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

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

are as follows:

|                                                   |                                      |
| ------------------------------------------------- | ------------------------------------ |
|                                                   | **Estimated Useful Life (in years)** |
| Aircraft, spare engines and related rotable parts | 25 to 30                             |
| Aircraft seats                                    | 10 to 15                             |
| Buildings                                         | 25 to 45                             |
| Other property and equipment                      | 3 to 15                              |
| Computer software                                 | 5 to 15                              |
| Building improvements                             | 1 to 40                              |

As of December 31,  2019  and  2018 , the Company had a carrying value of computer software of   $422 million  and   $359 million , respectively\. For the years ended December 31,  2019 ,  2018  and  2017 , the Company's depreciation expense related to computer software was   $135 million ,   $122 million  and   $117 million , respectively\. Aircraft and aircraft spare parts were assumed to have residual values of approximately  10%  of original cost, and other categories of property and equipment were assumed to have no residual value\.

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (j) | **Long\-Lived Asset Impairments—** The Company evaluates the carrying value of long\-lived assets subject to amortization whenever events or changes in circumstances indicate that an impairment may exist\. For purposes of this testing, the Company has generally identified the aircraft fleet type as the lowest level of identifiable cash flows\. An impairment charge is recognized when the asset's carrying value exceeds its net undiscounted future cash flows and its fair market value\. The amount of the charge is the difference between the asset's carrying value and fair market value\. See Note 14 of this report for additional information related to impairments\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| (k) | **Intangibles—** The Company has finite\-lived and indefinite\-lived intangible assets, including goodwill\. Finite\-lived intangible assets are amortized over their estimated useful lives\. Goodwill and indefinite\-lived intangible assets are not amortized but are reviewed for impairment on an annual basis as of October 1, or more frequently if events or circumstances indicate that the asset may be impaired\. See Note 14 of this report for additional information related to impairments\. |

The following table presents information about the Company's goodwill and other intangible assets at December 31 (in millions):

|                                     |                                                  |                                         |                                                  |                                         |
| ----------------------------------- | ------------------------------------------------ | --------------------------------------- | ------------------------------------------------ | --------------------------------------- |
|                                     | **2019**                                         | **2019**                                | **2018**                                         | **2018**                                |
|                                     | **Gross**

**Carrying**

**Amount** | **Accumulated**

**Amortization** | **Gross**

**Carrying**

**Amount** | **Accumulated**

**Amortization** |
| Goodwill                            | $4,523                                           |                                         | $4,523                                           |                                         |
| Indefinite\-lived intangible assets |                                                  |                                         |                                                  |                                         |
| Route authorities                   | $1,150                                           |                                         | $1,240                                           |                                         |
| Airport slots                       | 546                                              |                                         | 546                                              |                                         |
| Tradenames and logos                | 593                                              |                                         | 593                                              |                                         |
| Alliances                           | 404                                              |                                         | 404                                              |                                         |
| Total                               | $2,693                                           |                                         | $2,783                                           |                                         |
| Finite\-lived intangible assets     |                                                  |                                         |                                                  |                                         |
| Frequent flyer database             | $1,177                                           | $931                                    | $1,177                                           | $884                                    |
| Hubs                                | 145                                              | 104                                     | 145                                              | 97                                      |
| Contracts                           | 120                                              | 111                                     | 120                                              | 106                                     |
| Other                               | 314                                              | 294                                     | 314                                              | 293                                     |
| Total                               | $1,756                                           | $1,440                                  | $1,756                                           | $1,380                                  |

Amortization expense in  2019 ,  2018  and  2017  was   $60 million ,   $67 million  and   $79 million , respectively\. Projected amortization expense in  2020 ,  2021 ,  2022 ,  2023  and  2024  is   $55 million ,   $50 million ,   $40 million ,   $37 million  and   $32 million , respectively\.

59


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

The services under the marketing component are provided periodically, but no less than monthly\. Accordingly, the marketing component is considered earned and recognized in other revenues in the period of the mileage sale\. For the years ended December 31, 2017, 2016 and 2015, the marketing component of mileage sales and other marketing related payments included in other revenues was approximately $2\.2 billion, $1\.9 billion and $1\.7 billion, respectively\.

Effective January 1, 2018, we are adopting ASU 2014\-09: Revenue from Contracts with Customers (Topic 606)\. See Recent Accounting Pronouncements below for further discussion\.

***Long\-lived Assets***

Long\-lived assets consist of flight equipment, as well as other fixed assets and finite\-lived intangible assets such as certain domestic airport slots, customer relationships, marketing agreements, tradenames and airport gate leasehold rights\. In addition to the original cost, the recorded value of our fixed assets is impacted by a number of estimates made, including estimated useful lives, salvage values and our determination as to whether aircraft are temporarily or permanently grounded\. Finite\-lived intangible assets are originally recorded at their acquired fair values and are subsequently amortized over their estimated useful lives\. See Note 1 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 1 to American’s Consolidated Financial Statements in Part II, Item 8B for further information\.

We assess impairment on long\-lived assets used in operations when events and circumstances indicate that the assets may be impaired\. An asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the carrying amount of the assets and the net book value of the assets exceeds their estimated fair value\. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets\. Estimates of fair value represent management’s best estimate based on appraisals, industry trends and reference to market rates and transactions\.

The majority of American’s fleet types are depreciated over 25\-30 years\. It is possible that the ultimate lives of our aircraft will be significantly different than the current estimate due to unforeseen events in the future that impact our fleet plan, including positive or negative developments in the areas described above\. For example, operating the aircraft for a longer period will result in higher maintenance, fuel and other operating costs than if we replaced the aircraft\.

***Goodwill and Indefinite\-lived Assets***

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\. We have one consolidated reporting unit\.

Indefinite\-lived intangible assets other than goodwill include certain domestic airport slots at our hubs and international slots and route authorities\. Indefinite\-lived intangible assets are not amortized but instead are assessed for impairment annually on October 1^st^ or more frequently if events or circumstances indicate that the asset may be impaired\.

Goodwill and indefinite\-lived intangible assets are assessed for impairment by initially performing a qualitative assessment\. Under the qualitative approach, we analyze the following factors, among others, to determine if events and circumstances have affected the fair value of goodwill and indefinite\-lived intangible assets: (1) negative trends in our market capitalization, (2) an increase in fuel prices, (3) declining per mile passenger yields, (4) lower passenger demand as a result of a weakened U\.S\. and global economy and (5) changes to the regulatory environment\.

Based upon our annual assessment, there were no impairments of our goodwill and indefinite\-lived assets in 2017\.

74


Annual Report of Southwest Airlines Co\. for year 2017

**Southwest Airlines Co\.**

**Notes to Consolidated Financial Statements**

**1****\. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

***Basis of Presentation***

Southwest Airlines Co\. (the "Company") operates Southwest Airlines, a major domestic airline\. The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, which include AirTran Holdings, LLC, the successor to AirTran Holdings, Inc\. ("AirTran Holdings"), the former parent company of AirTran Airways, Inc\. ("AirTran Airways")\. The accompanying Consolidated Financial Statements include the results of operations and cash flows for all periods presented and all significant inter\-entity balances and transactions have been eliminated\. The preparation of financial statements in conformity with generally accepted accounting principles in the United States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes\. Actual results could differ from these estimates\.

