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

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

Certain states may also elect to impose restrictions apart from the revised national standards\. Finally, environmental cleanup laws could require the Company to undertake or subject the Company to liability for investigation and remediation costs at certain owned or leased locations or third party disposal locations\.

Until applicability of new regulations to our specific operations is better defined and/or until pending regulations are finalized, future costs to comply with such regulations will remain uncertain but are likely to increase our operating costs over time\. While we continue to monitor these developments, the precise nature of future requirements and their applicability to the Company are difficult to predict, but the financial impact to the Company and the aviation industry could be significant\.

**Employees**

As of December 31, 2017, UAL, including its subsidiaries, had approximately 89,800 employees\. Approximately 80% of the Company’s employees were represented by various U\.S\. labor organizations\.

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

The following table reflects the Company’s represented employee groups, the number of employees per represented group, union representation for each of United’s employee groups, and the amendable date for each employee group’s collective bargaining agreement as of December 31, 2017:

|                                                            |                                                            |                                                            |                              |                                                                           |                                      |
|:----------------------------------------------------------:|:----------------------------------------------------------:|:----------------------------------------------------------:| ----------------------------:|:-------------------------------------------------------------------------:|:------------------------------------:|
|                   **Employee** **Group**                   |                   **Employee** **Group**                   |                   **Employee** **Group**                   | **Number of  <br>Employees** |                                 **Union**                                 | **Agreement Open** **for Amendment** |
|                   **Flight Attendants**                    |                   **Flight Attendants**                    |                   **Flight Attendants**                    |                       22,676 |               Association of Flight Attendants (the “AFA”)                |             August 2021              |
|                   **Passenger Service**                    |                   **Passenger Service**                    |                   **Passenger Service**                    |                       13,299 | International Association of Machinists and Aerospace Workers (the “IAM”) |            December 2021             |
|                     **Fleet Service**                      |                     **Fleet Service**                      |                     **Fleet Service**                      |                       13,187 |                                    IAM                                    |            December 2021             |
|                         **Pilots**                         |                         **Pilots**                         |                         **Pilots**                         |                       11,492 |                Air Line Pilots Association, International                 |             January 2019             |
| **Technicians and Related & Flight Simulator Technicians** | **Technicians and Related & Flight Simulator Technicians** | **Technicians and Related & Flight Simulator Technicians** |                        9,535 |            International Brotherhood of Teamsters (the “IBT”)             |            December 2022             |
|                 **Storekeeper Employees**                  |                 **Storekeeper Employees**                  |                 **Storekeeper Employees**                  |                        1,000 |                                    IAM                                    |            December 2021             |
|                      **Dispatchers**                       |                      **Dispatchers**                       |                      **Dispatchers**                       |                          402 |              Professional Airline Flight Control Association              |            December 2021             |
|                 **Fleet Tech Instructors**                 |                 **Fleet Tech Instructors**                 |                 **Fleet Tech Instructors**                 |                          111 |                                    IAM                                    |            December 2021             |
|                     **Load Planners**                      |                     **Load Planners**                      |                     **Load Planners**                      |                           71 |                                    IAM                                    |            December 2021             |
|                   **Security Officers**                    |                   **Security Officers**                    |                   **Security Officers**                    |                           51 |                                    IAM                                    |            December 2021             |
|                **Maintenance Instructors**                 |                **Maintenance Instructors**                 |                **Maintenance Instructors**                 |                           40 |                                    IAM                                    |            December 2021             |

UNITE HERE is attempting to organize United’s Catering Operations employees, who are currently unrepresented, and filed an application to do so with the National Mediation Board on January 24, 2018\.

9


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

The following breaks down merger\-related costs incurred in 2018, 2017 and 2016 (in millions):

|                                      |          |          |          |
| ------------------------------------ | -------- | -------- | -------- |
|                                      | **2018** | **2017** | **2016** |
| Consulting and professional services | **$45**  | $52      | $32      |
| Employee\-related costs ^(a)^        | **13**   | 41       | 22       |
| Banking fees                         | **—**    | —        | 36       |
| Legal and accounting fees            | **1**    | 3        | 22       |
| Other merger\-related costs ^(b)^    | **28**   | 20       | 5        |
| Total Merger\-related Costs          | **$87**  | $116     | $117     |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------- |
| (a) | Employee\-related costs consist primarily of severance, retention bonuses, and training and skill development\.  |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | Other merger\-related costs consist primarily of costs for marketing and advertising, IT, employee appreciation and company sponsored events, moving expenses, supplies, and other immaterial expenses\. |

**NOTE 12\. STOCK\-BASED COMPENSATION PLANS**

The Company has various equity incentive plans under which it may grant stock awards to directors, officers and employees\. The Company also has an employee stock purchase plan\.

The table below summarizes the components of total stock\-based compensation (in millions):

|                                                  |          |          |          |
| ------------------------------------------------ | -------- | -------- | -------- |
|                                                  | **2018** | **2017** | **2016** |
| Stock options                                    | **$3**   | $3       | $2       |
| Stock awards                                     | **23**   | 24       | 11       |
| Deferred stock awards                            | **1**    | 1        | 1        |
| Employee stock purchase plan                     | **9**    | 6        | 5        |
| Stock\-based compensation                        | **$36**  | $34      | $19      |
| Tax benefit related to stock\-based compensation | **$9**   | $13      | $7       |

Unrecognized stock\-based compensation for non\-vested options and awards and the weighted\-average period the expense will be recognized (in millions):

|                                        |            |                                         |
| -------------------------------------- | ---------- | --------------------------------------- |
|                                        | **Amount** | **Weighted\-Average**

**Period** |
| Stock options                          | **$3**     | 1\.4                                    |
| Stock awards                           | **26**     | 1\.6                                    |
| Unrecognized stock\-based compensation | **$29**    | 1\.6                                    |

The Company is authorized to issue 17 million shares of common stock under these plans, of which 9,851,918 shares remain available for future grants of either options or stock awards as of December 31, 2018\.

***Stock Options***

Stock options to purchase common stock are granted at the fair market value of the stock on the date of grant\. The stock options granted have terms of up to ten years\.

 87


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

The percentage of regional passenger capacity by region and average stage length is presented below:

|                      |          |          |          |          |          |
| -------------------- | -------- | -------- | -------- | -------- | -------- |
|                      | **2017** | **2016** | **2015** | **2014** | **2013** |
| West Coast           | 59%      | 60%      | 62%      | 66%      | 66%      |
| Pacific Northwest    | 13%      | 16%      | 19%      | 19%      | 21%      |
| Canada               | 4%       | 5%       | 7%       | 8%       | 9%       |
| Alaska               | 3%       | 4%       | 5%       | 4%       | 2%       |
| Midcon               | 21%      | 15%      | 6%       | 2%       | 1%       |
| Mexico               | —%       | —%       | 1%       | 1%       | 1%       |
| Total                | 100%     | 100%     | 100%     | 100%     | 100%     |
| Average Stage Length | 422      | 381      | 348      | 339      | 329      |

**FREQUENT FLYER PROGRAM**

In 2017, we maintained two frequent flyer plans: the Alaska Airlines Mileage Plan™ and Virgin America Elevate®\. To provide consistency and clarity to our guests, we merged the two programs throughout the year, and Elevate® was officially sunset in December 2017\.

