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

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

Medicare eligibility\. Eligible employees are required to pay a portion of the costs of their retiree medical benefits, which in some cases may be offset by accumulated unused sick time at the time of their retirement\. Plan benefits are subject to co\-payments, deductibles and other limits as described in the plans\.

The Company accounts for other postretirement benefits by recognizing the difference between plan assets and obligations, or the plan’s funded status, in its financial statements\. Other postretirement benefit expense is recognized on an accrual basis over employees’ approximate service periods and is generally calculated independently of funding decisions or requirements\. United has not been required to pre\-fund its plan obligations, which has resulted in a significant net obligation, as discussed below\. The Company’s benefit obligation was $1\.7 billion for the other postretirement benefit plans at December 31, 2017 and 2016\.

The calculation of other postretirement benefit expense and obligations requires the use of a number of assumptions, including the assumed discount rate for measuring future payment obligations and the health care cost trend rate\. The Company determines the appropriate discount rate for each of the plans based on current rates on high quality corporate bonds that would generate the cash flow necessary to pay plan benefits when due\. The Company’s weighted average discount rate to determine its benefit obligations as of December 31, 2017 was 3\.63%, as compared to 4\.07% for December 31, 2016\. The health care cost trend rate assumed for 2017 was 6\.50%, declining to 5\.0% in 2023, as compared to assumed trend rate for 2018 of 6\.25%, declining to 5\.0% in 2023\. A 1% increase in assumed health care trend rates would increase the Company’s total service and interest cost for the year ended December 31, 2017 by $11 million; whereas, a 1% decrease in assumed health care trend rates would decrease the Company’s total service and interest cost for the year ended December 31, 2017 by $8 million\. A one percentage point decrease in the weighted average discount rate would increase the Company’s postretirement benefit liability by approximately $185 million and increase the estimated 2017 benefits expense by approximately $8 million\.

Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions and prior service credits result from a retroactive reduction in benefits due under the plans\. Under the applicable accounting standards for postretirement welfare benefit plans, actuarial gains and losses and prior service credits are not required to be recognized currently, but instead may be deferred as part of accumulated other comprehensive income and amortized into expense over the average remaining service life of the covered active employees or the average life expectancy of inactive participants\. At December 31, 2017 and 2016, the Company had unrecognized actuarial gains for postretirement welfare benefit plans of $301 million and $384 million, respectively, recorded in accumulated other comprehensive income\.

***Income Taxes\.*** The Tax Act, among other changes, reduces the federal corporate income tax rate to 21% beginning in 2018, requires companies to pay a one\-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings\. As of December 31, 2017, we had not completed our analysis of all aspects of the Tax Act\. However, we have made a provisional estimate for its effect on our existing deferred tax balances and the one\-time transition tax\. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%\. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts\.

**Forward\-Looking Information**

Certain statements throughout Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report are forward\-looking and thus reflect the Company’s current expectations and beliefs with respect to certain current and future events and anticipated financial and operating performance\. Such forward\-looking statements are and will be subject to many risks and uncertainties relating to the Company’s operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward\-looking statements\. Words such as “expects,” “will,” “plans,” “anticipates,” “indicates,” “believes,” “estimates,” “forecast,” “guidance,” “outlook,” “goals” and similar expressions are intended to identify forward\-looking statements\.

44


Annual Report of DELTA AIR LINES, INC\.  for year 2019

Recently Adopted Standards

Comprehensive Income\.  In February 2018, the FASB issued ASU No\. 2018\-02, "Income Statement—Reporting Comprehensive Income (Topic 220)\." This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income/(loss) ("AOCI") to retained earnings due to the U\.S\. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017\. We adopted this standard effective January 1, 2019 with the election not to reclassify $1\.2 billion of stranded tax effects, primarily related to our pension plans, from AOCI to retained earnings\.

45


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

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

**5\. Debt**

Long\-term debt and capital lease obligations included in the consolidated balance sheets consisted of (in millions):

|                                                                                |                  |                  |
| --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ---------------- |
|                                                                                | **December 31,** | **December 31,** |
|                                                                                | **2017**         | **2016**         |
| *Secured*                                                                                |                  |                  |
| 2013 Credit Facilities, variable interest rate of 3\.55%, installments through 2020  ^(a)^                                                                      | $1,825           | $1,843           |
| 2014 Credit Facilities, variable interest rate of 3\.43%, installments through 2021  ^(a)^                                                                      | 728              | 735              |
| April 2016 Credit Facilities, variable interest rate of 3\.57%, installments through 2023  ^(a)^                                                                | 990              | 1,000            |
| December 2016 Credit Facilities, variable interest rate of 3\.48%, installments through 2023  ^(a)^                                                             | 1,238            | 1,250            |
| Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3\.00% to 9\.75%, averaging 4\.30%, maturing from 2018 to 2029  ^(b)^ | 11,881           | 10,912           |
| Equipment loans and other notes payable, fixed and variable interest rates ranging from 2\.34% to 8\.48%, averaging 3\.29%, maturing from 2018 to 2029  ^(c)^   | 5,259            | 5,343            |
| Special facility revenue bonds, fixed interest rates ranging from 5\.00% to 8\.00%, maturing from 2018 to 2035                                                  | 857              | 891              |
| Other secured obligations, fixed interest rates ranging from 3\.81% to 12\.24%, maturing from 2018 to 2028                                                      | 773              | 849              |
|                                                                                | 23,551           | 22,823           |
| *Unsecured*                                                                                |                  |                  |
| 5\.50% senior notes, interest only payments until due in 2019  ^(d)^                                                                                | 750              | 750              |
| 6\.125% senior notes, interest only payments until due in 2018  ^(d)^                                                                                | 500              | 500              |
| 4\.625% senior notes, interest only payments until due in 2020  ^(d)^                                                                                | 500              | 500              |
|                                                                                | 1,750            | 1,750            |
| Total long\-term debt and capital lease obligations                                                                                | 25,301           | 24,573           |
| Less: Total unamortized debt discount, premium and issuance costs                                                                                | 236              | 229              |
| Less: Current maturities                                                                                | 2,554            | 1,855            |
| Long\-term debt and capital lease obligations, net of current maturities                                                                                | $22,511          | $22,489          |

The table below shows the maximum availability under revolving credit facilities, all of which were undrawn, as of December 31, 2017 (in millions):

|                               |        |
| ----------------------------- | ------ |
| 2013 Revolving Facility       | $1,200 |
| 2014 Revolving Facility       | 1,000  |
| April 2016 Revolving Facility | 300    |
| Total                         | $2,500 |

Secured financings are collateralized by assets, primarily aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities and airport slots\. At December 31, 2017, we were operating 33 aircraft under capital leases\. Leases can generally be renewed at rates based on fair market value at the end of the lease term for a number of additional years\.