***Cash and Cash Equivalents***

Cash in excess of that necessary for operating requirements is invested in short\-term, highly liquid, income\-producing investments\. Investments with original maturities of three months or less when purchased are classified as cash and cash equivalents, which primarily consist of certificates of deposit, money market funds, and investment grade commercial paper issued by major corporations and financial institutions\. Cash and cash equivalents are stated at cost, which approximates fair value\.

As of December 31, 2017, $15 million in cash collateral deposits were held by the Company from its fuel hedge counterparties and no cash collateral deposits were held by or provided by the Company to its interest rate hedge counterparties\. As of December 31, 2016, $301 million in cash collateral deposits were provided by the Company to its fuel hedge counterparties and no cash collateral deposits were held by or provided by the Company to its interest rate hedge counterparties\. Cash collateral amounts provided or held associated with fuel and interest rate derivative instruments are not restricted in any way and earn interest income at an agreed upon rate that approximates the rates earned on short\-term securities issued by the U\.S\. Government\. Depending on the fair value of the Company’s fuel and interest rate derivative instruments, the amounts of collateral deposits held or provided at any point in time can fluctuate significantly\. See Note 10 for further information on these collateral deposits and fuel derivative instruments\.

***Short\-term and Noncurrent Investments***

Short\-term investments consist of investments with original maturities of greater than three months but less than twelve months when purchased\. These are primarily short\-term securities issued by the U\.S\. Government and certificates of deposit issued by domestic banks\. All of these investments are classified as available\-for\-sale securities and are stated at fair value, which approximates cost\. For all short\-term investments, at each reset period or upon reinvestment, the Company accounts for the transaction as Proceeds from sales of short\-term investments for the security relinquished, and Purchases of short\-investments for the security purchased, in the accompanying Consolidated Statement of Cash Flows\. Unrealized gains and losses, net of tax, if any, are recognized in Accumulated other comprehensive income (loss) ("AOCI") in the accompanying Consolidated Balance Sheet\. Realized net gains and losses on specific investments, if any, are reflected in Interest income in the accompanying Consolidated Statement of Income\. Both unrealized and realized gains and/or losses associated with investments were immaterial for all years presented\.

Noncurrent investments consist of investments with maturities of greater than twelve months\. Noncurrent investments are included as a component of Other assets in the Consolidated Balance Sheet\.

***Accounts and Other Receivables***

75


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

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

The effects of the adoption of the New Revenue Standard and New Retirement Standard to our consolidated statement of operations for the twelve months ended December 31, 2017 were as follows (in millions):

|                                       |                 |                             |                                         |                                   |                             |               |
| ------------------------------------- | --------------- | --------------------------- | --------------------------------------- | --------------------------------- | --------------------------- | ------------- |
|                                       |                 | **New Revenue Standard**    | **New Revenue Standard**                | **New Revenue Standard**          | **New Retirement Standard** |               |
| **Year Ended  <br>December 31, 2017** | **As Reported** | **Deferred Revenue Method** | **Ancillary Revenue Reclassifications** | **Gross Versus Net Presentation** | **Reclassifications**       | **As Recast** |
| Operating revenues:                   |                 |                             |                                         |                                   |                             |               |
|  Passenger                            | $36,133         | $311                        | $2,648                                  | $39                               | $—                          | $39,131       |
|  Cargo                                | 800             | —                           | 42                                      | 48                                | —                           | 890           |
|  Other                                | 5,274           | —                           | (2,690)                                 | 17                                | —                           | 2,601         |
|  Total operating revenues             | 42,207          | 311                         | —                                       | 104                               | —                           | 42,622        |
|  Total operating expenses             | 38,149          | —                           | —                                       | 104                               | 138                         | 38,391        |
| Operating income                      | 4,058           | 311                         | —                                       | —                                 | (138)                       | 4,231         |
| Total nonoperating expense, net       | (974)           | —                           | —                                       | —                                 | 138                         | (836)         |
| Income before income taxes            | 3,084           | 311                         | —                                       | —                                 | —                           | 3,395         |
| Income tax provision  ^(1)^           | 1,165           | 948                         | —                                       | —                                 | —                           | 2,113         |
| Net income                            | $1,919          | $(637)                      | $—                                      | $—                                | $—                          | $1,282        |
| Diluted earnings per common share     | $3\.90          |                             |                                         |                                   |                             | $2\.61        |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(1)^ | The adjustment to the  2017  income tax provision includes an  $823 million  special charge to reduce our deferred tax asset associated with loyalty program liabilities as a result of the 2017 Tax Act enacted in December 2017 that reduced the federal corporate income tax rate from 35% to 21%\. |

The effects of the adoption of the New Revenue Standard to our December 31, 2017 consolidated balance sheet were as follows (in millions):

|                                      |                 |                          |               |
| ------------------------------------ | --------------- | ------------------------ | ------------- |
|                                      | **As Reported** | **New Revenue Standard** | **As Recast** |
| Deferred tax asset                   | $427            | $1,389                   | $1,816        |
| Air traffic liability                | 3,978           | 64                       | 4,042         |
| Current loyalty program liability    | 2,791           | 330                      | 3,121         |
| Noncurrent loyalty program liability | —               | 5,701                    | 5,701         |
| Total stockholders’ equity (deficit) | 3,926           | (4,706)                  | (780)         |

77


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

SkyTeam \. In addition to our marketing alliance agreements with individual foreign airlines, we are a member of the SkyTeam global airline alliance\. The other members of SkyTeam are Aeroflot, Aerolíneas Argentinas, Aeroméxico, Air Europa, Air France, Alitalia, China Airlines, China Eastern, China Southern, CSA Czech Airlines, Garuda Indonesia, Kenya Airways, KLM, Korean Air, Middle East Airlines, Saudi Arabian Airlines, Tarom, Vietnam Airlines and Xiamen Airlines\. Through alliance arrangements with other SkyTeam carriers, Delta is able to link its network with the route networks of the other member airlines, providing opportunities to increase connecting traffic while offering enhanced customer service through reciprocal codesharing and loyalty program participation, airport lounge access and cargo operations\.

Regional Carriers

We have air service agreements with domestic regional air carriers that feed traffic to our route system by serving passengers primarily in small and medium\-sized cities\. These arrangements enable us to better match capacity with demand in these markets\. Approximately  15%  of our passenger revenue in  2018  was related to flying by these regional air carriers\.

Through our regional carrier program, Delta Connection, we have contractual arrangements with regional carriers to operate aircraft using our "DL" designator code\. We have contractual arrangements with:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------- |
| • | Compass Airlines, LLC ("Compass") and GoJet Airlines, LLC, both subsidiaries of Trans States Holdings, Inc\. ("Trans States");  |

|   |                                                          |
| - | -------------------------------------------------------- |
| • | Endeavor Air, Inc\., a wholly owned subsidiary of ours;  |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------- |
| • | Republic Airline, Inc\. ("Republic"), a subsidiary of Republic Airways Holdings, Inc\.; and  |

|   |                                                         |
| - | ------------------------------------------------------- |
| • | SkyWest Airlines, Inc\., a subsidiary of SkyWest, Inc\. |

Our contractual agreements with regional carriers primarily are capacity purchase arrangements, under which we control the scheduling, pricing, reservations, ticketing and seat inventories for the regional carriers' flights operating under our "DL" designator code\. We are entitled to all ticket, cargo, mail, in\-flight and ancillary revenues associated with these flights\. We pay those airlines an amount, as defined in the applicable agreement, which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services\. These capacity purchase agreements are long\-term agreements, usually with initial terms of at least 10 years, which grant us the option to extend the initial term\. Certain of these agreements provide us the right to terminate the entire agreement, or in some cases remove some of the aircraft from the scope of the agreement, for convenience at certain future dates\.