Alaska Airlines Mileage Plan™ provides a comprehensive suite of frequent flyer benefits\. Miles can be earned by flying on our airlines or on one of our 18 airline partners, by using the Alaska Airlines credit card, or through other non\-airline partners\. Alaska's extensive list of airline partners includes carriers associated with each of the three major global alliances, making it easier for our members to earn miles and reach elite status in our frequent flyer program\. Through Alaska and our global partners, Mileage Plan™ members have access to a large network of over 900 worldwide travel destinations\. Further, members can receive 30,000 bonus miles upon signing up for the Alaska Airlines Visa Signature card and meeting a minimum spend threshold, and earn triple miles on Alaska Airlines and Virgin America purchases\. Alaska Airlines Visa Signature cardholders and small business cardholders in the U\.S\., and Platinum and World Elite Mastercard holders in Canada, also receive an annual companion ticket that allows members to purchase an additional ticket for $99 plus taxes, with no restrictions or black\-out dates, and a free first checked bag for up to seven people traveling in the same itinerary\. Earned miles can be redeemed for flights on our airlines, or partner airlines, or for upgrades to First Class on Alaska Airlines\. We believe all of these benefits give our Mileage Plan™ members more value for their travel\.

Mileage Plan™ and Elevate® revenues represented approximately 11% of Air Group's total revenues in 2017\. Mileage Plan™ helps drive revenue growth by attracting new customers and building customer loyalty through the benefits that we provide\.

**AGREEMENTS WITH OTHER AIRLINES**

Our agreements fall into three different categories: Frequent Flyer, Codeshare and Interline agreements\. Frequent Flyer agreements offer mileage credits and redemptions for our Mileage Plan™ members\. Alaska offers one of the most comprehensive frequent flyer programs for our Mileage Plan™ members through frequent flyer partnerships with 18 domestic and international carriers\.

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

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

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

 8


Annual Report of Southwest Airlines Co\. for year 2019

For air travel on Southwest, the amount of tickets that will expire unused are estimated and recognized in Passenger revenue once the scheduled flight date has passed\. Estimating the amount of tickets that will expire unused involves some level of subjectivity and judgment\. The majority of the Company's tickets sold are nonrefundable, which is the primary source of unused tickets\. The Company has a No Show policy that applies to fares that are not canceled or changed by a Customer at least ten minutes prior to a flight's scheduled departure\. See Note  1  to the Consolidated Financial Statements for further information\. According to the Company’s current "Contract of Carriage," all refundable tickets that are sold but not flown on the travel date can be reused for another flight up to a year from the date of sale, or some tickets can be refunded\. This policy also applies to unused Customer funds that may be the result of an exchange downgrade, in which a Customer exchanges their ticket from a previously purchased flight for a lower priced ticket, with the price difference being effectively refunded through it being made available for use by the Customer towards travel up to twelve months from the date of original purchase\. Fully refundable tickets rarely expire unused\. Estimates of tickets that will expire unused are based on historical experience over many years\. The Company has consistently applied this accounting method to estimate revenue from unused tickets at the date of scheduled travel\. Holding other factors constant, a 10 percent change in the Company’s estimate of the amount of tickets that will expire unused would have resulted in a  $61 million , or  less than one percent , change in Passenger revenues recognized for the  year ended December 31, 2019 \.

Events and circumstances outside of historical fare sale activity or historical Customer travel patterns can result in actual spoiled tickets differing significantly from estimates\. The Company evaluates its estimates within a narrow range of acceptable amounts\. If actual spoilage results in an amount outside of this range, estimates and assumptions are reviewed and adjustments to Air traffic liability and to Passenger revenue are recorded, as necessary\. Assumptions used to generate spoilage estimates can be impacted by several factors including, but not limited to: fare increases, fare sales, changes to the Company's ticketing policies, changes to the Company’s refund, exchange and unused funds policies, seat availability, and economic factors\. The Company’s estimation techniques have been consistently applied from year to year; however, as with any estimates, actual spoiled tickets may vary from estimated amounts\.

The Company believes it is unlikely that materially different estimates for future spoiled tickets would be reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made\.

Accounting for Long\-Lived Assets

Flight equipment and related assets make up the majority of the Company’s long\-lived assets\. Flight equipment primarily relates to the  695  Boeing 737 aircraft in the Company’s fleet at  December 31, 2019 , which are either owned or on finance lease\. The remaining  52  Boeing 737 aircraft in the Company’s fleet at  December 31, 2019 , are operated under operating leases\. The Company also has  67  B717 aircraft, which are leased/subleased to Delta\. As these aircraft were not in service for the Company, they were not included in the fleet count as of  December 31, 2019  or  2018 \. The Company also includes Assets constructed for others in its long\-lived assets\. These are airport improvement projects in which the Company is considered to have control of the asset during the construction period\. Once construction is effectively completed, the sale\-leaseback model would apply when control passes from the lessee to the lessor\. In accounting for long\-lived assets, the Company must make estimates about the expected useful lives of the assets, the expected residual values of the assets, and the potential for impairment based on the fair value of the assets and their future expected cash flows\.

The following table shows a breakdown of the Company’s long\-lived asset groups, along with information about estimated useful lives and residual values for new assets generally purchased from the manufacturer:

|                               |                        |                                   |
| ----------------------------- | ---------------------- | --------------------------------- |
|                               | Estimated useful life  | Estimated

 residual value  |
| Airframes and engines         | 25 years               | 15 percent                        |
| Spare aircraft engines        | 25 years               | 20 percent                        |
| Aircraft parts                | Fleet life             | 4 percent                         |
| Ground property and equipment | 5 to 30 years          | 0 to 10 percent                   |

56


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

|                                                                                |
| --------------------------------------------------------------------------------------- |
| **ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE** |

The information required by this item is incorporated herein by reference from our 2019 Proxy Statement\.

|                                                      |
| ---------------------------------------------------- |
| **ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES** |

The information required by this item is incorporated herein by reference from our 2019 Proxy Statement\.

**PART IV**

|                        |
| ---------------------- |
| **ITEM 15\. EXHIBITS** |

The following documents are filed as part of this report:

|     |                                  |
| --- | -------------------------------- |
| 1\. | *Exhibits:*  See Exhibit Index\. |

 96


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

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

The expected effects of adoption of the New Revenue Standard to American’s December 31, 2017 balance sheet are as follows:

|                                      |             |                      |           |
| ------------------------------------ | ----------- | -------------------- | --------- |
|                                      | As Reported | New Revenue Standard | As Recast |
| Deferred tax asset                   | $682        | $1,389               | $2,071    |
| Air traffic liability                | 3,978       | 64                   | 4,042     |
| Current loyalty program liability    | 2,791       | 384                  | 3,175     |
| Noncurrent loyalty program liability | —           | 5,647                | 5,647     |
| Total stockholder’s equity (deficit) | 14,594      | (4,706)              | 9,888     |

*Standards Effective for 2019 Reporting Periods*

***ASU 2016\-02: Leases (Topic 842) (the New Lease Standard)***

The New Lease Standard requires lessees to recognize a lease liability and a right\-of\-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the New Revenue Standard\. The New Lease Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years\. Early adoption is permitted\. American expects it will adopt the New Lease Standard effective January 1, 2019\. Entities are required to adopt the New Lease Standard using a modified retrospective approach, which results in the recast of each prior reporting period presented, for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients\. American is currently evaluating how the adoption of the New Lease Standard will impact its consolidated financial statements\. Interpretations are on\-going and could have a material impact on its implementation\. Currently, American expects that the adoption of the New Lease Standard will have a material impact on its consolidated balance sheet due to the recognition of right\-of\-use assets and lease liabilities principally for certain leases currently accounted for as operating leases\.