96


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

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

|                              |                              |                              |       |       |  |  |  |       |       |  |  |  |       |       |  |  |  |       |       |  |  |  |       |       |
|:---------------------------- |:---------------------------- |:---------------------------- | -----:| -----:|:- |:- |:- | -----:| -----:|:- |:- |:- | -----:| -----:|:- |:- |:- | -----:| -----:|:- |:- |:- | -----:| -----:|
|                              |                              |                              |  2019 |  2019 |  |  |  |  2018 |  2018 |  |  |  |  2017 |  2017 |  |  |  |  2016 |  2016 |  |  |  |  2015 |  2015 |
| West Coast                   | West Coast                   | West Coast                   |  61 % |  61 % |  |  |  |  53 % |  53 % |  |  |  |  59 % |  59 % |  |  |  |  60 % |  60 % |  |  |  |  62 % |  62 % |
| Pacific Northwest            | Pacific Northwest            | Pacific Northwest            |  10 % |  10 % |  |  |  |  11 % |  11 % |  |  |  |  13 % |  13 % |  |  |  |  16 % |  16 % |  |  |  |  19 % |  19 % |
| Canada                       | Canada                       | Canada                       |   3 % |   3 % |  |  |  |   3 % |   3 % |  |  |  |   4 % |   4 % |  |  |  |   5 % |   5 % |  |  |  |   7 % |   7 % |
| Alaska                       | Alaska                       | Alaska                       |   1 % |   1 % |  |  |  |   2 % |   2 % |  |  |  |   3 % |   3 % |  |  |  |   4 % |   4 % |  |  |  |   5 % |   5 % |
| Midcon                       | Midcon                       | Midcon                       |  25 % |  25 % |  |  |  |  30 % |  30 % |  |  |  |  21 % |  21 % |  |  |  |  15 % |  15 % |  |  |  |   6 % |   6 % |
| Mexico                       | Mexico                       | Mexico                       |    —  |    —  |  |  |  |   1 % |   1 % |  |  |  |   — % |   — % |  |  |  |   — % |   — % |  |  |  |   1 % |   1 % |
| Total                        | Total                        | Total                        | 100 % | 100 % |  |  |  | 100 % | 100 % |  |  |  | 100 % | 100 % |  |  |  | 100 % | 100 % |  |  |  | 100 % | 100 % |
| Average Stage Length (miles) | Average Stage Length (miles) | Average Stage Length (miles) |  490  |  490  |  |  |  |  468  |  468  |  |  |  |  422  |  422  |  |  |  |  381  |  381  |  |  |  |  348  |  348  |

FREQUENT FLYER PROGRAM

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 an 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 800 worldwide travel destinations\. Further, members can receive up to 40,000 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 purchases\. Alaska Airlines Visa Signature cardholders and small business cardholders in the U\.S\., and Platinum and World Elite Mastercard cardholders 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 six people traveling on the same itinerary\. Earned miles can be redeemed for flights on our airlines, or our partner airlines, for hotel stays via mileageplanhotels\.com, or for upgrades to First Class on Alaska Airlines\. We believe all of these benefits give our Mileage Plan™ members more value than competing programs\.

Mileage Plan™ revenues, including those in the Passenger revenue income statement line item, represented approximately 13% of Air Group's total revenues in 2019\. Mileage Plan™ helps drive revenue growth by attracting new customers, keeping existing customers actively engaged, 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 enable our Mileage Plan^TM^  members to earn mileage credits and make redemptions on one of our 18 domestic and international partner airlines\.

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

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

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

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

8


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

**AMERICAN AIRLINES, INC\.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In millions)**

|                                    |                             |                             |                             |
| ---------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                    | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                    | **2017**                    | **2016**                    | **2015**                    |
| **Operating revenues:**            |                             |                             |                             |
| Mainline passenger                 | $29,238                     | $27,909                     | $29,037                     |
| Regional passenger                 | 6,895                       | 6,670                       | 6,475                       |
| Cargo                              | 800                         | 700                         | 760                         |
| Other                              | 5,262                       | 4,884                       | 4,666                       |
| Total operating revenues           | 42,195                      | 40,163                      | 40,938                      |
| **Operating expenses:**            |                             |                             |                             |
| Aircraft fuel and related taxes    | 6,128                       | 5,071                       | 6,226                       |
| Salaries, wages and benefits       | 11,804                      | 10,881                      | 9,514                       |
| Regional expenses                  | 6,572                       | 6,009                       | 5,952                       |
| Maintenance, materials and repairs | 1,959                       | 1,834                       | 1,889                       |
| Other rent and landing fees        | 1,806                       | 1,772                       | 1,731                       |
| Aircraft rent                      | 1,197                       | 1,203                       | 1,250                       |
| Selling expenses                   | 1,477                       | 1,323                       | 1,394                       |
| Depreciation and amortization      | 1,702                       | 1,525                       | 1,364                       |
| Special items, net                 | 712                         | 709                         | 1,051                       |
| Other                              | 4,806                       | 4,532                       | 4,378                       |
| Total operating expenses           | 38,163                      | 34,859                      | 34,749                      |
| **Operating income**               | 4,032                       | 5,304                       | 6,189                       |
| **Nonoperating income (expense):** |                             |                             |                             |
| Interest income                    | 215                         | 104                         | 49                          |
| Interest expense, net              | (988)                       | (906)                       | (796)                       |
| Other, net                         | (15)                        | (59)                        | (774)                       |
| Total nonoperating expense, net    | (788)                       | (861)                       | (1,521)                     |
| **Income before income taxes**     | 3,244                       | 4,443                       | 4,668                       |
| Income tax provision (benefit)     | 1,322                       | 1,662                       | (3,452)                     |
| **Net income**                     | $1,922                      | $2,781                      | $8,120                      |

See accompanying notes to consolidated financial statements\.