SkyWest Airlines operates some flights for us under a revenue proration agreement\. This proration agreement establishes a fixed dollar or percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries\.

Loyalty Program

Our SkyMiles ^®^  loyalty program is designed to retain and increase traveler loyalty by offering incentives to customers to increase travel on Delta\. The loyalty program allows program members to earn mileage credit for travel awards by flying on Delta, its regional carriers and other participating airlines\. Mileage credit may also be earned by using certain services offered by program participants, such as credit card companies, hotels and car rental agencies\. In addition, individuals may purchase mileage credits\. Miles do not expire, but are subject to the program rules\. We reserve the right to terminate the program with six months advance notice, and to change the program's terms and conditions at any time without notice\.

Loyalty program mileage credits can be redeemed for air travel (including upgrades) on Delta and participating airlines, for membership in our Delta Sky Clubs ^®^  and for other awards\. We offer last\-seat availability for travel awards on our own flights (including most Delta Connection flights)\. Mileage credits are subject to certain transfer restrictions and travel awards on partner airlines are subject to capacity\-controlled seating\. In  2018 , 8\.2% of revenue miles flown on Delta were from award travel, as program members redeemed miles in the loyalty program for 17\.2 million award redemptions\.

 4


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

agreement bringing our last work group under a single collective bargaining agreement\. We also finished painting the remainder of the Airbus fleet in the Alaska livery, and completed interior cabin renovations on 60% of the Airbus fleet\.

With the integration largely behind us, we have shifted our focus towards our vision and strategy for the next five years\. This strategy has three major pillars:

People:

Our success depends on our more than 24,000 employees living our values every day to deliver award\-winning customer service as one team\. We know engaged employees deliver higher productivity, superior execution and better guest experiences, which is why investing in our people is imperative to our future success\.

In 2019, we completed Flight Path \- a program that brought all Alaska and Horizon employees together through leader\-led sessions to inform, engage and set the course for our business and culture\. Aside from one\-time programs, we continue to communicate with employees through a variety of vehicles, including weekly Leader Look Ahead and periodic live\-streamed webcasts, to provide employees better information and a stronger connection to organizational priorities\. Our efforts were recognized by Forbes Magazine, who named Alaska as one of the World's Best Employers for the fifth year in a row for 2019, and as one of America's Best Employers for Diversity in 2020\.

Aligning our employees' goals with Air Group's goals has been an important contributor to our strong track record of accomplishments and financial performance\. The majority of Alaska and Horizon employees participate in our Performance\-Based Pay (PBP) and Operational Performance Rewards (OPR) programs, which encourage employees to work together to achieve metrics related to the Company's strategy \- including safety, profitability, on\-time performance, low costs, customer loyalty and customer satisfaction\. Over the last ten years, our incentive programs have paid out on average more than one month's pay for most employees\. In 2019, our employees earned more than $150 million under these incentive programs\.

Growth:

Driving growth will require our focus in a variety of areas, including a powerful brand, optimized network and strong revenue generation\.

• Powerful brand \-  P roviding genuine and caring service to our guests is key to our success and loyalty to the Alaska brand\. This service is demonstrated daily by our employees who are empowered to make the best choices for our guests\.  As proof, in 2019, Alaska ranked first in the J\.D\. Power and Associates annual survey of customer satisfaction among traditional network carriers for the 12th year in a row\. Alaska was also recognized for excellent service by Condé Nast Traveler and Travel \+ Leisure magazine for the second consecutive year, continuing an achievement earned by Virgin America for the preceding ten years\.

Our award winning Mileage Plan^TM^  is another way we build long\-term guest relationships and grow our brand\. We maintain the only distance\-based frequent flier program in the United States, which rewards all fliers regardless of the price they paid for their tickets\. In 2019, we increased our sign\-up promotion for new cardholders to 40,000 miles, providing immediate utility of the program\. We also offered promotions like Buy One Get One Free companion fares and continued popular redemption benefits, including using miles for hotel redemptions (with access to over 400,000 hotels worldwide), and adding EL AL Airlines as a new global partner\.

Over the past two years, we initiated a refresh of many of our amenities with the aim of highlighting our West Coast roots\. From updated on\-board offerings, including fresh and local food, to local craft beers and wines, as well as updating our in\-air Wi\-Fi to meet the evolving needs of our guests, we will continue to innovate and evolve to provide our guests with the best experience\. Work towards updated guest\-facing amenities continued in 2019, with our flagship lounge opening in the North Satellite at Sea\-Tac Airport, as well as the announcement of a new lounge at San Francisco International Airport, which is expected to open in the second half of 2020\. We also strive to connect with West Coast guests through key sponsorships including Russell Wilson, the San Jose Sharks, San Francisco Giants, Seattle Mariners, Portland Timbers, Seattle's new NHL team, and more\.

• Optimized Network  \- The acquisition of Virgin America positioned us as the fifth largest airline in the U\.S\., with an unparalleled ability to serve West Coast travelers\. We offer the highest guest relevance of any carrier from the West Coast\. Competition in our markets is significant, and we know that we must defend our customer base as we grow our network presence by providing guests with an increased choice of schedule times and fares\. We are intensely focused on providing the most utility and routes to our guests\. From our West Coast hub cities, we lead all other airlines in

5


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

Extended interruptions or disruptions in service at major airports in which we operate or the extended grounding of a type of aircraft or engine we operate could have a material adverse effect on our operations\.

The airline industry is heavily dependent on business models that concentrate operations in major airports in the United States and throughout the world\. An extended interruption or disruption at an airport where we have significant operations could have a material adverse effect on our business, financial condition and results of operations\.

Similarly, the airline industry is heavily dependent on a limited number of aircraft and engine manufacturers whose products are subject to extensive regulatory requirements\. The long\-term grounding of an aircraft or engine type that we operate could have a significant impact on our operations if we are not able to substitute or replace the affected aircraft or engine type and could, in any event, have a material adverse effect on our financial condition and results of operations\.

The airline industry is subject to extensive government regulation, and new regulations may increase our operating costs\.

Airlines are subject to extensive regulatory and legal compliance requirements that result in significant costs\. For instance, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that necessitate significant expenditures\. We expect to continue incurring significant expenses to comply with the FAA's regulations\.

Other laws, regulations, taxes and airport rates and charges have also been imposed from time to time that significantly increase the cost of airline operations or reduce revenues\. The industry is heavily taxed\. Additional taxes and fees, if implemented, could negatively impact our results of operations\.

Airport slot access is subject to government regulation and changes in slot regulations or allocations could impose a significant cost on the airlines operating in airports subject to such regulations or allocations\. In addition, the failure of the federal government to upgrade the U\.S\. air traffic control system has resulted in delays and disruptions of air traffic during peak travel periods in certain congested markets\. The failure to improve the air traffic control system could lead to increased delays and inefficiencies in flight operations as demand for U\.S\. air travel increases, having a material adverse effect on our operations\. Failure to update the air traffic control system in a timely manner, and the substantial funding requirements of an updated system that may be imposed on air carriers, may have an adverse impact on our financial condition and results of operations\.