138


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

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

**Schedule II**

**Valuation and Qualifying Accounts**

**For the Years Ended** **December 31, 2018****,** **2017** **and** **2016**

|                                                  |                                                          |                                                                              |                    |           |                                                    |
| ------------------------------------------------ | -------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------ | --------- | -------------------------------------------------- |
| **(In millions)**

**Description**     | **Balance at**

**Beginning of**

**Period** | **Additions**

**Charged to**

**Costs and**

**Expenses** | **Deductions (a)** | **Other** | **Balance at**

**End of**

**Period** |
| **Allowance for doubtful accounts:**             |                                                          |                                                                              |                    |           |                                                    |
| 2018                                             | $7                                                       | $17                                                                          | $16                | $—        | $8                                                 |
| 2017                                             | 10                                                       | 20                                                                           | 23                 | —         | 7                                                  |
| 2016                                             | 18                                                       | 18                                                                           | 26                 | —         | 10                                                 |
| **Obsolescence allowance—spare parts:**          |                                                          |                                                                              |                    |           |                                                    |
| 2018                                             | $354                                                     | $73                                                                          | $15                | $—        | $412                                               |
| 2017                                             | 295                                                      | 75                                                                           | 17                 | 1         | 354                                                |
| 2016                                             | 235                                                      | 61                                                                           | 16                 | 15        | 295                                                |
| **Valuation allowance for deferred tax assets:** |                                                          |                                                                              |                    |           |                                                    |
| 2018                                             | $63                                                      | $2                                                                           | $6                 | $—        | $59                                                |
| 2017                                             | 68                                                       | 11                                                                           | 27                 | 11        | 63                                                 |
| 2016                                             | 48                                                       | 47                                                                           | 27                 | —         | 68                                                 |

(a) Deduction from reserve for purpose for which reserve was created\.

112


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

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

***Benefit Payments***

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

|                                                   |          |          |          |          |          |                |
| ------------------------------------------------- | -------- | -------- | -------- | -------- | -------- | -------------- |
|                                                   | **2018** | **2019** | **2020** | **2021** | **2022** | **2023\-2027** |
| Pension benefits                                  | $715     | $754     | $799     | $843     | $884     | $4,976         |
| Retiree medical and other postretirement benefits | 96       | 92       | 80       | 75       | 70       | 315            |

***Plan Assets***

The objectives of our investment policies are to: maintain sufficient income and liquidity to pay retirement benefits; produce a long\-term rate of return that meets or exceeds the assumed rate of return for plan assets; limit the volatility of asset performance and funded status; and diversify assets among asset classes and investment managers\.

Based on these investment objectives, a long\-term strategic asset allocation has been established\. This strategic allocation seeks to balance the potential benefit of improving funded position with the potential risk that the funded position would decline\. The current strategic target asset allocation is as follows:

|                                 |                   |
| ------------------------------- | ----------------- |
| **Asset Class/Sub\-Class**      | **Allowed Range** |
| Equity                          | 65% \- 90%        |
| Public:                         |                   |
| U\.S\. Large                    | 20% \- 50%        |
| U\.S\. Small/Mid                | 0% \- 10%         |
| International                   | 17% \- 27%        |
| Emerging Markets                | 5% \- 11%         |
| Alternative Investments         | 5% \- 20%         |
| Fixed Income                    | 15% \- 40%        |
| Public:                         |                   |
| U\.S\. Long Duration            | 15% \- 30%        |
| High Yield and Emerging Markets | 0% \- 10%         |
| Private Income                  | 0% \- 10%         |
| Other                           | 0% \- 5%          |
| Cash Equivalents                | 0% \- 5%          |

Public equity and emerging market fixed income securities are used to provide diversification and are expected to generate higher returns over the long\-term than U\.S\. long duration bonds\. Public stocks are managed using a value investment approach in order to participate in the returns generated by stocks in the long\-term, while reducing year\-over\-year volatility\. U\.S\. long duration bonds are used to partially hedge the assets from declines in interest rates\. Alternative (private) investments are used to provide expected returns in excess of the public markets over the long\-term\. Additionally, the pension plan’s master trust engages currency overlay managers in an attempt to increase returns by protecting non\-U\.S\. dollar denominated assets from a rise in the relative value of the U\.S\. dollar\. The pension plan’s master trust also participates in securities lending programs to generate additional income by loaning plan assets to borrowers on a fully collateralized basis\. These programs are subject to market risk\.

Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year\. Securities traded in the over\-the\-counter market are valued at the last bid price\. The money market fund is valued at fair value which represents the net asset value of the shares of such fund as of the close of business at the end of the period\. Investments in limited partnerships are carried at estimated net asset value as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships\. Common/collective trusts are valued at net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts\. The pension plan’s master trust also invests in a 103\-12 investment entity (the 103\-12 Investment Trust) which is designed to invest plan assets of more than one unrelated employer\. The 103\-12 Investment Trust is valued at net asset value which is determined by the issuer at the end of each month and is based on the aggregate fair value

110


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

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *DOT:*  In order to provide passenger and cargo air transportation in the U\.S\., a domestic airline is required to hold a certificate of public convenience and necessity issued by the DOT\. Subject to certain individual airport capacity, noise and other restrictions, this certificate permits an air carrier to operate between any two points in the U\.S\. Certificates do not expire, but may be revoked for failure to comply with federal aviation statutes, regulations, orders or the terms of the certificates\. While airlines are permitted to establish their own fares without government regulation,  the DOT has jurisdiction over the approval of international codeshare agreements, marketing alliance agreements between major domestic carriers, international and some domestic route authorities, Essential Air Service market subsidies, carrier liability for personal or property damage, and certain airport rates and charges disputes\. International treaties may also contain restrictions or requirements for flying outside of the U\.S\. and impose different carrier liability limits than those applicable to domestic flights\. The DOT has been active in implementing a variety of “consumer protection” regulations, covering subjects such as advertising, passenger communications, denied boarding compensation and tarmac delay response\.  Airlines are subject to enforcement actions that are brought by the DOT from time to time for alleged violations of consumer protection and other economic regulations\. We are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate\.  |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *FAA:*  The FAA, through Federal Aviation Regulations (FARs), generally regulates all aspects of airline operations, including establishing personnel, maintenance and flight operation standards\. Domestic airlines are required to hold a valid air carrier operating certificate issued by the FAA\. Pursuant to these regulations, we have established, and the FAA has approved, our operations specifications and a maintenance program for each type of aircraft we operate\. Each maintenance program provides for the ongoing maintenance of the relevant aircraft type, ranging from frequent routine inspections to major overhauls\. From time to time, the FAA issues airworthiness directives (ADs) that must be incorporated into our aircraft maintenance program and operations\. All airlines are subject to enforcement actions that are brought by the FAA from time to time for alleged violations of FARs or ADs\. At this time, we are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *TSA:*  Airlines serving the U\.S\. must operate a TSA\-approved Aircraft Operator Standard Security Program (AOSSP), and comply with TSA Security Directives (SDs) and regulations\. Under TSA authority, we are required to collect a September 11 Security Fee of $5\.60 per one\-way trip from passengers and remit that sum to the government to fund aviation security me asures\.  Airlines are subject to enforcement actions that are brought by the TSA from time to time for alleged violations of the AOSSP, SDs or security regulations\. We are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate\.  |

The Department of Justice and DOT have jurisdiction over airline antitrust matters\. The U\.S\. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services\. Labor relations in the air transportation industry are regulated under the Railway Labor Act\. To the extent we continue to fly to foreign countries and pursue alliances with international carriers, we may be subject to certain regulations of foreign agencies and international treaties\.