126


Annual Report of DELTA AIR LINES, INC\.  for year 2019

|                                                                                |                                                                                |                                                                                |                                      |                                      |                                      |
|:--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |:--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |:--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |:------------------------------------:|:------------------------------------:|:------------------------------------:|
|                                                                                |                                                                                |                                                                                |                 Page                 |                 Page                 |                 Page                 |
| [ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND](http://ir.delta.com/.#i_0_295)

[RELATED STOCKHOLDER MATTERS](http://ir.delta.com/.#i_0_295) | [ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND](http://ir.delta.com/.#i_0_295)

[RELATED STOCKHOLDER MATTERS](http://ir.delta.com/.#i_0_295) | [ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND](http://ir.delta.com/.#i_0_295)

[RELATED STOCKHOLDER MATTERS](http://ir.delta.com/.#i_0_295) | [98](http://ir.delta.com/.#i_0_295)  | [98](http://ir.delta.com/.#i_0_295)  | [98](http://ir.delta.com/.#i_0_295)  |
| [ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR](http://ir.delta.com/.#i_0_298)

INDEPENDENCE                                                       | [ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR](http://ir.delta.com/.#i_0_298)

INDEPENDENCE                                                       | [ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR](http://ir.delta.com/.#i_0_298)

INDEPENDENCE                                                       | [98](http://ir.delta.com/.#i_0_298)  | [98](http://ir.delta.com/.#i_0_298)  | [98](http://ir.delta.com/.#i_0_298)  |
| [ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES](http://ir.delta.com/.#i_0_301)                                                                                | [ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES](http://ir.delta.com/.#i_0_301)                                                                                | [ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES](http://ir.delta.com/.#i_0_301)                                                                                | [99](http://ir.delta.com/.#i_0_301)  | [99](http://ir.delta.com/.#i_0_301)  | [99](http://ir.delta.com/.#i_0_301)  |
| PART IV                                                                                | PART IV                                                                                | PART IV                                                                                |                                      |                                      |                                      |
| [ITEM 15\. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES](http://ir.delta.com/.#i_0_307)                                                                                | [ITEM 15\. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES](http://ir.delta.com/.#i_0_307)                                                                                | [ITEM 15\. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES](http://ir.delta.com/.#i_0_307)                                                                                | [99](http://ir.delta.com/.#i_0_307)  | [99](http://ir.delta.com/.#i_0_307)  | [99](http://ir.delta.com/.#i_0_307)  |
| [ITEM 16\. FORM 10\-K SUMMARY](http://ir.delta.com/.#i_0_310)                                                                                | [ITEM 16\. FORM 10\-K SUMMARY](http://ir.delta.com/.#i_0_310)                                                                                | [ITEM 16\. FORM 10\-K SUMMARY](http://ir.delta.com/.#i_0_310)                                                                                | [102](http://ir.delta.com/.#i_0_310) | [102](http://ir.delta.com/.#i_0_310) | [102](http://ir.delta.com/.#i_0_310) |
| [SIGNATURES](http://ir.delta.com/.#i_0_313)                                                                                | [SIGNATURES](http://ir.delta.com/.#i_0_313)                                                                                | [SIGNATURES](http://ir.delta.com/.#i_0_313)                                                                                | [103](http://ir.delta.com/.#i_0_313) | [103](http://ir.delta.com/.#i_0_313) | [103](http://ir.delta.com/.#i_0_313) |


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

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

***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 (ROU) asset on the balance sheet for operating leases\. Accounting for finance leases is substantially unchanged\. 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\.

In the fourth quarter of 2018, American elected to early adopt the New Lease Standard as of January 1, 2018 using a modified retrospective transition, with the cumulative\-effect adjustment to the opening balance of retained earnings as of the effective date (the effective date method)\. Under the effective date method, financial results reported in periods prior to 2018 are unchanged\. American also elected the package of practical expedients, which among other things, does not require reassessment of lease classification\.

The adoption of the New Lease Standard had a significant impact on American’s consolidated balance sheet due to the recognition of approximately $10 billion of lease liabilities with corresponding right\-of\-use assets for operating leases\.

Additionally, American recognized a $197 million cumulative effect adjustment credit, net of tax, to retained earnings\. The adjustment to retained earnings was driven principally by sale\-leaseback transactions including the recognition of unamortized deferred aircraft sale\-leaseback gains\. Prior to the adoption of the New Lease Standard, gains on sale\-leaseback transactions were generally deferred and recognized in the income statement over the lease term\. Under the New Lease Standard, gains on sale\-leaseback transactions (subject to adjustment for off\-market terms) are recognized immediately\.

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

This ASU made several modifications to Subtopic 825\-10, including the elimination of the available\-for\-sale classification of equity investments, and it required equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income\. This standard was adopted prospectively as of January 1, 2018 and resulted in a $60 million cumulative effect adjustment credit to retained earnings, net of tax, related to American's investment in China Southern Airlines Company Limited (China Southern Airlines), which was previously accounted for under the cost method\.

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

This ASU required that the change in the total cash balance, cash at the beginning of the period and cash at the end of the period on the statement of cash flows include restricted cash, and also required companies that report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows\. This standard was applied retrospectively, which resulted in the recast of prior reporting periods in the statement of cash flows\. For the years ended December 31, 2018, 2017 and 2016, $11 million, $103 million and $113 million, respectively, of restricted cash is included in the total cash and restricted cash balance at the end of the period\. A reconciliation of cash and restricted cash reported on American's consolidated statements of cash flows to the amounts reported on its consolidated balance sheets is provided in a table below the Consolidated Statements of Cash Flows\.

136


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

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

We have transformed distribution to a more retail oriented, merchandised approach by introducing well\-defined and differentiated products for our customers\. We offer distinct travel experiences with clear value propositions that enable customer choice\. Delta One ^TM^ , Delta Premium Select, First Class and Delta Comfort\+ ^TM^  include varying premium amenities and services while Main Cabin and Basic Economy allow varying levels of pre\-travel flexibility as well as exceptional service once onboard the aircraft\. We expect that these merchandising initiatives as implemented across all of Delta's distribution channels will allow customers to better understand our product offerings, make it easier to buy the products they desire and increase customer satisfaction\. This merchandising effort is most effective in Delta's digital channels where customers can compare all product options in a single, easy to understand display\.