As an international carrier, we are subject to a wide variety of U\.S\. and foreign laws that affect trade, including tariff and trade policies, export requirements, taxes, monetary policies and other restrictions and charges\. On October 2, 2019, an arbitration tribunal of the World Trade Organization ruled in a long\-standing dispute that the United States could impose $7\.5 billion in retaliatory tariffs in response to European Union subsidies to Airbus\. Effective October 18, 2019, the U\.S\. Trade Representative imposed tariffs on certain products imported from the European Union, including an ad valorem duty of 10% on commercial aircraft originating in France and Germany\. Some of the Airbus aircraft that we have on order would be subject to these tariffs if imported as new aircraft\. We are pursuing strategies to minimize the impact of these tariffs on our aircraft deliveries but if we are unsuccessful or if the tariffs are increased, these tariffs could substantially increase the cost to us of the affected aircraft, which in turn could have a material adverse effect on our financial results\.

In addition, some of our operations are in high\-risk legal compliance environments\. Failure to comply with trade sanctions, the U\.S\. Foreign Corrupt Practices Act and other applicable laws or regulations could result in litigation, assessment of damages, imposition of penalties or other consequences, any or all of which could harm our reputation and have an adverse effect on our financial results\.

We and other U\.S\. carriers are subject to U\.S\. and foreign laws regarding privacy of passenger and employee data that are not consistent in all countries in which we operate\. In addition to the heightened level of concern regarding privacy of passenger data in the U\.S\., certain European government agencies have recently updated privacy regulations applicable to private industry, including airlines\. Ongoing compliance with these evolving regulatory regimes is expected to result in additional operating costs and could have a material adverse effect on our operations and any future expansion\.

19


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

Failure to appropriately comply with information security rules and regulations or safeguard our employee or guest data could result in damage to our reputation and cause us to incur substantial legal and regulatory cost\.

We accept, store and transmit information about our guests, our employees, our business partners, and our business\. Many international and U\.S\. jurisdictions have established or are in the process of establishing their own data security and privacy regulatory framework with which we, our business partners, and our corporate customers must comply\. There are also various bills pending at the U\.S\. state and federal levels that could impose additional privacy and data security obligations\. This uncertain and increasingly complex regulatory environment may result in significant expenses associated with increased investment in technology and the development of new operational processes, particularly as we continue to collect and retain large amounts of personal information\. If our online activities or our other customer\-facing technology systems do not function as designed, we may experience a loss of customer confidence, decreased sales, or be exposed to fraud, any of which could materially and adversely affect our reputation and operations\. In addition, we frequently rely on third\-party hosting sites and data processors, including cloud providers\. To the extent that either we or third parties with whom we share information are found to be out of compliance with applicable laws and regulations, we could be subject to additional litigation, regulatory risks and reputational harm\.

Cyber security threats have and will continue to impact our business\. Failure to appropriately mitigate these risks could negatively impact our operations, reputation and financial condition\.

Our sensitive information is securely transmitted over public and private networks\. Our systems are subject to increasing and evolving cyber security risks\. Unauthorized parties have attempted and continue to attempt to gain access to our systems and information, including through fraudulent misrepresentation and other means of deception\. Methods used by unauthorized parties are continually evolving and may be difficult to identify\. Because of these ever\-evolving risks and regular attacks, we continue to review policies and educate our people on various methods utilized in attempts to gain unauthorized access to bolster awareness and encourage cautionary practices\. However, the nature of these attacks means that proper policies and education may not be enough to prevent all unauthorized access\. A compromise of our systems, the security of our infrastructure or those of other business partners that result in our information being accessed or stolen by unauthorized persons could adversely affect our operations and our reputation\.

FINANCIAL CONDITION AND FINANCIAL MARKETS

Our business, financial condition and results of operations are substantially exposed to the volatility of jet fuel prices\. Significant increases in jet fuel costs would harm our business\.

Fuel costs constitute a significant portion of our total operating expenses\. Future increases in the price of jet fuel may harm our business, financial condition and results of operations unless we are able to increase fares and fees or add additional ancillary services to attempt to recover increasing fuel costs\.

Our indebtedness and other fixed obligations could lead to liquidity constraints that may restrict our activities\.

We carry, and will continue to carry for the foreseeable future, a substantial amount of debt related to aircraft lease and financing commitments\. Although we aim to keep our leverage low, due to our high fixed costs, including such aircraft lease commitments and debt service, a decrease in revenues would result in a disproportionately greater decrease in earnings\.

Our outstanding long\-term debt and other fixed obligations could have important consequences\. For example, they could limit our ability to obtain additional financing to fund our future capital expenditures, working capital or other purposes; require us to dedicate a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; or limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions\.

Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, we cannot ensure we will be able to do so in the future\. If we fail to do so, our business could be harmed\.

24


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

We rely on partner airlines for codeshare and frequent flyer marketing arrangements\.

Our airlines are parties to marketing agreements with a number of domestic and international air carriers, or “partners\." These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska codeshare flights\. In addition, the agreements generally provide that members of Alaska’s Mileage Plan™ program can earn credit on or redeem credit for partner flights and vice versa\. We receive revenue from flights sold under codeshare and from interline arrangements\. In addition, we believe that the frequent flyer arrangements are an important part of our frequent flyer program\. The loss of a significant partner through bankruptcy, consolidation, or otherwise, could have a negative effect on our revenues or the attractiveness of our Mileage Plan™ program, which we believe is a source of competitive advantage\.

We routinely engage in analysis and discussions regarding our own strategic position, including alliances, codeshare arrangements, interline arrangements, and frequent flyer program enhancements, and will continue to have future discussions with other airlines regarding similar activities\. If other airlines participate in consolidation or reorganization, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of ours and potentially impairing our ability to realize expected benefits from our own strategic relationships\.

Economic uncertainty, or another recession, would likely impact demand for our product and could harm our financial condition and results of operations\.

The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions\. We are also highly dependent on U\.S\. consumer confidence and the health of the U\.S\. economy\. Unfavorable U\.S\. economic conditions have historically driven changes in travel patterns and have resulted in reduced spending for both leisure and business travel\. For some consumers, leisure travel is a discretionary expense, and shorter distance travelers, in particular, have the option to replace air travel with surface travel\. Businesses are able to forgo air travel by using communication alternatives such as videoconferencing or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat\. Unfavorable economic conditions also hamper the ability of airlines to raise fares to counteract increased fuel, labor and other costs\. Unfavorable or even uncertain economic conditions could negatively affect our financial condition and results of operations\.

INFORMATION TECHNOLOGY

We rely heavily on automated systems to operate our business, and a failure to invest in new technology or a disruption of our current systems or their operators could harm our business\.

We depend on automated systems to operate our business, including our airline reservation system, our telecommunication systems, our website, our maintenance systems, our check\-in kiosks, mobile devices, and other systems\. Substantially all of our tickets are issued to our guests as electronic tickets, and the majority of our guests check\-in using our website, airport kiosks, or our mobile application\. We depend on our reservation system to be able to issue, track and accept these electronic tickets\. In order for our operations to work efficiently, we must continue to invest in new technology to ensure that our website, reservation system and check\-in systems are able to accommodate a high volume of traffic, maintain information security and deliver important flight information\. Substantial or repeated website, reservations system or telecommunication systems failures or service disruptions could reduce the attractiveness of our services and cause our guests to do business with another airline\. In addition, we rely on other automated systems for crew scheduling, flight dispatch and other operational needs\. We are in the final stages of moving our primary data facility\. Disruptions, failed migration, untimely recovery, or a breach of these systems or the data center could result in the loss of important data, an increase of our expenses, an impact on our operational performance, or a possible temporary cessation of our operations\.