**ENVIRONMENTAL AND OCCUPATIONAL SAFETY MATTERS**

We are subject to various laws and government regulations concerning environmental matters and employee safety and health in the U\.S\. and other countries\. We are also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters\. The U\.S\. Environmental Protection Agency, OSHA, and other federal agencies have been authorized to create and enforce regulations that have an impact on our operations\. In addition to these federal activities, various states have been delegated certain authorities under these federal statutes\. Many state and local governments have adopted environmental and employee safety and health laws and regulations\. We maintain our safety, health and environmental programs in order to meet or exceed these requirements\.

In the future there may be legislation to reduce carbon and other greenhouse gas emissions\. Over the course of several years, we have transitioned to more fuel\-efficient aircraft fleets and reduced our emissions with the goal of continuing that trend\.

The Airport Noise and Capacity Act recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as they do not interfere unreasonably with interstate or foreign commerce or the national air transportation system\. Authorities in several cities have established aircraft noise reduction programs, including the imposition of nighttime curfews\. We believe we have sufficient scheduling flexibility to accommodate local noise restrictions\.

Although we do not currently anticipate that these regulatory matters, individually or collectively, will have a material effect on our financial condition, results of operations or cash flows, new regulations or compliance issues that we do not currently anticipate could have the potential to harm our financial condition, results of operations or cash flows in future periods\.

 18


Annual Report of Southwest Airlines Co\. for year 2017

**EXECUTIVE OFFICERS OF THE REGISTRANT**

The following information regarding the Company’s executive officers is as of February 1, 2018\.

|                        |                                                               |         |
| ---------------------- | ------------------------------------------------------------- | ------- |
| **Name**               | **Position**                                                  | **Age** |
| Gary C\. Kelly         | Chairman of the Board & Chief Executive Officer               | 62      |
| Thomas M\. Nealon      | President                                                     | 56      |
| Michael G\. Van de Ven | Chief Operating Officer                                       | 56      |
| Robert E\. Jordan      | Executive Vice President Corporate Services                   | 57      |
| Tammy Romo             | Executive Vice President & Chief Financial Officer            | 55      |
| Andrew M\. Watterson   | Executive Vice President & Chief Revenue Officer              | 51      |
| Gregory D\. Wells      | Executive Vice President Daily Operations                     | 59      |
| Mark R\. Shaw          | Senior Vice President, General Counsel, & Corporate Secretary | 55      |

Set forth below is a description of the background of each of the Company’s executive officers\.

*Gary C\. Kelly* has served as the Company's Chairman of the Board since May 2008 and as its Chief Executive Officer since July 2004\. Mr\. Kelly also served as President from July 2008 to January 2017, Executive Vice President & Chief Financial Officer from June 2001 to July 2004, and Vice President Finance & Chief Financial Officer from 1989 to 2001\. Mr\. Kelly joined the Company in 1986 as its Controller\.

*Thomas M\. Nealon* has served as the Company's President since January 2017\. Mr\. Nealon also served as Executive Vice President Strategy & Innovation from January 2016 to January 2017\. Prior to becoming an executive officer of the Company, Mr\. Nealon served on the Company’s Board of Directors from December 2010 until November 2015\. Mr\. Nealon has also served as Group Executive Vice President of J\.C\. Penney Company, Inc\., a retail company, from August 2010 until December 2011\. In this role Mr\. Nealon was responsible for Strategy, jcp\.com, Information Technology, Customer Insights, and Digital Ventures\. Mr\. Nealon also served as J\.C\. Penney’s Executive Vice President & Chief Information Officer from September 2006 until August 2010\. Prior to joining J\.C\. Penney, Mr\. Nealon was a partner with The Feld Group, a provider of information technology consulting services, where he served in a consultant capacity as Senior Vice President & Chief Information Officer for the Company from 2002 to 2006\. Mr\. Nealon also served as Chief Information Officer for Frito\-Lay, a division of PepsiCo, Inc\., from 1996 to 2000, and in various software engineering, systems engineering, and management positions for Frito\-Lay from 1983 to 1996\.

*Michael G\. Van de Ven* has served as the Company's Chief Operating Officer since May 2008\. Mr\. Van de Ven also served as Executive Vice President & Chief Operating Officer from May 2008 to January 2017, Chief of Operations from September 2006 to May 2008, Executive Vice President Aircraft Operations from November 2005 through August 2006, Senior Vice President Planning from August 2004 to November 2005, Vice President Financial Planning & Analysis from 2001 to 2004, Senior Director Financial Planning & Analysis from 2000 to 2001, and Director Financial Planning & Analysis from 1997 to 2000\. Mr\. Van de Ven joined the Company in 1993 as its Director Internal Audit\.

*Robert E\. Jordan* has served as the Company's Executive Vice President Corporate Services since July 2017 and as President of AirTran Airways, Inc\. since May 2011\. Mr\. Jordan also served as Executive Vice President & Chief Commercial Officer from September 2011 to July 2017, Executive Vice President Strategy & Planning from May 2008 to September 2011, Executive Vice President Strategy & Technology from September 2006 to May 2008, Senior Vice President Enterprise Spend Management from August 2004 to September 2006, Vice President Technology from 2002 to 2004, Vice President Purchasing from 2001 to 2002, Controller from 1997 to 2001, Director Revenue Accounting from 1994 to 1997, and Manager Sales Accounting from 1990 to 1994\. Mr\. Jordan joined the Company in 1988 as a programmer\.

*Tammy Romo* has served as the Company's Executive Vice President & Chief Financial Officer since July 2015\. Ms\. Romo also served as Senior Vice President Finance & Chief Financial Officer from September 2012 to July 2015, Senior Vice President of Planning from February 2010 to September 2012, Vice President of Financial Planning from September 2008 to February 2010, Vice President Controller from February 2006 to August 2008, Vice President Treasurer from September 2004 to February 2006, Senior Director of Investor Relations from March 2002 to September