Technology Transformation

Significant progress was made in 2017 in the transformation of our information technology function to improve operational reliability and enhance disaster recovery capabilities\. Most significantly, we opened a new data center to provide redundancy for our key systems and continue the enhancement of that facility\. We also reduced the risk of technology system failures to our operations through additional disaster recovery processes and heightened emphasis on our information security program including through the hiring of an experienced information security professional as our Chief Information Security Officer\.

We are engaged in a digital transformation by continuing to invest in technology that supports our operations and provides tools for our employees, with our long term goal to convert our technology into a competitive advantage\. These investments include improvements to infrastructure and technology architecture to unify and improve access to data sources and continue innovations in customer facing applications\. This digital transformation will enhance interactions with our customers and allow us to deliver more personalized service, further enhancing the customer experience and strengthening our brand and competitive position\.

Competition

The airline industry is highly competitive, marked by significant competition with respect to routes, fares, schedules (both timing and frequency), services, products, customer service and frequent flyer programs\. The industry has evolved through mergers and new entry, both domestically and internationally, and changes in international alliances\. Consolidation in the airline industry, the rise of well\-funded government sponsored international carriers, changes in international alliances and the creation of immunized joint ventures have altered, and will continue to alter, the competitive landscape in the industry, resulting in the formation of airlines and alliances with increased financial resources, more extensive global networks and more competitive cost structures\.

Domestic

Our domestic operations are subject to competition from traditional network carriers, including American Airlines and United Airlines, national point\-to\-point carriers, including Alaska Airlines, JetBlue Airways and Southwest Airlines, and discount carriers, some of which may have lower costs than we do and provide service at low fares to destinations served by us\. Point\-to\-point, discount and ultra low\-cost carriers, including Spirit Airlines and Allegiant Air, place significant competitive pressure on network carriers in the domestic market\. In particular, we face significant competition at our domestic hub and gateway airports either directly at those airports or at the hubs of other airlines that are located in close proximity to our hubs and gateways\. We also face competition in smaller to medium\-sized markets from regional jet operations of other carriers\.

International

Our international operations are subject to competition from both foreign and domestic carriers\. Competition is increasing from government\-owned and \-funded carriers in the Gulf region, including Emirates, Etihad Airways and Qatar Airways\. These carriers have large numbers of international widebody aircraft on order and are increasing service to the U\.S\. These carriers are government\-subsidized, which has allowed them to grow quickly, reinvest in their product and expand their global presence at the expense of U\.S\. airlines\.

Through alliance and other marketing and codesharing agreements with foreign carriers, U\.S\. carriers have increased their ability to sell international transportation, such as services to and beyond traditional European and Asian gateway cities\. Similarly, foreign carriers have obtained increased access to interior U\.S\. passenger traffic beyond traditional U\.S\. gateway cities through these relationships\. In particular, alliances formed by domestic and foreign carriers, including SkyTeam, the Star Alliance (among United Airlines, Lufthansa German Airlines, Air Canada and others) and the oneworld alliance (among American Airlines, British Airways, Qantas and others) have enhanced competition in international markets\.

 6


Annual Report of Southwest Airlines Co\. for year 2019

Mark R\. Shaw  has served as the Company's Executive Vice President & Chief Legal & Regulatory Officer since November 2018\. Mr\. Shaw also served as Executive Vice President, Chief Legal & Regulatory Officer, & Corporate Secretary from August 2018 to November 2018, Senior Vice President, General Counsel, & Corporate Secretary from July 2015 to August 2018, Vice President, General Counsel, & Corporate Secretary from February 2013 to July 2015, and as Associate General Counsel \- Corporate & Transactions from February 2008 to February 2013\. Mr\. Shaw joined the Company in 2000 as an Attorney in the General Counsel Department\.

Andrew M\. Watterson  has served as the Company's Executive Vice President & Chief Commercial Officer since January 2020\. Mr\. Watterson also served as Executive Vice President & Chief Revenue Officer from July 2017 to January 2020, Senior Vice President & Chief Revenue Officer from January 2017 to July 2017, Senior Vice President of Network & Revenue from January 2016 to January 2017, and as Vice President of Network Planning & Performance from October 2013 to January 2016\.

Gregory D\. Wells  has served as the Company's Executive Vice President Daily Operations since January 2017\. Mr\. Wells also served as Senior Vice President Operational Performance from October 2013 to January 2017, Senior Vice President Operations from September 2006 to October 2013, Senior Vice President Ground Operations from November 2005 to September 2006, Vice President Ground Operations from September 2004 to November 2005, Vice President Safety, Security, and Flight Dispatch from October 2001 to September 2004, Director Flight Dispatch from February 1999 to October 2001, Senior Director Ground Operations from August 1998 to February 1999, and Director Ground Operations from August 1996 to August 1998\. Prior to August 1996, Mr\. Wells had various other operational experience with the Company including as Station Manager in both San Jose and Phoenix\. Mr\. Wells has over 37 years of experience with the Company\.

34


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

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

Benefit Obligations, Fair Value of Plan Assets and Funded Status

The following tables provide a reconciliation of the changes in the pension and retiree medical and other postretirement benefits obligations, fair value of plan assets and a statement of funded status as of  December 31, 2019  and  2018 :

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

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

**Other Postretirement Benefits** |
|                                           | **2019**             | **2018**             | **2019**                                                         | **2018**                                                         |
|                                           | **(In millions)**    | **(In millions)**    | **(In millions)**                                                | **(In millions)**                                                |
| Benefit obligation at beginning of period | $16,282              | $18,175              | $837                                                             | $1,010                                                           |
| Service cost                              | 2                    | 2                    | 3                                                                | 5                                                                |
| Interest cost                             | 699                  | 670                  | 33                                                               | 35                                                               |
| Actuarial (gain) loss  ^(1), (2)^         | 1,951                | (1,905

)      | 20                                                               | (132

)                                                    |
| Settlements                               | (2

)          | (4

)          | —                                                                | —                                                                |
| Benefit payments                          | (686

)        | (659

)        | (74

)                                                     | (81

)                                                     |
| Other                                     | —                    | 3                    | 5                                                                | —                                                                |
| Benefit obligation at end of period       | $18,246              | $16,282              | $824                                                             | $837                                                             |

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

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

**Other Postretirement Benefits** |
|                                                  | **2019**                 | **2018**                 | **2019**                                                         | **2018**                                                         |
|                                                  | **(In millions)**        | **(In millions)**        | **(In millions)**                                                | **(In millions)**                                                |
| Fair value of plan assets at beginning of period | $10,001                  | $11,340                  | $225                                                             | $295                                                             |
| Actual return (loss) on plan assets              | 2,292                    | (1,148