23


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

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

geographic regions as the overwhelming majority of the Company’s revenue producing assets (primarily U\.S\. registered aircraft) can be deployed in any of its geographic regions\.

**NOTE 16 \- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

|                                             |                   |                   |                    |                   |
|:------------------------------------------- | -----------------:| -----------------:| ------------------:| -----------------:|
| **UAL**                                     | **Quarter Ended** | **Quarter Ended** |  **Quarter Ended** | **Quarter Ended** |
| **(In millions, except per share amounts)** |     **March 31**  |      **June 30**  |  **September 30**  |  **December 31**  |
| **2017**                                    |                   |                   |                    |                   |
| Operating revenue                           |           $ 8,420 |         $ 10,000  |            $9,878  |           $9,438  |
| Income from operations                      |              278  |            1,399  |             1,092  |              729  |
| Net income                                  |               96  |              818  |               637  |              580  |
| Basic earnings per share                    |            0\.31  |            2\.67  |             2\.12  |            1\.99  |
| Diluted earnings per share                  |            0\.31  |            2\.66  |             2\.12  |            1\.99  |
| **2016**                                    |                   |                   |                    |                   |
| Operating revenue                           |           $8,195  |           $9,396  |            $9,913  |           $9,052  |
| Income from operations                      |              649  |            1,060  |             1,624  |            1,005  |
| Net income                                  |              313  |              588  |               965  |              397  |
| Basic earnings per share                    |            0\.88  |            1\.78  |             3\.02  |            1\.26  |
| Diluted earnings per share                  |            0\.88  |            1\.78  |             3\.01  |            1\.26  |

100


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

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

|                |                            |
| -------------- | -------------------------- |
|  **ITEM 16\.** | **FORM  10\-K SUMMARY\.**  |

None\.

132


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

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

UAL's quarterly financial data is subject to seasonal fluctuations and historically its second and third quarter financial results, which reflect higher travel demand, are better than its first and fourth quarter financial results\. UAL's quarterly results were impacted by the following significant items (in millions):

|                                                                                |                      |                   |                      |                   |
| ------------------------------------------------------------------------------------------ | -------------------- | ----------------- | -------------------- | ----------------- |
|                                                                                | **Quarter Ended**    | **Quarter Ended** | **Quarter Ended**    | **Quarter Ended** |
|                                                                                | **March 31**         | **June 30**       | **September 30**     | **December 31**   |
| **2019**                                                                                |                      |                   |                      |                   |
| Impairment of assets                                                                       | 8                    | 61                | —                    | 102               |
| Severance and benefit costs                                                                | 6                    | 6                 | 2                    | 2                 |
| (Gains) losses on sale of assets and other special charges                                 | 4                    | 4                 | 25                   | 26                |
| Total operating special charges                                                            | 18                   | 71                | 27                   | 130               |
| Nonoperating unrealized (gains) losses on investments                                      | (17

)         | (34

)      | (21

)         | (81

)      |
| Total special charges and unrealized (gains) losses on investments                         | 1                    | 37                | 6                    | 49                |
| Income tax benefit related to special charges and unrealized (gains) losses on investments | —                    | (8

)       | (2

)          | (11

)      |
| Total special charges and unrealized (gains) losses on investments, net of income tax      | 1                    | 29                | 4                    | 38                |
| **2018**                                                                                |                      |                   |                      |                   |
| Impairment of assets                                                                       | $23                  | $111              | $11                  | $232              |
| Termination of an engine maintenance service agreement                                     | —                    | —                 | —                    | 64                |
| Severance and benefit costs                                                                | 14                   | 11                | 9                    | 7                 |
| (Gains) losses on sale of assets and other special charges                                 | 3                    | 7                 | (3

)          | (2

)       |
| Total operating special charges                                                            | 40                   | 129               | 17                   | 301               |
| Nonoperating unrealized (gains) losses on investments                                      | (45

)         | 135               | (29

)         | (56

)      |
| Total special charges and unrealized (gains) losses on investments                         | (5

)          | 264               | (12

)         | 245               |
| Income tax benefit related to special charges and unrealized (gains) losses on investments | 1                    | (59

)      | 3                    | (55

)      |
| Income tax adjustments                                                                     | —                    | —                 | —                    | (5

)       |
| Total special charges and unrealized (gains) losses on investments, net of income tax      | $

(4

) | $205              | $

(9

) | $185              |

See Note 14 of this report for additional information related to these items\.

88


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

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

adverse effects of any future terrorist attacks, international hostilities or other security events\. Any such events could have a material adverse impact on the Company's financial condition, liquidity and operating results\.

***Increasing privacy and data security obligations or a significant data breach may adversely affect the Company's business\.***

The Company is subject to increasing legislative, regulatory and customer focus on privacy issues and data security\. Also, a number of the Company's commercial partners, including credit card companies, have imposed data security standards that the Company must meet\. These standards continue to evolve\. The Company will continue its efforts to meet its privacy and data security obligations; however, it is possible that certain new obligations may be difficult to meet and could increase the Company's costs\.

Additionally, the Company must manage evolving cybersecurity risks\. Our network systems and storage applications, and those systems and storage and other business applications maintained by our third\-party providers, may be subject to attempts to gain unauthorized access, breach, malfeasance or other system disruptions\. In some cases, it is difficult to anticipate or to detect immediately such incidents and the damage caused thereby\. While we continually work to safeguard our internal network systems and validate the security of our third\-party providers, including through information security policies and employee awareness and training, there is no assurance that such actions will be sufficient to prevent cyber\-attacks or security breaches\. The loss, disclosure, misappropriation of or access to customers', employees' or business partners' information or the Company's failure to meet its obligations could result in legal claims or proceedings, penalties and remediation costs\. A significant data breach or the Company's failure to meet its obligations may adversely affect the Company's reputation, business, operating results and financial condition\.

***Disruptions to our regional network and United Express flights provided by third\-party regional carriers could adversely affect our business, operating results and financial condition\.***

The Company has contractual relationships with various regional carriers to provide regional aircraft service branded as United Express\. These regional operations are an extension of the Company's mainline network and complement the Company's operations by carrying traffic that connects to mainline service and allows flights to smaller cities that cannot be provided economically with mainline aircraft\. The Company's business and operations are dependent on its regional flight network, with regional capacity accounting for approximately 11% of the Company's total capacity for the year ended December 31, 2018\.

Although the Company has agreements with its regional carriers that include contractually agreed performance metrics, each regional carrier is a separately certificated commercial air carrier and the Company does not control the operations of these carriers\. A number of factors may impact the Company's regional network, including weather\-related effects and seasonality\. In addition, the decrease in qualified pilots driven by changes to federal regulations has adversely impacted and could continue to affect the Company's regional flying\. For example, the FAA's expansion of minimum pilot qualification standards, including a requirement that a pilot have at least 1,500 total flight hours, as well as the FAA's revised pilot flight and duty time requirements under Part 117 of the Federal Aviation Regulations, have contributed to a smaller supply of pilots available to regional carriers\. The decrease in qualified pilots resulting from the regulations as well as factors including a decreased student pilot population and a shrinking U\.S\. military from which to hire qualified pilots, could adversely impact the Company's operations and financial condition, and could also require the Company to reduce regional carrier flying\.

If a significant disruption occurs to the Company's regional network or flights or if one or more of the regional carriers with which the Company has relationships is unable to perform their obligations over an extended period of time, there could be a material adverse effect on the Company's business, financial condition and operating results\.