32


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

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

**Number** | **Description**                                                                                |
| 4\.64                         | [Form of Amendment No\. 1 to Trust Indenture and Security Agreement among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, Wilmington Trust, National Association, as Securities Intermediary, and Wilmington Trust Company, as Indenture Trustee (Exhibit B to Note Purchase Agreement) (incorporated by reference to Exhibit 4\.9 to US Airways Group’s Current Report on Form 8\-K filed on June 6, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513250235/d548366dex49.htm)               |
| 4\.65                         | [Amended and Restated Guarantee, dated as of March 31, 2014, from American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.) relating to obligations of US Airways under the equipment notes relating to its Series 2013\-1 Pass Through Certificates (incorporated by reference to Exhibit 10\.5 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000011/d715288dex105.htm)                                                       |
| 4\.66                         | [Form of Participation Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee, Subordination Agent and Pass Through Trustee (Schedule I to Amendment No\. 1 to Note Purchase Agreement (2012\-2)) (incorporated by reference to Exhibit 4\.10 to US Airways Group’s Current Report on Form 8\-K filed on June 6, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513250235/d548366dex410.htm)                                     |
| 4\.67                         | [Form of Trust Indenture and Security Agreement among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, Wilmington Trust, National Association, as Securities Intermediary, and Wilmington Trust Company, as Indenture Trustee (Schedule II to Amendment No\. 1 to Note Purchase Agreement (2012\-2)) (incorporated by reference to Exhibit 4\.11 to US Airways Group’s Current Report on Form 8\-K filed on June 6, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513250235/d548366dex411.htm) |
| 4\.68                         | [Form of Participation Agreement (Participation Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee and Subordination Agent) (incorporated by reference to Exhibit 4\.14 to US Airways Group’s Current Report on Form 8\-K filed on December 23, 2010 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012310116213/p18414exv4w14.htm)                                                                                |
| 4\.69                         | [Form of Indenture (Trust Indenture and Security Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee) (incorporated by reference to Exhibit 4\.15 to US Airways Group’s Current Report on Form 8\-K filed on December 23, 2010 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012310116213/p18414exv4w15.htm)                                                                                |
| 4\.70                         | [Amended and Restated Guarantee, dated as of March 31, 2014, from American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.) relating to obligations of US Airways under the equipment notes relating to its Series 2010\-1 Pass Through Certificates (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000011/d715288dex101.htm)                                                       |
| 4\.71                         | [Form of Participation Agreement (Participation Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee and Subordination Agent) (incorporated by reference to Exhibit 4\.18 to US Airways Group’s Current Report on Form 8\-K filed on July 1, 2011 (Commission File No\. 1\-08444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012311063424/p18939exv4w18.htm)                                                                                |
| 4\.72                         | [Form of Indenture (Trust Indenture and Security Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee) (incorporated by reference to Exhibit 4\.19 to US Airways Group’s Current Report on Form 8\-K filed on July 1, 2011 (Commission File No\. 1\-08444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012311063424/p18939exv4w19.htm)                                                                                |
| 4\.73                         | [Guarantee, dated as of June 28, 2011, from American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.) (incorporated by reference to Exhibit 4\.23 to US Airways Group’s Current Report on Form 8\-K filed on July 1, 2011 (Commission File No\. 1\-08444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012311063424/p18939exv4w23.htm)                                                                                |
| 4\.74                         | [Amended and Restated Guarantee, dated as of March 31, 2014, from American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.) relating to obligations of US Airways under the equipment notes relating to its Series 2011\-1 Pass Through Certificates (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000011/d715288dex102.htm)                                                       |
| 4\.75                         | [Form of Participation Agreement (Participation Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee and Subordination Agent) (incorporated by reference to Exhibit 4\.18 to US Airways Group’s Current Report on Form 8\-K filed on May 16, 2012 (Commission File No\. 1\-08444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312512236751/d354045dex418.htm)                                                                                |
| 4\.76                         | [Form of Indenture (Trust Indenture and Security Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee) (incorporated by reference to Exhibit 4\.19 to US Airways Group’s Current Report on Form 8\-K filed on May 16, 2012 (Commission File No\. 1\-08444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312512236751/d354045dex419.htm)                                                                                |
| 4\.77                         | [Amended and Restated Guarantee, dated as of March 31, 2014, from American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.) relating to obligations of US Airways under the equipment notes relating to its Series 2012\-1 Pass Through Certificates (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000011/d715288dex103.htm)                                                       |

185


Annual Report of Southwest Airlines Co\. for year 2018

Company expands its international flight offerings, CBP and its requirements and resources will also become increasingly important considerations to the Company\. For instance, with the exception of flights from a small number of foreign "preclearance" locations, arriving international flights may only land at CBP\-designated airports, and CBP officers must be present and in sufficient quantities at those airports to effectively process and inspect arriving international passengers and cargo\. Thus, CBP personnel and CBP\-mandated procedures can affect the Company's operations, costs, and Customer experience\. The Company has made, and expects to continue to make, significant investments in facilities, equipment, and technologies at certain airports in order to improve the Customer experience and to assist CBP with its inspection and processing duties; however, the Company is not able to predict the impact, if any, that various CBP measures or the lack of CBP resources will have on Company revenues and costs, either in the short\-term or the long\-term\.

**Insurance**

The Company carries insurance of types customary in the airline industry and in amounts the Company deems adequate to protect the Company and its property and to comply both with federal regulations and certain of the Company's credit and lease agreements\. The policies principally provide coverage for public and passenger liability, property damage, cargo and baggage liability, loss or damage to aircraft, engines, and spare parts, and workers’ compensation\. In addition, the Company carries a cyber\-security insurance policy with regards to data protection and business interruption associated with both security breaches from malicious parties and from certain system failures\.

Although the Company has been able to purchase aviation, property, liability, and professional insurance via the commercial insurance marketplace, available commercial insurance could be more expensive in the future and/or have material differences in coverage than insurance that has historically been provided and may not be adequate to protect the Company's risk of loss from future events, including acts of terrorism\. Further, available cyber\-security insurance with regards to data protection and business interruption could be more expensive in the future and/or have material differences in coverage than insurance that has historically been provided and may not be adequate to protect the Company's risk of loss\. With respect to any insurance claims, policy coverages and claims are subject to acceptance by the many insurers involved and may require arbitration and/or mediation to effectively settle the claims over prolonged periods of time\.

**Competition**

Competition within the airline industry is intense and highly unpredictable, and Southwest currently competes with other airlines on virtually all of its scheduled routes\. As a result of moderately improved economic conditions and an increased focus by airlines on costs, the airline industry has become increasingly competitive in recent years with a healthier financial condition and improved profitability\.

Key competitive factors within the airline industry include (i) pricing and cost structure; (ii) routes, loyalty programs, and schedules; and (iii) customer service, operational reliability, and amenities\. Southwest also competes for customers with other forms of transportation, as well as alternatives to travel\. In recent years, the majority of domestic airline service has been provided by Southwest and the other largest major U\.S\. airlines, including American Airlines, Delta Air Lines, and United Airlines\. The DOT defines major U\.S\. airlines as those airlines with annual revenues of at least $1 billion; there are currently 13 passenger airlines offering scheduled service, including Southwest, that meet this standard\.

**Pricing and Cost Structure**

Pricing is a significant competitive factor in the airline industry, and the availability of fare information on the Internet allows travelers to easily compare fares and identify competitor promotions and discounts\. During 2018, the Company experienced competitive challenges associated with industry changes from both a fare level and productoffering perspective\. As discussed above under "Business \- Industry," other carrier offerings ranged from a "Basic Economy" fare product, designed to compete with ULCC fares, to a "Premium Economy" product, targeted to appeal to customers willing to pay a premium for additional amenities\. Also in response to ULCC pricing, some carriers have removed their fare floors for certain routes, leading to a lower fare offering across the industry\. These changes have put increased pressure on the industry's fare environment and have created a challenging revenue environment\.

Pricing can be driven by a variety of factors\. For example, airlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors and/or cash flow\. In addition, multiple airlines have been

17


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

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

***ASU 2017\-07: Compensation \- Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the New Retirement Standard)***

The New Retirement Standard requires all components of American’s net periodic benefit cost (income), with the exception of service cost, previously reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense)\. The New Retirement Standard is required to be applied retrospectively, which results in the recast of each prior reporting period presented\. The adoption of the New Retirement Standard has no impact on pre\-tax income or net income reported\. See recast 2017 statement of operations data presented below for the expected effects of adoption\.

***ASU 2016\-01: Financial Instruments \- Overall (Subtopic 825\-10)***

This ASU makes several modifications to Subtopic 825\-10, including the elimination of the available\-for\-sale classification of equity investments, and it requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income\. This standard is applied prospectively as of the beginning of the year of adoption\. The adoption of this standard is not expected to have a material impact on American’s consolidated financial statements\.