)          | 41                                                               | (24

)                                                     |
| Employer contributions  ^(3)^                    | 1,224                    | 472                      | 12                                                               | 35                                                               |
| Settlements                                      | (2

)              | (4

)              | —                                                                | —                                                                |
| Benefit payments                                 | (686

)            | (659

)            | (74

)                                                     | (81

)                                                     |
| Fair value of plan assets at end of period       | $12,829                  | $10,001                  | $204                                                             | $225                                                             |
| Funded status at end of period                   | $

(5,417

) | $

(6,281

) | $

(620

)                                           | $

(612

)                                           |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | The  2019  and  2018  pension actuarial (gain) loss primarily relates to changes in American’s weighted average discount rate and mortality assumption and, in  2018 , changes to American’s retirement rate assumptions\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | The  2019  retiree medical and other postretirement benefits actuarial loss primarily relates to changes in American’s weighted average discount rate assumption and plan experience adjustments\. |

The  2018  retiree medical and other postretirement benefits actuarial gain primarily relates to changes in American’s weighted average discount rate, medical trend and per capita claims assumptions\.

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | During  2019 , American contributed   $1\.2 billion  to its defined benefit pension plans, including supplemental contributions of   $444 million  and a   $780 million  minimum required contribution\. During  2018 , American contributed   $472 million  to its defined benefit pension plans, including supplemental contributions of   $433 million  and a   $39 million  minimum required contribution\. |

142


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

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

**Number** | **Description**                                                                                |
| 4\.135                        | [Revolving Credit Agreement (2017\-1AA), dated as of January 13, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1AA, as Borrower, and Citibank N\.A\., as Liquidity Provider (incorporated by reference to Exhibit 4\.18 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex418.htm)                                                                                |
| 4\.136                        | [Revolving Credit Agreement (2017\-1A), dated as of January 13, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1A, as Borrower, and Citibank N\.A\., as Liquidity Provider (incorporated by reference to Exhibit 4\.19 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex419.htm)                                                                                |
| 4\.137                        | [Revolving Credit Agreement (2017\-1B), dated as of January 13, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1B, as Borrower, and Citibank N\.A\., as Liquidity Provider (incorporated by reference to Exhibit 4\.20 to American’s Current Report on Form 8\-K filed on January 17, 2017 (Commission File No\. 1\-02691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517011067/d319419dex420.htm)                                                                                |
| 4\.138                        | [Acknowledgment and Agreement (2017\-1), dated as of March 31, 2017, by and among American Airlines Inc\., Citibank, N\.A\., as initial Liquidity Provider, National Australia Bank Limited, as Replacement Liquidity Provider, and Wilmington Trust Company, as Subordination Agent and trustee (incorporated by reference to Exhibit 4\.20 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex420.htm)                                                                                |
| 4\.139                        | [Revolving Credit Agreement (2017\-1AA), dated as of March 31, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1AA, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.21 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex421.htm)                                                                              |
| 4\.140                        | [Revolving Credit Agreement (2017\-1A), dated as of March 31, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1A, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.22 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex422.htm)                                                                                |
| 4\.141                        | [Revolving Credit Agreement (2017\-1B), dated as of March 31, 2017, between Wilmington Trust Company, as Subordination Agent, as agent and trustee for the trustee of the American Airlines Pass Through Trust 2017\-1B, as Borrower, and National Australia Bank Limited, as Liquidity Provider (incorporated by reference to Exhibit 4\.23 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex423.htm)                                                                                |
| 4\.142                        | [Form of American Airlines Group Inc\. Indenture for Debt Securities (incorporated by reference to Exhibit 4\.1 to AAG’s Registration Statement on Form S\-3ASR filed on February 22, 2017 (Commission File No\. 333\-216167)\. ](http://www.sec.gov/Archives/edgar/data/4515/000119312517052055/d366751dex41.htm)                                                                                |
| 4\.143                        | [Form of American Airlines, Inc\. Indenture for Debt Securities (incorporated by reference to Exhibit 4\.2 to AAG’s Registration Statement on Form S\-3ASR filed on February 22, 2017 (Commission File No\. 333\-216167)\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517052055/d366751dex42.htm)                                                                                |
| 4\.144                        | [Trust Supplement No\. 2017\-2AA, dated as of August 14, 2017, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.2 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex42.htm)                                                                                |
| 4\.145                        | [Trust Supplement No\. 2017\-2A, dated as of August 14, 2017, between American Airlines, Inc\. and Wilmington Trust Company, as Trustee, to the Pass Through Trust Agreement, dated as of September 16, 2014 (incorporated by reference to Exhibit 4\.3 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex43.htm)                                                                                |
| 4\.146                        | [Intercreditor Agreement (2017\-2), dated as of August 14, 2017, among Wilmington Trust Company, as Trustee of the American Airlines Pass Through Trust 2017\-2AA and as Trustee of the American Airlines Pass Through Trust 2017\-2A, National Australia Bank Limited, as Class AA Liquidity Provider and Class A Liquidity Provider, and Wilmington Trust Company, as Subordination Agent (incorporated by reference to Exhibit 4\.4 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex44.htm) |
| 4\.147                        | [Note Purchase Agreement, dated as of August 14, 2017, among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust, National Association, as Escrow Agent, and Wilmington Trust Company, as Paying Agent (incorporated by reference to Exhibit 4\.9 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex49.htm)                                          |
| 4\.148                        | [Form of Participation Agreement (Participation Agreement among American Airlines, Inc\., Wilmington Trust Company, as Pass Through Trustee under each of the Pass Through Trust Agreements, Wilmington Trust Company, as Subordination Agent, Wilmington Trust Company, as Loan Trustee, and Wilmington Trust Company, in its individual capacity as set forth therein) (incorporated by reference to Exhibit B to Exhibit 4\.9 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex49.htm)       |
| 4\.149                        | [Form of Indenture and Security Agreement (Indenture and Security Agreement between American Airlines, Inc\., and Wilmington Trust Company, as Loan Trustee) (incorporated by reference to Exhibit C to Exhibit 4\.9 to American’s Current Report on Form 8\-K filed on August 14, 2017 (Commission File No\. 1\-2691))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517257245/d376721dex49.htm)                                                                                |

190


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

DELTA AIR LINES, INC\.