***Current or future litigation and regulatory actions, or failure to comply with the terms of any settlement, order or arrangement relating to these actions, could have a material adverse impact on the Company\.***

From time to time, we are subject to litigation and other legal and regulatory proceedings relating to our business or investigations or other actions by governmental agencies, including as described in Part I, Item 3, Legal Proceedings, of this report\. No assurances can be given that the results of these or new matters will be favorable to us\. An adverse resolution of lawsuits, arbitrations, investigations or other proceedings or actions could have a material adverse effect on our financial condition and operating results, including as a result of non\-monetary remedies, and could also result in adverse publicity\. Defending ourselves in these matters may be time\-consuming, expensive and disruptive to normal business operations and may result in significant expense and a diversion of management's time and attention from the operation of our business, which could impede our ability to achieve our business objectives\. Additionally, any amount that we may be required to pay to satisfy a judgment, settlement, fine or penalty may not be covered by insurance\. If we fail to comply with the terms contained in any settlement, order or agreement with a governmental authority relating to these matters, we could be subject to criminal or civil penalties, which could have a material adverse impact on the Company\. Under our charter and certain indemnification agreements that we have entered into (and may in the future enter into) with our officers, directors and certain third parties, we

12


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

Alaska’s union contracts at December 31, 2019 were as follows:

|                                                                     |                                                                     |  |  |  |                                        |                                        |                                        |  |  |  |                     |                     |  |  |  |                      |                      |                      |
|:------------------------------------------------------------------- |:------------------------------------------------------------------- |:- |:- |:- |:-------------------------------------- |:-------------------------------------- |:-------------------------------------- |:- |:- |:- | -------------------:| -------------------:|:- |:- |:- |:--------------------:|:--------------------:|:--------------------:|
| Union                                                               | Union                                                               |  |  |  | Employee Group                         | Employee Group                         | Employee Group                         |  |  |  | Number of Employees | Number of Employees |  |  |  |   Contract Status    |   Contract Status    |   Contract Status    |
| Air Line Pilots Association, International (ALPA)^(a)^              | Air Line Pilots Association, International (ALPA)^(a)^              |  |  |  | Pilots                                 | Pilots                                 | Pilots                                 |  |  |  |              3,048  |              3,048  |  |  |  | Amendable 3/31/2020  | Amendable 3/31/2020  | Amendable 3/31/2020  |
| Association of Flight Attendants (AFA)                              | Association of Flight Attendants (AFA)                              |  |  |  | Flight attendants                      | Flight attendants                      | Flight attendants                      |  |  |  |              6,043  |              6,043  |  |  |  | Amendable 12/17/2021 | Amendable 12/17/2021 | Amendable 12/17/2021 |
| International Association of Machinists and Aerospace Workers (IAM) | International Association of Machinists and Aerospace Workers (IAM) |  |  |  | Ramp service and stock clerks          | Ramp service and stock clerks          | Ramp service and stock clerks          |  |  |  |                723  |                723  |  |  |  | Amendable 9/27/2024  | Amendable 9/27/2024  | Amendable 9/27/2024  |
| IAM                                                                 | IAM                                                                 |  |  |  | Clerical, office and passenger service | Clerical, office and passenger service | Clerical, office and passenger service |  |  |  |              4,443  |              4,443  |  |  |  | Amendable 9/27/2024  | Amendable 9/27/2024  | Amendable 9/27/2024  |
| Aircraft Mechanics Fraternal Association (AMFA)                     | Aircraft Mechanics Fraternal Association (AMFA)                     |  |  |  | Mechanics, inspectors and cleaners     | Mechanics, inspectors and cleaners     | Mechanics, inspectors and cleaners     |  |  |  |                946  |                946  |  |  |  | Amendable 10/17/2023 | Amendable 10/17/2023 | Amendable 10/17/2023 |
| Mexico Workers Association of Air Transport^(b)^                    | Mexico Workers Association of Air Transport^(b)^                    |  |  |  | Mexico airport personnel               | Mexico airport personnel               | Mexico airport personnel               |  |  |  |                 92  |                 92  |  |  |  | Amendable 9/29/2019  | Amendable 9/29/2019  | Amendable 9/29/2019  |
| Transport Workers Union of America (TWU)                            | Transport Workers Union of America (TWU)                            |  |  |  | Dispatchers                            | Dispatchers                            | Dispatchers                            |  |  |  |                 82  |                 82  |  |  |  | Amendable 3/24/2021  | Amendable 3/24/2021  | Amendable 3/24/2021  |

(a) Negotiations with ALPA for an updated collective bargaining agreement are ongoing as of the date of this filing\.

(b) As a result of amendments to Mexican labor laws, the Company has up to four years to make changes to the existing labor agreements\. During that time, the existing contracts remain in place\.

Horizon’s union contracts at December 31, 2019 were as follows:

|                                              |                                              |                                              |  |  |  |                                                              |                                                              |                                                              |  |  |  |                     |                     |  |  |  |                      |                      |                      |
|:-------------------------------------------- |:-------------------------------------------- |:-------------------------------------------- |:- |:- |:- |:------------------------------------------------------------ |:------------------------------------------------------------ |:------------------------------------------------------------ |:- |:- |:- | -------------------:| -------------------:|:- |:- |:- |:--------------------:|:--------------------:|:--------------------:|
| Union                                        | Union                                        | Union                                        |  |  |  | Employee Group                                               | Employee Group                                               | Employee Group                                               |  |  |  | Number of Employees | Number of Employees |  |  |  |   Contract Status    |   Contract Status    |   Contract Status    |
| International Brotherhood of Teamsters (IBT) | International Brotherhood of Teamsters (IBT) | International Brotherhood of Teamsters (IBT) |  |  |  | Pilots                                                       | Pilots                                                       | Pilots                                                       |  |  |  |                824  |                824  |  |  |  | Amendable 12/31/2024 | Amendable 12/31/2024 | Amendable 12/31/2024 |
| AFA^(a)^                                     | AFA^(a)^                                     | AFA^(a)^                                     |  |  |  | Flight attendants                                            | Flight attendants                                            | Flight attendants                                            |  |  |  |                685  |                685  |  |  |  | Amendable 7/18/2019  | Amendable 7/18/2019  | Amendable 7/18/2019  |
| AMFA                                         | AMFA                                         | AMFA                                         |  |  |  | Mechanics and related classifications                        | Mechanics and related classifications                        | Mechanics and related classifications                        |  |  |  |                261  |                261  |  |  |  | Amendable 12/15/2020 | Amendable 12/15/2020 | Amendable 12/15/2020 |
| Unifor                                       | Unifor                                       | Unifor                                       |  |  |  | Station personnel in
Vancouver and Victoria, BC, Canada | Station personnel in
Vancouver and Victoria, BC, Canada | Station personnel in
Vancouver and Victoria, BC, Canada |  |  |  |                 40  |                 40  |  |  |  |  Expires 2/13/2022   |  Expires 2/13/2022   |  Expires 2/13/2022   |
| TWU                                          | TWU                                          | TWU                                          |  |  |  | Dispatchers                                                  | Dispatchers                                                  | Dispatchers                                                  |  |  |  |                 24  |                 24  |  |  |  | Amendable 8/26/2018  | Amendable 8/26/2018  | Amendable 8/26/2018  |

(a) Negotiations with AFA for an updated collective bargaining agreement are ongoing as of the date of this filing\.

