Agreement Under Supplemental Retirement Program for Officers of American Airlines, Inc\., as amended and restated as of June 1, 2007 (incorporated by reference to Exhibit 10\.128 to AMR’s Annual Report on Form 10\-K for the year ended December 31, 2008 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620109000009/ex10128.htm) †                                                                                |
| 10\.62                        | [Trust Agreement Under Supplemental Executive Retirement Program for Officers of American Airlines, Inc\. Participating in the Super Saver Plus Plan, as amended and restated as of June 1, 2007 (incorporated by reference to Exhibit 10\.129 to AMR’s Annual Report on Form 10\-K for the year ended December 31, 2008 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620109000009/ex10129.htm) †                                                                                |
| 10\.63                        | [American Airlines Group Inc\. 2013 Incentive Award Plan (incorporated by reference to Exhibit 4\.1 of AAG’s Form S\-8 Registration Statement, filed on December 4, 2013)\.](http://www.sec.gov/Archives/edgar/data/6201/000119312513462268/d639480dex41.htm) †                                                                                |
| 10\.64                        | [First Amendment to the American Airlines Group Inc\. 2013 Incentive Award Plan\.](https://americanairlines.gcs-web.com/email-alerts/ex106410k2017.htm) †                                                                                |
| 10\.65                        | [Form of American Airlines Group Inc\. 2013 Incentive Award Plan Restricted Stock Unit (Cash\-Settled) Award Grant Notice and Award Agreement (incorporated by reference to Exhibit 10\.125 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000004/d682697dex10125.htm) †                                                                                |

194


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

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

|                                                                          |                                                  |                                                  |                                                  |                                                                                |
|:------------------------------------------------------------------------ | ------------------------------------------------:| ------------------------------------------------:| ------------------------------------------------:|:-------------------------------------------------------------------------------:|
| **Details about AOCI Components**                                        | **Amount Reclassified from AOCI to
Income** | **Amount Reclassified from AOCI to
Income** | **Amount Reclassified from AOCI to
Income** | **Affected Line Item in
the Statement Where
Net Income is Presented** |
|                                                                          |                      **Year Ended December 31,** |                      **Year Ended December 31,** |                      **Year Ended December 31,** |                                                                                |
|                                                                          |                                         **2017** |                                         **2016** |                                         **2015** |                                                                                |
| Fuel derivative contracts                                                |                                                  |                                                  |                                                  |                                                                                |
| Fuel contracts\-reclassifications of losses into earnings (d)            |                                              $2  |                                            $217  |                                            $604  |                                  Aircraft fuel                                  |
| Pension and Postretirement liabilities                                   |                                                  |                                                  |                                                  |                                                                                |
| Amortization of unrecognized (gains) losses and prior service cost (e)   |                                              58  |                                              26  |                                              31  |                           Salaries and related costs                            |
| Investments and other                                                    |                                                  |                                                  |                                                  |                                                                                |
| Available\-for\-sale securities—reclassifications of gains into earnings |                                               —  |                                               (2 |                                               —  |                               Miscellaneous, net                                |

(a) Prior service credits increased by $0 million, $30 million and $0 million and actuarial losses increased by approximately $306 million, $560 million and $78 million for 2017, 2016 and 2015, respectively\.

(b) This amount represents the reclassification from AOCI to RE of the stranded tax effects resulting from the enactment of the Tax Act\.

(c) Deferred tax balance relates mainly to Pension and Other Postretirement Liabilities\.

(d) The last of the Company’s fuel hedge derivatives designated for cash flow hedge accounting expired in December 2016\. The 2017 amount reclassified from AOCI into fuel expense represents hedge losses on December 2016 settled trades, but for which the associated fuel purchased in December 2016 was not consumed until January 2017\. The Company’s current strategy is to not enter into transactions to hedge its fuel consumption, although the Company regularly reviews its strategy based on market conditions and other factors\.

(e) This AOCI component is included in the computation of net periodic pension and other postretirement costs (see Note 8 of this report for additional information)\.

Prior to the release of the deferred income tax valuation allowance in the third quarter of 2015, the Company recorded approximately $465 million of valuation allowance adjustments in AOCI\. Subsequent to the release of the deferred income tax valuation allowance in 2015, the $465 million debit remained within AOCI, of which $180 million related to losses on fuel hedges designated for hedge accounting and $285 million related to pension and other postretirement liabilities\. Accounting rules required the adjustments to remain in AOCI as long as the Company had fuel derivatives designated for cash flow hedge accounting and the Company continues to provide pension and postretirement benefits\. In 2016, the Company settled all of its fuel hedges and has not entered into any new fuel derivative contracts for hedge accounting\. Accordingly, the Company reclassified the $180 million to income tax expense in 2016\.

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