Consolidated Statements of Operations

|                                                                                |                                                                                |                                                                                |                                                                                |
| ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- |
|                                                                                | **Year Ended December 31,**                                                              | **Year Ended December 31,**                                                              | **Year Ended December 31,**                                                              |
| **(in millions, except per share data)**                                                 | **2018**                                                                                | **2017**                                                                                | **2016**                                                                                |
| **Operating Revenue:**                                                                   |                                                                                |                                                                                |                                                                                |
| Passenger                                                                                | $39,755                                                                                | $36,947                                                                                | $35,814                                                                                |
| Cargo                                                                                | 865                                                                                | 744                                                                                | 684                                                                                |
| Other                                                                                | 3,818                                                                                | 3,447                                                                                | 2,952                                                                                |
|  Total operating revenue                                                                 | 44,438                                                                                | 41,138                                                                                | 39,450                                                                                |
| **Operating Expense:**                                                                   |                                                                                |                                                                                |                                                                                |
| Salaries and related costs                                                               | 10,743                                                                                | 10,058                                                                                | 9,394                                                                                |
| Aircraft fuel and related taxes                                                          | 9,020                                                                                | 6,756                                                                                | 5,985                                                                                |
| Regional carriers expense, excluding fuel                                                | 3,438                                                                                | 3,466                                                                                | 3,447                                                                                |
| Depreciation and amortization                                                            | 2,329                                                                                | 2,222                                                                                | 1,886                                                                                |
| Contracted services                                                                      | 2,175                                                                                | 2,108                                                                                | 1,918                                                                                |
| Passenger commissions and other selling expenses                                         | 1,941                                                                                | 1,827                                                                                | 1,751                                                                                |
| Ancillary businesses and refinery                                                        | 1,695                                                                                | 1,495                                                                                | 1,182                                                                                |
| Landing fees and other rents                                                             | 1,662                                                                                | 1,501                                                                                | 1,472                                                                                |
| Aircraft maintenance materials and outside repairs                                       | 1,575                                                                                | 1,591                                                                                | 1,434                                                                                |
| Profit sharing                                                                           | 1,301                                                                                | 1,065                                                                                | 1,115                                                                                |
| Passenger service                                                                        | 1,178                                                                                | 1,123                                                                                | 964                                                                                |
| Aircraft rent                                                                            | 394                                                                                | 351                                                                                | 285                                                                                |
| Other                                                                                | 1,723                                                                                | 1,609                                                                                | 1,621                                                                                |
| Total operating expense                                                                  | 39,174                                                                                | 35,172                                                                                | 32,454                                                                                |
| **Operating Income**                                                                     | 5,264                                                                                | 5,966                                                                                | 6,996                                                                                |
| **Non\-Operating Expense:**                                                              |                                                                                |                                                                                |                                                                                |
| Interest expense, net                                                                    | (311

)                                                                            | (396

)                                                                            | (388

)                                                                            |
| Unrealized gain/(loss) on investments, net                                               | 14                                                                                | —                                                                                | —                                                                                |
| Miscellaneous, net                                                                       | 184                                                                                | (70

)                                                                             | (255

)                                                                            |
| Total non\-operating expense, net                                                        | (113

)                                                                            | (466

)                                                                            | (643

)                                                                            |
| **Income Before Income Taxes**                                                           | 5,151                                                                                | 5,500                                                                                | 6,353                                                                                |
| **Income Tax Provision**                                                                 | (1,216

)                                                                          | (2,295

)                                                                          | (2,158

)                                                                          |
| **Net Income**                                                                           | $3,935                                                                                | $3,205                                                                                | $4,195                                                                                |
| **Basic Earnings Per Share**                                                             | $5\.69                                                                                | $4\.45                                                                                | $5\.59                                                                                |
| **Diluted Earnings Per Share**                                                           | $5\.67                                                                                | $4\.43                                                                                | $5\.55                                                                                |
| **Cash Dividends Declared Per Share**                                                    | $1\.31                                                                                | $1\.02                                                                                | $0\.68                                                                                |
| The accompanying notes are an integral part of these Consolidated Financial Statements\. | The accompanying notes are an integral part of these Consolidated Financial Statements\. | The accompanying notes are an integral part of these Consolidated Financial Statements\. | The accompanying notes are an integral part of these Consolidated Financial Statements\. |

 54


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

*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\. We expect we 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\. We are currently evaluating how the adoption of the New Lease Standard will impact our consolidated financial statements\. Interpretations are on\-going and could have a material impact on our implementation\. Currently, we expect that the adoption of the New Lease Standard will have a material impact on our 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\.

**ITEM 7A\. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed below\. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions we may take to mitigate our exposure to such changes\. Therefore, actual results may differ\. See Note 7 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 5 to American’s Consolidated Financial Statements in Part II, Item 8B for additional discussion regarding risk management matters\.

***Aircraft Fuel***

Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business\. Because of the amount of fuel needed to operate our airlines, even a relatively small increase or decrease in the price of fuel can have a material effect on our costs and liquidity\. Jet fuel market prices have fluctuated substantially over the past several years with market spot prices ranging from a low of approximately $0\.80 per gallon to a high of approximately $2\.00 per gallon during the period from January 1, 2015 to December 31, 2017\.

As of December 31, 2017, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption\. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices\. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors\. Based on our 2018 forecasted mainline and regional fuel consumption, we estimate that a one cent per gallon increase in aviation fuel price would increase our 2018 annual fuel expense by $45 million\.

***Foreign Currency***

We are exposed to the effect of foreign exchange rate fluctuations on the U\.S\. dollar value of foreign currency\-denominated operating revenues and expenses\. Our largest exposure comes from the British pound, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real\. We do not currently have a foreign currency hedge program\. A uniform 10% strengthening in the value of the U\.S\. dollar from 2017 levels relative to each of the currencies in which we have foreign currency exposure would have resulted in a decrease in operating income of approximately $203 million for the year ended December 31, 2017\.

Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States\. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition\. See Part I, Item 1A\. Risk Factors –*“We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control”* for additional discussion of this and other currency risks\.