McGee Air Services union contract at December 31, 2019 was as follows:

|       |       |       |  |  |  |                        |                        |                        |  |  |  |                     |                     |  |  |  |                     |                     |                     |
|:----- |:----- |:----- |:- |:- |:- |:---------------------- |:---------------------- |:---------------------- |:- |:- |:- | -------------------:| -------------------:|:- |:- |:- |:-------------------:|:-------------------:|:-------------------:|
| Union | Union | Union |  |  |  | Employee Group         | Employee Group         | Employee Group         |  |  |  | Number of Employees | Number of Employees |  |  |  |   Contract Status   |   Contract Status   |   Contract Status   |
| IAM   | IAM   | IAM   |  |  |  | Fleet and ramp service | Fleet and ramp service | Fleet and ramp service |  |  |  |              1,664  |              1,664  |  |  |  | Amendable 7/19/2023 | Amendable 7/19/2023 | Amendable 7/19/2023 |

14


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

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

American Airlines Group Inc\.:

Opinion on Internal Control Over Financial Reporting

We have audited American Airlines Group Inc\. and subsidiaries’ (the Company) internal control over financial reporting as of  December 31, 2019 , based on criteria established in  Internal Control  –  Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission\. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of  December 31, 2019 , based on criteria established in  Internal Control  –  Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of  December 31, 2019  and  2018 , the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity (deficit) for each of the years in the three\-year period ended  December 31, 2019 , and the related notes (collectively, the consolidated financial statements), and our report dated  February 19, 2020  expressed an unqualified opinion on those consolidated financial statements\.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting\. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit\. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U\.S\. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB\.

We conducted our audit in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects\. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk\. Our audit also included performing such other procedures as we considered necessary in the circumstances\. We believe that our audit provides a reasonable basis for our opinion\.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles\. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements\.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements\. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate\.

/s/ KPMG LLP

Dallas, Texas

February 19, 2020

160


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

10\-K 1 alk10\-k123117\.htm 10\-K

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

**FORM 10\-K**

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------- |
| x | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

For the fiscal year ended December 31, 2017

OR

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------- |
| ¨ | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

For the transition period from to

**Commission File Number 1\-8957**

**ALASKA AIR GROUP, INC\.**

|                          |                                          |
| ------------------------ | ---------------------------------------- |
| **Delaware**             | **91\-1292054**                          |
| (State of Incorporation) | (I\.R\.S\. Employer Identification No\.) |

|                                                              |
| ------------------------------------------------------------ |
| **19300 International Boulevard, Seattle, Washington 98188** |
| **Telephone: (206) 392\-5040**                               |

Securities registered pursuant to Section 12(b) of the Act:

|                                    |                             |
| ---------------------------------- | --------------------------- |
| **Common Stock, $0\.01 Par Value** | **New York Stock Exchange** |

 Securities registered pursuant to Section 12(g) of the Act:

**None**

Indicate by check mark if the registrant is a well\-known seasoned issuer, as defined in Rule 405 of the Securities Act\. Yesx No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act\. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days\. Yesx No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S\-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)\. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S\-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10\-K or any amendment to this Form 10\-K\. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non\-accelerated filer or a smaller reporting company\. See definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b\-2 of the Exchange Act:

Large accelerated filerx Accelerated filer ¨ Non\-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b\-2 of the Exchange Act\.): Yes ¨ No x

As of January 31, 2018, shares of common stock outstanding totaled 122,996,587\. The aggregate market value of the shares of common stock of Alaska Air Group, Inc\. held by nonaffiliates on June 30, 2017, was approximately $11\.1 billion (based on the closing price of $89\.76 per share on the New York Stock Exchange on that date)\.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of Definitive Proxy Statement relating to 2018 Annual Meeting of Shareholders are incorporated by reference in Part III\.


Annual Report of Southwest Airlines Co\. for year 2019

Companion Pass promotion in first quarter 2019 for new Cardholders\. The Company currently expects Other revenues in  first quarter 2020  to increase, compared with  first quarter 2019 \.

Operating unit revenues for  2019  increase d by  3\.7 percent , compared with  2018 \. Currently, passenger booking and revenue trends remain healthy, and the Company expects  first quarter 2020  RASM to increase in the range of 3\.5 to 5\.5 percent, compared with  first quarter 2019 \. The Company's outlook for  first quarter 2020  year\-over\-year RASM includes an estimated 1\.5 point benefit—approximately one point due to the negative impact to passenger bookings from the U\.S\. government shutdown during first quarter 2019 and approximately one\-half point related to unscheduled maintenance disruptions and related flight cancellations during first quarter 2019\. Additionally, first quarter 2020 year\-over\-year RASM is expected to benefit by approximately two points due to the removal of MAX flights from the Company's schedule, which will result in lower first quarter 2020 capacity\.

Operating Expenses

Operating expenses for  2019   increase d by  $712 million , or  3\.8 percent , compared with  2018 , while capacity decreased  1\.6 percent  over the same period\. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs\. However, the Company's Operating expenses are largely fixed once flight schedules are published and the Company experienced lower than expected ASMs during 2019 due to the MAX groundings\. Flight cancellations are expected to drive unit cost pressure for the duration of the MAX groundings\. The following table presents the Company's Operating expenses per ASM for  2019  and  2018 , followed by explanations of these changes on a per ASM basis and dollar basis:

|                                    |                             |                             |             |             |
| ---------------------------------- | --------------------------- | --------------------------- | ----------- | ----------- |
|                                    | **Year ended December 31,** | **Year ended December 31,** | **Per ASM** | **Percent** |
| (in cents, except for percentages) | **2019**                    | **2018**                    | **change**  | **change**  |
| Salaries, wages, and benefits      | 5\.27¢                      | 4\.79¢                      | 0\.48¢      | 10\.0 %     |
| Fuel and oil                       | 2\.76                       | 2\.89                       | (0\.13)     | (4\.5)      |
| Maintenance materials and repairs  | 0\.78                       | 0\.69                       | 0\.09       | 13\.0       |
| Landing fees and airport rentals   | 0\.87                       | 0\.83                       | 0\.04       | 4\.8        |
| Depreciation and amortization      | 0\.78                       | 0\.75                       | 0\.03       | 4\.0        |
| Other operating expenses           | 1\.92                       | 1\.79                       | 0\.13       | 7\.3        |
| Total                              | 12\.38¢                     | 11\.74¢                     | 0\.64¢      | 5\.5 %      |

Operating expenses per ASM for  2019  increase d by  5\.5 percent , compared with  2018 , primarily as a result of higher Salaries, wages, and benefits expense\. See below for further information\. Operating expenses per ASM for  2019 , excluding Fuel and oil expense and special items (a non\-GAAP financial measure),  increase d  8\.5 percent  year\-over\-year, also primarily as a result of higher Salaries, wages, and benefits expense\. See  Note Regarding Use of Non\-GAAP Financial Measures  and the  Reconciliation of Reported Amounts to Non\-GAAP Financial Measures  for additional detail regarding non\-GAAP financial measures\. Based on current trends, the Company expects its  first quarter 2020  unit costs, excluding Fuel and oil expense and profitsharing expense, to increase in the range of 6\.0 to 8\.0 percent, year\-over\-year\. This outlook includes an estimated seven point year\-over\-year unit cost headwind in first quarter 2020 driven by lower  first quarter 2020  capacity as a result of the ongoing MAX groundings, which includes the impact of unabsorbed overhead that will be utilized upon the MAX return to service\. It also includes one to two points of inflation primarily due to higher salaries, wages, and benefits; maintenance expense; and operating expenses related to investments in technology and facilities\. This inflation will be substantially offset in first quarter 2020 due to the non\-recurring first quarter 2019 costs associated with the Company's ratified labor agreement with its Mechanics and costs associated with unscheduled maintenance disruptions and related flight cancellations\.