***ASU 2016\-18: Statement of Cash Flows (Topic 230): Restricted Cash***

This ASU requires that the change in total cash, cash at beginning of period and cash at end of period on the statement of cash flows include restricted cash and restricted cash equivalents and also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows\. This standard is required to be applied retrospectively, which results in the recast of each prior reporting period statement of cash flows presented\. The adoption of this standard is not expected to have a material impact on American’s consolidated financial statements\.

***Impacts to*** ***2017*** ***Results***

The expected effects of adoption of the New Revenue Standard and New Retirement Standard to American’s statement of operations for the twelve months ended December 31, 2017 are as follows:

|                                  |             |                         |                      |                         |           |
| -------------------------------- | ----------- | ----------------------- | -------------------- | ----------------------- | --------- |
|                                  |             | New Revenue Standard    | New Revenue Standard | New Retirement Standard |           |
|                                  | As Reported | Deferred Revenue Method | Reclassifications    | Reclassifications       | As Recast |
| Operating revenues:              |             |                         |                      |                         |           |
|  Passenger                       | $36,133     | $311                    | $2,687               | $—                      | $39,131   |
|  Cargo                           | 800         | —                       | 90                   | —                       | 890       |
|  Other                           | 5,262       | —                       | (2,673)              | —                       | 2,589     |
|  Total operating revenues        | 42,195      | 311                     | 104                  | —                       | 42,610    |
|  Total operating expenses        | 38,163      | —                       | 104                  | 138                     | 38,405    |
| Operating income                 | 4,032       | 311                     | —                    | (138)                   | 4,205     |
|  Total nonoperating expense, net | (788)       | —                       | —                    | 138                     | (650)     |
| Income before income taxes       | 3,244       | 311                     | —                    | —                       | 3,555     |
| Income tax provision  ^(1)^      | 1,322       | 948                     | —                    | —                       | 2,270     |
| Net income                       | $1,922      | $(637)                  | $—                   | $—                      | $1,285    |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | The adjustment to the  2017  income tax provision includes an  $830 million  special charge to reduce American’s deferred tax asset associated with loyalty program liabilities as a result of H\.R\. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act), enacted in December 2017 that reduced the federal corporate income tax rate from  35%  to  21% \. |

137


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

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

ITEM 1A\. RISK FACTORS

Risk Factors Relating to Delta

Our business and results of operations are dependent on the price of aircraft fuel\. High fuel costs or cost increases, including in the cost of crude oil, could have a material adverse effect on our operating results\.

Our operating results are significantly impacted by changes in the price of aircraft fuel\. Over the last decade, fuel prices have increased substantially at times and have been highly volatile during the last several years\. In  2017 , our average fuel price per gallon, including the impact of fuel hedges, was  $1\.68 , a  12\.8%  increase from our average fuel price in  2016 \. In  2016 , our average fuel price per gallon was  $1\.49 , a 21\.6% decrease from our average fuel price in  2015 \. In  2015 , our average fuel price per gallon was  $1\.90 , a 45\.2% decrease from our average fuel price in 2014\. Fuel costs represented  19\.2% ,  18\.3%  and  23\.0%  of our operating expense in  2017 ,  2016  and  2015 , respectively\.

Our ability to pass along rapidly increasing fuel costs to our customers may be affected by the competitive nature of the airline industry\. Because passengers often purchase tickets well in advance of their travel, a significant rapid increase in fuel price may result in the fare charged not covering that increase\. At times in the past, we often were not able to increase our fares to offset fully the effect of increases in fuel costs, and we may not be able to do so in the future\.

We acquire a significant amount of jet fuel from our wholly owned subsidiary, Monroe, and through strategic agreements that Monroe has with third parties\. The cost of the fuel we purchase under these arrangements remains subject to volatility in the cost of crude oil and jet fuel\. In addition, we continue to purchase a significant amount of aircraft fuel in addition to what we obtain from Monroe\. Our aircraft fuel purchase contracts alone do not provide material protection against price increases as these contracts typically establish the price based on industry standard market price indices\.

Fuel hedging activities are intended to manage the financial impact of the volatility in the price of jet fuel\. The effects of rebalancing our hedge portfolio and mark\-to\-market adjustments may have a negative effect on our financial results\.

We have recently managed our fuel price risk through a hedging program intended to reduce the financial impact from changes in the price of fuel as fuel prices are subject to potential volatility\.  We may utilize different contract and commodity types in this program and test their economic effectiveness against our financial targets\. We closely monitor the hedge portfolio and rebalance the portfolio based on market conditions, which may result in locking in gains or losses on hedge contracts prior to their settlement dates\. Our hedging program may not be successful in providing price protection due to market conditions and the choice of hedging instruments\. In addition, we record mark\-to\-market adjustments ("MTM adjustments") on our fuel hedges\. MTM adjustments are based on market prices at the end of the reporting period for contracts settling in future periods\. Losses from rebalancing or MTM adjustments (or both) may have a negative impact on our financial results\.

Our fuel hedge contracts may contain margin funding requirements, which require us to post margin to counterparties or cause counterparties to post margin to us as market prices in the underlying hedged items change\. If fuel prices decrease significantly from the levels existing at the time we enter into fuel hedge contracts, we may be required to post a significant amount of margin, which could have a material impact on the level of our unrestricted cash and cash equivalents and short\-term investments\.

Significant extended disruptions in the supply of aircraft fuel, including from Monroe, could have a material adverse effect on our operations and operating results\.

Weather\-related events, natural disasters, political disruptions or wars involving oil\-producing countries, changes in governmental policy concerning aircraft fuel production, transportation, taxes or marketing, changes in refining capacity, environmental concerns and other unpredictable events may impact crude oil and fuel supply and could result in shortages in the future\. Shortages in fuel supplies could have negative effects on our results of operations and financial condition\.

 12


Annual Report of Southwest Airlines Co\. for year 2017

The Company also has some risk associated with changing interest rates due to the short\-term nature of its invested cash, which totaled $1\.5 billion, and short\-term investments, which totaled $1\.8 billion at December 31, 2017\. See Notes 1 and 11 to the Consolidated Financial Statements for further information\. The Company currently invests available cash in certificates of deposit, highly rated money market instruments, investment grade commercial paper, treasury securities, U\.S\. government agency securities, and other highly rated financial instruments, depending on market conditions and operating cash requirements\. Because of the short\-term nature of these investments, the returns earned parallel closely with short\-term floating interest rates\. The Company has not undertaken any additional actions to cover interest rate market risk and is not a party to any other material market interest rate risk management activities\.

A hypothetical 10 percent change in market interest rates as of December 31, 2017, would not have a material effect on the fair value of the Company’s fixed\-rate debt instruments\. See Note 11 to the Consolidated Financial Statements for further information on the fair value of financial instruments\. A change in market interest rates could, however, have a corresponding effect on earnings and cash flows associated with the Company’s floating\-rate debt, invested cash (excluding cash collateral deposits held, if applicable), floating\-rate aircraft leases, and short\-term investments because of the floating\-rate nature of these items\. Assuming floating market rates in effect as of December 31, 2017 were held constant throughout a 12\-month period, a hypothetical 10 percent change in those rates would have an immaterial impact on the Company’s net earnings and cash flows\. Utilizing these assumptions and considering the Company’s cash balance (excluding the impact of cash collateral deposits held or provided to counterparties, if applicable), short\-term investments, and floating\-rate debt outstanding at December 31, 2017, an increase in rates would have a net positive effect on the Company’s earnings and cash flows, while a decrease in rates would have a net negative effect on the Company’s earnings and cash flows\. However, a 10 percent change in market rates would not impact the Company’s earnings or cash flow associated with the Company’s publicly traded fixed\-rate debt\.