78


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

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

Frequent Flyer Program

Our SkyMiles program offers incentives to travel on Delta\. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and airlines that participate in the SkyMiles program, as well as through participating companies such as credit card companies, hotels and car rental agencies\. We sell mileage credits to non\-airline businesses, customers and other airlines\. Effective January 1, 2015, the SkyMiles program was modified from a model in which customers earn redeemable mileage credits based on distance traveled to a model based on ticket price\. This award change did not affect the way we account for the program\.

The SkyMiles program includes two types of transactions that are considered revenue arrangements with multiple deliverables\. As discussed below, these are (1) passenger ticket sales earning mileage credits and (2) the sale of mileage credits to participating companies with which we have marketing agreements\. Mileage credits are a separate unit of accounting as they can be redeemed by customers in future periods for air travel on Delta and participating airlines, membership in our Sky Club and other program awards\.

Passenger Ticket Sales Earning Mileage Credits\.  Passenger ticket sales earning mileage credits under our SkyMiles program provide customers with (1) mileage credits earned and (2) air transportation\. We value each deliverable on a standalone basis\. Our estimate of the selling price of a mileage credit is based on an analysis of our sales of mileage credits to other airlines and customers, which is re\-evaluated at least annually\. We use established ticket prices to determine the estimated selling price of air transportation\. We allocate the total amount collected from passenger ticket sales between the deliverables based on their relative selling prices\.

We defer revenue for the mileage credits related to passenger ticket sales when the credits are earned and recognize it as passenger revenue when miles are redeemed and services are provided\. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize these amounts in passenger revenue when we provide transportation or when the ticket expires unused\.

Sale of Mileage Credits\.  Customers may earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies with which we have marketing agreements to sell mileage credits\. Our contracts to sell mileage credits under these marketing agreements have multiple deliverables, as defined below\.

Our most significant contract to sell mileage credits relates to our co\-brand credit card relationship with American Express\. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta\-American Express co\-branded credit card holders ("Cardholders") and American Express Membership Rewards program participants and allow American Express to market using our customer database\. Cardholders earn mileage credits for making purchases using co\-branded cards, may check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive other benefits while traveling on Delta\. These benefits that we provide in the form of separate products and services under the SkyMiles agreements are referred to as "deliverables\." Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the SkyMiles program\. As a result, we sell mileage credits at agreed\-upon rates to American Express for provision to their customers under the co\-brand credit card program and the Membership Rewards program\.

Our marketing agreements with American Express extend to 2022\. We account for the agreements consistent with the accounting method that allocates the consideration received to the individual products and services delivered based on their relative selling prices\. We determined our best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) the rate at which we sell mileage credits to other airlines, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value\.

We recognize revenue as we deliver each sales element\. We defer the travel deliverable (mileage credits) as part of frequent flyer deferred revenue and recognize passenger revenue as the mileage credits are used for travel\. The revenue allocated to the remaining deliverables is recorded in other revenue\. We recognize the revenue for these services as they are performed\.

Breakage\.  For mileage credits that we estimate are not likely to be redeemed ("breakage"), we recognize the associated value proportionally during the period in which the remaining mileage credits are expected to be redeemed\. Management uses statistical models to estimate breakage based on historical redemption patterns\. A change in assumptions as to the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years\.

 61


Annual Report of DELTA AIR LINES, INC\.  for year 2019

The airline industry is subject to many forms of environmental regulation, including increased regulation to reduce emissions\. Failure to comply with environmental regulations or the enactment of additional regulation could have a material adverse effect on our financial results\.

Many aspects of our operations are subject to increasingly stringent federal, state, local and international laws governing the protection of the environment\. Compliance with existing and future environmental laws and regulations can require significant expenditures and violations can lead to significant fines and penalties\.

Future regulatory action concerning climate change, aircraft emissions and noise emissions could have a significant effect on the airline industry\. In order to address aircraft emissions, ICAO, a UN specialized agency, formally adopted a global, market\-based emission offset program known as CORSIA\. This program establishes a medium\-term goal for the aviation industry of achieving carbon\-neutral growth in international aviation beginning in 2021, based on a 2019\-2020 baseline\. Certain CORSIA program details remain to be developed and could potentially be affected by political developments in participating countries or the results of the pilot phase of the program, and thus the impact of CORSIA cannot be fully predicted\. However, CORSIA is expected to increase operating costs for airlines that operate internationally\.

In addition to CORSIA, we may face additional regulation of aircraft emissions in the U\.S\. and abroad and become subject to further taxes, charges or additional requirements to obtain permits or purchase allowances or emission credits for greenhouse gas emissions in various jurisdictions\. Additional regulation could result in taxation, regulatory or permitting requirements from multiple jurisdictions for the same operations and significant costs for us and the airline industry\. In addition to direct costs, such regulation could result in increased fuel costs passed through from fuel suppliers affected by any such regulations\. While the specific nature of future actions is hard to predict, new laws or regulations related to environmental matters adopted in the U\.S\. or other countries could impose significant additional costs on our operations\.

Because of the global nature of our business, unfavorable global economic conditions or volatility in currency exchange rates could have a material adverse effect on our business, financial condition and operating results\.

As a result of the discretionary nature of air travel, the airline industry has been cyclical and particularly sensitive to changes in economic conditions\. Because we operate globally, with approximately 30% of our revenues from operations outside of the U\.S\., our business is subject to economic conditions throughout the world\. During periods of unfavorable or volatile economic conditions in the global economy, demand for air travel can be significantly impacted as business and leisure travelers choose not to travel, seek alternative forms of transportation for short trips or conduct business using technological alternatives\. If unfavorable economic conditions occur, particularly for an extended period, our business, financial condition and results of operations may be adversely affected\. In addition, significant or volatile changes in exchange rates between the U\.S\. dollar and other currencies, and the imposition of exchange controls or other currency restrictions, may have a material adverse effect on our liquidity, financial conditions and results of operations\.

Economic conditions following the United Kingdom’s exit from the European Union could have a material adverse effect on our business\.

Following a referendum in June 2016 in which voters in the U\.K\. approved an exit (often referred to as Brexit) from the European Union, the U\.K\.’s withdrawal became effective on January 31, 2020\. A transition period will apply until the end of 2020 (or later, if extended) during which the pre\-Brexit legal regime will continue to apply (including with respect to aviation) while the U\.K\. and European Union negotiate rules that will apply to their future relationship\. It is unknown how that future relationship will be structured\. Regardless of what happens between the U\.K\. and European Union, the U\.S\. \- European Union Open Skies air services agreement will continue to apply to air services between the U\.S\. and the European Union and a new U\.S\.\-U\.K\. Open Skies agreement will apply to air services between the U\.S\. and the U\.K\.