Salaries, wages, and benefits expense for  2019  increase d by $ 644 million , or  8\.4 percent , compared with  2018 \. On a per ASM basis, Salaries, wages, and benefits expense for  2019  increased  10\.0 percent , compared with  2018 \. On both a dollar and per ASM basis, the majority of the increases were the result of higher salaries expense, driven by annual wage rate increases as well as increased headcount\. In addition, the Company's Board of Directors authorized a

43


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

awards redeemed and flown on other airlines (less the cost paid to the other airlines based on contractual agreements)\. The elements that represent use of the Alaska and Virgin America brands and access to frequent flyer member lists and advertising are recognized as commission income in the period that those elements are sold and included in Other—net revenue in the consolidated statements of operations\.

Frequent flyer program deferred revenue and liabilities included in the consolidated balance sheets (in millions):

|                                    |            |          |
| ---------------------------------- | ---------- | -------- |
|                                    | **2017**   | **2016** |
| **Current Liabilities:**           |            |          |
| Other accrued liabilities          | **$519**   | $484     |
| **Other Liabilities and Credits:** |            |          |
| Deferred revenue                   | **699**    | 638      |
| Other liabilities                  | **26**     | 21       |
| Total                              | **$1,244** | $1,143   |

The amounts recorded in other accrued liabilities relate primarily to deferred revenue expected to be realized within one year, which includes Mileage Plan™ awards that have been issued but not yet flown for $47 million and $43 million at December 31, 2017 and 2016\.

Frequent flyer program revenue included in the consolidated statements of operations (in millions):

|                                       |          |          |          |
| ------------------------------------- | -------- | -------- | -------- |
|                                       | **2017** | **2016** | **2015** |
| Passenger revenues                    | **$380** | $293     | $267     |
| Other ***—*** net revenues            | **482**  | 429      | 329      |
| Total frequent flyer program revenues | **$862** | $722     | $596     |

Other***—***net revenue includes commission revenues of $396 million, $329 million, and $280 million in 2017, 2016, and 2015\.

***Selling Expenses***

Selling expenses include credit card fees, global distribution systems charges, the estimated cost of frequent flyer travel awards earned through air travel, advertising, promotional costs, commissions and incentives\. Advertising production costs are expensed as incurred\. Advertising expense was $91 million, $61 million, and $55 million during the years ended December 31, 2017, 2016, and 2015\.

***Derivative Financial Instruments***

The Company's operations are significantly impacted by changes in aircraft fuel prices and interest rates\. In an effort to manage exposure to these risks, the Company periodically enters into fuel and interest rate derivative instruments\. These derivative instruments are recognized at fair value on the balance sheet and changes in the fair value are recognized in AOCL or in the consolidated statements of operations, depending on the nature of the instrument\.

The Company does not apply hedge accounting to its derivative fuel hedge contracts nor does it hold or issue them for trading purposes\. For cash flow hedges related to interest rate swaps, the effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item\. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in interest expense\.

***Fair Value Measurements***

Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date\. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value\. There are three levels of inputs that may be used to measure fair value:

*Level 1* \- Quoted prices in active markets for identical assets or liabilities\.

 71


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

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

Loan Agreement, and (2) guaranteed Synergy's obligation to pay Kingsland (which amount, if paid by United, will increase United's secured loan to Synergy by such amount) if the market price of AVH common stock on the fifth anniversary is less than $12 per ADR on the NYSE, for an aggregate maximum possible combined put payment and guarantee amount on the fifth anniversary of $217\.2 million\. Accordingly, the Company recorded a liability of $31 million for the fair value of its guarantee to loan additional funds to Synergy if required\. Any additional loans to Synergy would be collateralized by Synergy's shares of AVH stock and other collateral\.

***Increased Cost Provisions\.*** In United's financing transactions that include loans, United typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on LIBOR, for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject, in most cases, to obligations of the lenders to take certain limited steps to mitigate the requirement for, or the amount of, such increased costs\. At December 31, 2018, the Company had $3\.5 billion of floating rate debt and $27 million of fixed rate debt, with remaining terms of up to 12 years, that are subject to these increased cost provisions\. In several financing transactions involving loans or leases from non\-U\.S\. entities, with remaining terms of up to 12 years and an aggregate balance of $3\.2 billion, the Company bears the risk of any change in tax laws that would subject loan or lease payments thereunder to non\-U\.S\. entities to withholding taxes, subject to customary exclusions\.

As of December 31, 2018, United is the guarantor of $145 million of aircraft mortgage debt issued by one of United's regional carriers\. The aircraft mortgage debt is subject to similar increased cost provisions as described above for the Company's debt, and the Company would potentially be responsible for those costs under the guarantees\.

***Fuel Consortia\.*** United participates in numerous fuel consortia with other air carriers at major airports to reduce the costs of fuel distribution and storage\. Interline agreements govern the rights and responsibilities of the consortia members and provide for the allocation of the overall costs to operate the consortia based on usage\. The consortia (and in limited cases, the participating carriers) have entered into long\-term agreements to lease certain airport fuel storage and distribution facilities that are typically financed through tax\-exempt bonds, either special facilities lease revenue bonds or general airport revenue bonds, issued by various local municipalities\. In general, each consortium lease agreement requires the consortium to make lease payments in amounts sufficient to pay the maturing principal and interest payments on the bonds\. As of December 31, 2018, approximately $1\.7 billion principal amount of such bonds were secured by significant fuel facility leases in which United participates, as to which United and each of the signatory airlines has provided indirect guarantees of the debt\. As of December 31, 2018, the Company's contingent exposure was approximately $164 million principal amount of such bonds based on its recent consortia participation\. The Company's contingent exposure could increase if the participation of other air carriers decreases\. The guarantees will expire when the tax\-exempt bonds are paid in full, which ranges from 2022 to 2051\. The Company did not record a liability at the time these indirect guarantees were made\.

***Regional Capacity Purchase\.*** As of December 31, 2018, United had 292 call options to purchase regional jet aircraft being operated by certain of its regional carriers with contract dates extending until 2029\. These call options are exercisable upon wrongful termination or breach of contract, among other conditions\. None of the call options were exercisable at December 31, 2018\.

***Credit Card Processing Agreements\.*** The Company has agreements with financial institutions that process customer credit card transactions for the sale of air travel and other services\. Under certain of the Company's credit card processing agreements, the financial institutions in certain circumstances have the right to require that the Company maintain a reserve equal to a portion of advance ticket sales that has been processed by that financial institution, but for which the Company has not yet provided the air transportation\. Such financial institutions may require additional cash or other collateral reserves to be established or additional withholding of payments related to receivables collected if the Company does not maintain certain minimum levels of unrestricted cash, cash equivalents and short\-term investments (collectively, "Unrestricted Liquidity")\. The Company's current level of Unrestricted Liquidity is substantially in excess of these minimum levels\.

***Labor Negotiations\.*** As of December 31, 2018, United, including its subsidiaries, had approximately 92,000 employees\. Approximately 83% of United's employees were represented by various U\.S\. labor organizations as of December 31, 2018\.The agreement with the International Brotherhood of Teamsters (the "IBT") contains provisions that require the Company to align contract terms with other airlines' workgroups under certain conditions\.

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

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