The Company is also subject to a financial covenant included in its revolving credit facility, and is subject to credit rating triggers related to its credit card transaction processing agreements, the pricing related to any funds drawn under its revolving credit facility, and some of its hedging counterparty agreements\. Certain covenants include the maintenance of minimum credit ratings and/or triggers that are based on changes in these ratings\. The Company’s revolving credit facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre\-tax income to fixed obligations, as defined\. As of December 31, 2017, the Company was in compliance with this covenant and there were no amounts outstanding under the revolving credit facility\. However, if conditions change and the Company fails to meet the minimum standards set forth in the revolving credit facility, there could be a reduction in the availability of cash under the facility, or an increase in the costs to keep the facility intact as written\. The Company’s hedging counterparty agreements contain ratings triggers in which cash collateral could be required to be posted with the counterparty if the Company’s credit rating were to fall below investment grade by two of the three major rating agencies, and if the Company was in a net liability position with the counterparty\. See Note 10 to the Consolidated Financial Statements for further information\.

The Company currently has agreements with organizations that process credit card transactions arising from purchases of air travel tickets by its Customers utilizing American Express, Discover, and MasterCard/VISA\. Credit card processors have financial risk associated with tickets purchased for travel because the processor generally forwards the cash related to the purchase to the Company soon after the purchase is completed, but the air travel generally occurs after that time; therefore, the processor will have liability if the Company does not ultimately provide the air travel\. Under these processing agreements, and based on specified conditions, increasing amounts of cash reserves could be required to be posted with the counterparty\.

A majority of the Company’s sales transactions are processed by Chase Paymentech\. Should chargebacks processed by Chase Paymentech reach a certain level, proceeds from advance ticket sales could be held back and used to establish a reserve account to cover such chargebacks and any other disputed charges that might occur\. Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels below investment grade\. Cash reserve requirements are based on the Company’s public debt rating and a corresponding percentage of the Company’s Air traffic liability\.

69


Annual Report of Southwest Airlines Co\. for year 2019

discretionary, special $124 million pre\-tax profitsharing award for Boeing compensation which was accrued in fourth quarter 2019\. Based on current cost trends and anticipated capacity, the Company expects  first quarter 2020  Salaries, wages, and benefits expense per ASM, excluding profitsharing expense, to increase, compared with  first quarter 2019 \.

During 2019, the Company conducted negotiations with various unionized Employee groups\. The following table sets forth the Company’s unionized Employee groups with amendable contracts that are currently in negotiations on collective\-bargaining agreements:

|                                                                                |                                     |                                                                                |                    |
| -------------------------------------------------------------------------------------------------- | ----------------------------------- | ----------------------------------------------------------------------------------- | ------------------ |
| **Employee Group**                                                                                | **Approximate Number of Employees** | **Representatives**                                                                 | **Amendable Date** |
| Southwest Flight Attendants                                                                        | 16,000                              | Transportation Workers of America, AFL\-CIO, Local 556 ("TWU 556")                  | November 2018      |
| Southwest Customer Service Agents, Customer Representatives, and Source of Support Representatives | 7,200                               | International Association of Machinists and Aerospace Workers, AFL\-CIO ("IAM 142") | December 2018      |
| Southwest Dispatchers                                                                              | 400                                 | Transportation Workers of America, AFL\-CIO, Local 550 ("TWU 550")                  | June 2019          |
| Southwest Flight Crew Training Instructors                                                         | 130                                 | Transportation Workers of America, AFL\-CIO, Local 557 ("TWU 557")                  | January 2020       |
| Southwest Meteorologists                                                                           | 10                                  | TWU 550                                                                             | June 2019          |

In addition to the above, the Southwest Airlines Pilots' Association (“SWAPA”), which represents the Company's approximately 9,300 Pilots, has notified the Company of its request to begin discussions on a new agreement, prior to the current contract amendable date of September 1, 2020\. The Company and SWAPA are scheduled for initial discussions in first quarter 2020\.

Fuel and oil expense for  2019  decrease d by  $269 million , or  5\.8  percent, compared with  2018 \. On a per ASM basis, Fuel and oil expense  decrease d  4\.5  percent, compared with  2018 \. On both a dollar and per ASM basis, the decreases were primarily attributable to lower market jet fuel prices\. The Company's  2019  average economic jet fuel cost per gallon  decrease d  5\.0 percent , year\-over\-year, to $ 2\.09  from  $2\.20 \. See  Note Regarding Use of Non\-GAAP Financial Measures  and the  Reconciliation of Reported Amounts to Non\-GAAP Financial Measures  for additional detail regarding non\-GAAP financial measures\. These figures include  $\.05  per gallon in premium expense and  $\.02  per gallon in favorable cash settlements from fuel derivative contracts in 2019, compared with  $\.06  per gallon in premium expense and  $\.07  per gallon in favorable cash settlements from fuel derivative contracts in 2018\. The  decrease s were partially offset by a decline in the Company's fuel efficiency during  2019 , compared with  2018 , when measured on the basis of ASMs generated per gallon of fuel\. The decline in fuel efficiency was primarily due to the removal of the Company's most fuel efficient aircraft from its schedule as a result of the MAX groundings\.

As of  January 17, 2020 , on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:

|                 |                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |
| --------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| **Period**      | **Maximum percent of estimated fuel consumption covered by fuel derivative contracts at varying West Texas Intermediate/Brent Crude Oil, Heating Oil, and Gulf Coast Jet Fuel\-equivalent price levels (a)** | **Maximum percent of estimated fuel consumption covered by fuel derivative contracts at varying West Texas Intermediate/Brent Crude Oil, Heating Oil, and Gulf Coast Jet Fuel\-equivalent price levels (a)** | **Maximum percent of estimated fuel consumption covered by fuel derivative contracts at varying West Texas Intermediate/Brent Crude Oil, Heating Oil, and Gulf Coast Jet Fuel\-equivalent price levels (a)** | **Maximum percent of estimated fuel consumption covered by fuel derivative contracts at varying West Texas Intermediate/Brent Crude Oil, Heating Oil, and Gulf Coast Jet Fuel\-equivalent price levels (a)** | **Maximum percent of estimated fuel consumption covered by fuel derivative contracts at varying West Texas Intermediate/Brent Crude Oil, Heating Oil, and Gulf Coast Jet Fuel\-equivalent price levels (a)** |
| **2020**        | 59%                                                                                | 59%                                                                                | 59%                                                                                | 59%                                                                                | 59%                                                                                |
| **2021**        | 54%                                                                                | 54%                                                                                | 54%                                                                                | 54%                                                                                | 54%                                                                                |
| **2022**        | 31%                                                                                | 31%                                                                                | 31%                                                                                | 31%                                                                                | 31%                                                                                |
| **Beyond 2022** | less than 5%                                                                                | less than 5%                                                                                | less than 5%                                                                                | less than 5%                                                                                | less than 5%                                                                                |

44


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

***Our ability to utilize our NOL Carryforwards may be limited\.***

Under the Internal Revenue Code of 1986, as amended (the Code), a corporation is generally allowed a deduction for NOLs carried over from prior taxable years (NOL Carryforwards)\. As of December 31, 2018, we had available NOL Carryforwards of approximately $10\.2 billion for regular federal income tax purposes that will expire, if unused, beginning in 2022, and approximately $3\.2 billion for state income tax purposes that will expire, if unused, between 2019 and 2038\. Our NOL Carryforwards are subject to adjustment on audit by the Internal Revenue Service and the respective state taxing authorities\.