Currently, it is uncertain what will be the terms of the future relationship between the U\.K\. and the European Union on matters such as trade, customs, financial services and the movement of goods and people\. Furthermore, post\-Brexit ambiguity or changes in regulations could diminish the value of route authorities, slots or other assets owned by us or our joint venture partners and, therefore, could have a material adverse effect on our business and results of operations and financial condition\.

20


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

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

is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets\. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell\.

Total depreciation and amortization expense was $2\.1 billion, $1\.8 billion and $1\.6 billion for the years ended December 31, 2017, 2016 and 2015, respectively\.

***(f) Income Taxes***

Income taxes are accounted for under the asset and liability method\. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards\. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes\.

American provides a valuation allowance for its deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized\. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income\. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets\. Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond American’s control, such as the health of the economy, the level and volatility of fuel prices and travel demand\.

***(g) Goodwill***

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and liabilities assumed\. Goodwill is not amortized but assessed for impairment annually on October 1^st^ or more frequently if events or circumstances indicate that goodwill may be impaired\. American has one consolidated reporting unit\.

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill\. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill\. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded\. Based upon American’s annual assessment, there was no goodwill impairment in 2017\. The carrying value of the goodwill on American’s consolidated balance sheets was $4\.1 billion as of December 31, 2017 and 2016\.

***(h) Other Intangibles, Net***

Intangible assets consist primarily of domestic airport slots, customer relationships, marketing agreements, international slots and route authorities, airport gate leasehold rights and tradenames\.

*Finite\-Lived Intangible Assets*

Finite\-lived intangible assets are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable\.

The following table provides information relating to American’s amortizable intangible assets as of December 31, 2017 and 2016 (in millions):

|                               |                  |                  |
| ----------------------------- | ---------------- | ---------------- |
|                               | **December 31,** | **December 31,** |
|                               | **2017**         | **2016**         |
| Domestic airport slots        | $365             | $365             |
| Customer relationships        | 300              | 300              |
| Marketing agreements          | 105              | 105              |
| Tradenames                    | 35               | 35               |
| Airport gate leasehold rights | 137              | 137              |
| Accumulated amortization      | (622)            | (578)            |
| Total                         | $320             | $364             |

Certain domestic airport slots and airport gate leasehold rights are amortized on a straight\-line basis over 25 years\. The customer relationships and marketing agreements were identified as intangible assets subject to amortization and

132


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

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

9\.  Fair Value Measurements and Other Investments

Assets Measured at Fair Value on a Recurring Basis

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i\.e\. an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability\. Accounting standards include disclosure requirements around fair values used for certain financial instruments and establish a fair value hierarchy\. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market\. Each fair value measurement is reported in one of three levels:

|   |                                                                      |
| - | -------------------------------------------------------------------- |
| • | Level 1 – Observable inputs such as quoted prices in active markets; |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------- |
| • | Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions\. |

When available, we use quoted market prices to determine the fair value of our financial assets\. If quoted market prices are not available, we measure fair value using valuation techniques that use, when possible, current market\-based or independently\-sourced market parameters, such as interest rates and currency rates\.

We utilize the market approach to measure the fair value of our financial assets\. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets\. Our short\-term investments classified as Level 2 primarily utilize broker quotes in a non\-active market for valuation of these securities\. No changes in valuation techniques or inputs occurred during the year ended  December 31, 2019 \.

Assets measured at fair value on a recurring basis are summarized below (in millions):

|                                                    |                                                     |                                                     |                                                     |                                                     |
| -------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- |
|                                                    | **Fair Value Measurements as of December 31, 2019** | **Fair Value Measurements as of December 31, 2019** | **Fair Value Measurements as of December 31, 2019** | **Fair Value Measurements as of December 31, 2019** |
|                                                    | **Total**                                           | **Level 1**                                         | **Level 2**                                         | **Level 3**                                         |
| Short\-term investments  ^(1),^  ^(2)^ :           |                                                     |                                                     |                                                     |                                                     |
| Money market funds                                 | $333                                                | $333                                                | $—                                                  | $—                                                  |
| Bank notes/certificates of deposit/time deposits   | 2,107                                               | —                                                   | 2,107                                               | —                                                   |
| Corporate obligations                              | 1,021                                               | —                                                   | 1,021                                               | —                                                   |
| Repurchase agreements                              | 85                                                  | —                                                   | 85                                                  | —                                                   |
|                                                    | 3,546                                               | 333                                                 | 3,213                                               | —                                                   |
| Restricted cash and short\-term investments  ^(1)^ | 158                                                 | 10                                                  | 148                                                 | —                                                   |
| Long\-term investments  ^(3)^                      | 204                                                 | 204                                                 | —                                                   | —                                                   |
| Total                                              | $3,908                                              | $547                                                | $3,361                                              | $—                                                  |

|                                                    |                                                     |                                                     |                                                     |                                                     |
| -------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- |
|                                                    | **Fair Value Measurements as of December 31, 2018** | **Fair Value Measurements as of December 31, 2018** | **Fair Value Measurements as of December 31, 2018** | **Fair Value Measurements as of December 31, 2018** |
|                                                    | **Total**                                           | **Level 1**                                         | **Level 2**                                         | **Level 3**                                         |
| Short\-term investments  ^(1)^ :                   |                                                     |                                                     |                                                     |                                                     |
| Money market funds                                 | $16                                                 | $16                                                 | $—                                                  | $—                                                  |
| Bank notes/certificates of deposit/time deposits   | 2,436                                               | —                                                   | 2,436                                               | —                                                   |
| Corporate obligations                              | 1,658                                               | —                                                   | 1,658                                               | —                                                   |
| Repurchase agreements                              | 375                                                 | —                                                   | 375                                                 | —                                                   |
|                                                    | 4,485                                               | 16                                                  | 4,469                                               | —                                                   |
| Restricted cash and short\-term investments  ^(1)^ | 154                                                 | 12                                                  | 142                                                 | —                                                   |
| Long\-term investments  ^(3)^                      | 189                                                 | 189                                                 | —                                                   | —                                                   |
| Total                                              | $4,828                                              | $217                                                | $4,611                                              | $—                                                  |

97