A corporation’s ability to deduct its federal NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Code (Section 382) if it undergoes an “ownership change” as defined in Section 382 (generally where cumulative stock ownership changes among material stockholders exceed 50 percent during a rolling three\-year period)\. We experienced an ownership change in connection with our emergence from the Chapter 11 Cases and US Airways Group experienced an ownership change in connection with the Merger\. The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy\. We elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9\.0 billion (with $8\.4 billion of unlimited NOL still remaining at December 31, 2018) of our federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382\. If the special rules are determined not to apply, our ability to utilize such federal NOL Carryforwards may be subject to limitation\. Substantially all of our remaining federal NOL Carryforwards attributable to US Airways Group and its subsidiaries are subject to limitation under Section 382 as a result of the Merger; however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation\. Similar limitations may apply for state income tax purposes\.

Notwithstanding the foregoing, an ownership change subsequent to our emergence from the Chapter 11 Cases may severely limit or effectively eliminate our ability to utilize our NOL Carryforwards and other tax attributes\. To reduce the risk of a potential adverse effect on our ability to utilize our NOL Carryforwards, our Certificate of Incorporation contains transfer restrictions applicable to certain substantial stockholders\. These restrictions may adversely affect the ability of certain holders of AAG common stock to dispose of or acquire shares of AAG common stock\. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, no assurance can be given that an ownership change will not occur even with these restrictions in place\.

Our ability to use our NOL Carryforwards also will depend on the amount of taxable income generated in future periods\. The NOL Carryforwards may expire before we can generate sufficient taxable income to use them\.

***We have a significant amount of goodwill, which is assessed for impairment at least annually\. In addition, we may never realize the full value of our intangible assets or long\-lived assets, causing us to record material impairment charges\.***

Goodwill and indefinite\-lived intangible assets are not amortized, but are assessed for impairment at least annually, or more frequently if conditions indicate that an impairment may have occurred\. In accordance with applicable accounting standards, we first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test\. In addition, we are required to assess certain of our other long\-lived assets for impairment if conditions indicate that an impairment may have occurred\.

Future impairment of goodwill or other long\-lived assets could be recorded in results of operations as a result of changes in assumptions, estimates, or circumstances, some of which are beyond our control\. There can be no assurance that a material impairment charge of goodwill or tangible or intangible assets will be avoided\. The value of our aircraft could be impacted in future periods by changes in supply and demand for these aircraft\. Such changes in supply and demand for certain aircraft types could result from grounding of aircraft by us or other airlines\. An impairment charge could have a material adverse effect on our business, results of operations and financial condition\.

***The price of AAG common stock has recently been and may in the future be volatile\.***

The market price of AAG common stock has fluctuated in the past, and may fluctuate substantially in the future, due to a variety of factors, many of which are beyond our control, including:

|   |                                                          |
| - | -------------------------------------------------------- |
| • | macro\-economic conditions, including the price of fuel; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------- |
| • | changes in market values of airline companies as well as general market conditions; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------- |
| • | our operating and financial results failing to meet the expectations of securities analysts or investors; |

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Annual Report of Southwest Airlines Co\. for year 2019

Item 7 \.  Management's Discussion and Analysis of Financial Condition and Results of Operations

YEAR IN REVIEW

For the  47 ^th^  consecutive year, the Company was profitable, recording GAAP and non\-GAAP results for  2019  and  2018  as noted in the following tables\. See  Note Regarding Use of Non\-GAAP Financial Measures  and the  Reconciliation of Reported Amounts to Non\-GAAP Financial Measures  for additional detail regarding non\-GAAP financial measures\.

|                                         |                  |                  |                    |
| --------------------------------------- | ---------------- | ---------------- | ------------------ |
|                                         | **Year ended**   | **Year ended**   |                    |
| (in millions, except per share amounts) | **December 31,** | **December 31,** |                    |
| GAAP                                    | **2019**         | **2018**         | **Percent Change** |
| Operating income                        | $2,957           | $3,206           | (7\.8)             |
| Net income                              | $2,300           | $2,465           | (6\.7)             |
| Net income per share, diluted           | $4\.27           | $4\.29           | (0\.5)             |
| Non\-GAAP                               |                  |                  |                    |
| Operating income                        | $2,957           | $3,167           | (6\.6)             |
| Net income                              | $2,300           | $2,435           | (5\.5)             |
| Net income per share, diluted           | $4\.27           | $4\.24           | 0\.7               |

Net income for the year ended  December 31, 2019 , was  $2\.3 billion , a  6\.7 percent  decrease  year\-over\-year, as compared to  2018  Net income of  $2\.5 billion \. Diluted earnings per share for  2019  was  $4\.27 , as compared with  $4\.29  for  2018 \. For the year ended December 31, 2019, Non\-GAAP Net income was also  $2\.3 billion , a  5\.5 percent  decrease  year\-over\-year\. Non\-GAAP diluted earnings per share for  2019  was also  $4\.27 , as compared with  $4\.24  for  2018 \. The  decrease  in GAAP Net income was primarily due to the impact of the Federal Aviation Administration ("FAA") grounding of the Boeing 737 MAX aircraft ("MAX"), unscheduled maintenance disruptions in first quarter 2019, and the U\.S\. government shutdown in first quarter 2019\. The  decrease  in GAAP Net income also resulted from an  8\.4 percent   increase  in Salaries, wages, and benefits expense, which included a discretionary, special $124 million pre\-tax profitsharing award which was accrued in fourth quarter 2019, coupled with a  6\.1 percent   increase  in Other operating expenses\. These increases were partially offset by a  2\.1 percent   increase  in Operating revenues, and a  5\.8 percent   decrease  in Fuel and oil expense\. See below for further information\. Operating income for the year ended  December 31, 2019 , was  $3\.0 billion , a  decrease  of  7\.8 percent  year\-over\-year, and non\-GAAP Operating income was also  $3\.0 billion , a  6\.6 percent  decrease  year\-over\-year\.

Boeing 737 MAX Grounding

The estimated 2019 Operating income reduction attributable to the MAX groundings from March 13, 2019, through the end of the year, was  $828 million \. The Company reached a confidential agreement (the “Boeing settlement”) with The Boeing Company on compensation related to estimated 2019 financial damages due to the grounding of the MAX\. The terms of the Boeing settlement are confidential, but are intended to provide for a substantial portion of the Company's financial damages in 2019 associated with the MAX grounding\. The Boeing settlement did not impact 2019 earnings, as substantially all of the compensation will be accounted for as a reduction of the cost basis for both owned MAX aircraft and future purchased MAX aircraft, which is expected to reduce depreciation expense in future years\. The Company’s Board of Directors authorized a discretionary, special  $124 million  pre\-tax profitsharing award for Boeing compensation which was accrued in fourth quarter 2019\. The Company continues to engage in discussions with Boeing regarding compensation for 2020 damages related to the MAX groundings; however, no settlement assumptions have been factored into the Company's 2020 outlook\. Based on continued uncertainty around the timing of MAX return to service, the Company has proactively removed the MAX from its flight schedule through June 6, 2020\. Based on recent guidance from Boeing estimating that the ungrounding of the MAX will be mid\-2020, the Company will likely extend MAX\-related flight schedule adjustments further to provide operational reliability and a dependable flight schedule

40