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

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

***Benefit Payments***

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

|                                                   |          |          |          |          |          |                |
| ------------------------------------------------- | -------- | -------- | -------- | -------- | -------- | -------------- |
|                                                   | **2019** | **2020** | **2021** | **2022** | **2023** | **2024\-2028** |
| Pension benefits                                  | $720     | $758     | $797     | $836     | $876     | $4,917         |
| Retiree medical and other postretirement benefits | 84       | 75       | 71       | 66       | 64       | 280            |

***Plan Assets***

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

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

|                                 |                   |
| ------------------------------- | ----------------- |
| **Asset Class/Sub\-Class**      | **Allowed Range** |
| Equity                          | 60% \- 85%        |
| Public:                         |                   |
| U\.S\. Large                    | 20% \- 50%        |
| U\.S\. Small/Mid                | 0% \- 10%         |
| International                   | 17% \- 27%        |
| Emerging Markets                | 5% \- 11%         |
| Alternative Investments         | 5% \- 20%         |
| Fixed Income                    | 15% \- 40%        |
| Public:                         |                   |
| U\.S\. Long Duration            | 15% \- 30%        |
| High Yield and Emerging Markets | 0% \- 10%         |
| Private Income                  | 0% \- 10%         |
| Cash Equivalents                | 0% \- 5%          |

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

Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year\. Securities traded in the over\-the\-counter market are valued at the last bid price\. The money market fund is valued at fair value which represents the net asset value of the shares of such fund as of the close of business at the end of the period\. Investments in limited partnerships are carried at estimated net asset value as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships\. Common/collective trusts are valued at net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts\. The pension plan’s master trust also invests in a 103\-12 investment entity (the 103\-12 Investment Trust) which is designed to invest plan assets of more than one unrelated employer\. The 103\-12 Investment Trust is valued at net asset value which is determined by the issuer at the end of each month and is based on the aggregate fair value of trust assets less liabilities, divided by the number of units outstanding\. No changes in valuation techniques or inputs occurred during the year\.

115


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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Delta Air Lines, Inc\.

Opinion on Internal Control over Financial Reporting

We have audited Delta Air Lines, Inc\.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control\-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria)\. In our opinion, Delta Air Lines, Inc\. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on  the COSO criteria \.

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,  and the related consolidated statements of operations, comprehensive income, cash flows and stockholders’ equity for each of the three years in the period ended December 31, 2019, and the related notes and our report dated February 12, 2020 expressed an unqualified opinion thereon\.

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 included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and 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 Limitation 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\.

|                   |                   |                   |                       |                       |                       |
| ----------------- | ----------------- | ----------------- | --------------------- | --------------------- | --------------------- |
| Atlanta, Georgia  | Atlanta, Georgia  | Atlanta, Georgia  | /s/ Ernst & Young LLP | /s/ Ernst & Young LLP | /s/ Ernst & Young LLP |
| February 12, 2020 | February 12, 2020 | February 12, 2020 |                       |                       |                       |

97


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

|                         |                                |
| ----------------------- | ------------------------------ |
| Date: February 21, 2018 | /s/ Susan D\. Kronick          |
|                         | Susan D\. Kronick, Director    |
| Date: February 21, 2018 | /s/ Martin H\. Nesbitt         |
|                         | Martin H\. Nesbitt, Director   |
| Date: February 21, 2018 | /s/ Denise M\. O’Leary         |
|                         | Denise M\. O’Leary, Director   |
| Date: February 21, 2018 | /s/ Ray M\. Robinson           |
|                         | Ray M\. Robinson, Director     |
| Date: February 21, 2018 | /s/ Richard P\. Schifter       |
|                         | Richard P\. Schifter, Director |

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of American Airlines, Inc\. and in the capacities and on the dates noted:

|                         |                                                      |
| ----------------------- | ---------------------------------------------------- |
| Date: February 21, 2018 | /s/ W\. Douglas Parker                               |
|                         | W\. Douglas Parker                                   |
|                         | Chairman and Chief Executive Officer                 |
|                         | (Principal Executive Officer)                        |
| Date: February 21, 2018 | /s/ Derek J\. Kerr                                   |
|                         | Derek J\. Kerr                                       |
|                         | Executive Vice President and Chief Financial Officer |
|                         | (Principal Financial and Accounting Officer)         |
| Date: February 21, 2018 | /s/ Stephen L\. Johnson                              |
|                         | Stephen L\. Johnson, Director                        |
| Date: February 21, 2018 | /s/ Robert D\. Isom                                  |
|                         | Robert D\. Isom, Director                            |

200


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

As of January 31, 2020, shares of common stock outstanding totaled 122,913,010\. The aggregate market value of the shares of common stock of Alaska Air Group, Inc\. held by nonaffiliates on June 30, 2019, was approximately $7\.9 billion (based on the closing price of $63\.91 per share on the New York Stock Exchange on that date)\.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Definitive Proxy Statement relating to 2020 Annual Meeting of Shareholders are incorporated by reference in Part III\.

2


Annual Report of Southwest Airlines Co\. for year 2019

remains focused on strengthening its schedule in core markets to provide additional regional and international connectivity, improving its recoverability during irregular operations, and growing its presence in strategic markets that serve as cornerstones for its network such as Baltimore, Denver, and Houston\.

The Company ended 2019 with international service to 13 destinations through 25 international gateway cities within the 48 contiguous United States\.

Cost Structure

A key component of the Company's business strategy is its focus on cost discipline and profitably charging competitively low fares\. Adjusted for stage length, the Company has lower unit costs, on average, than the majority of the largest domestic carriers; however, as discussed below under "Management’s Discussion and Analysis of Financial Condition and Results of Operations," the Company experienced significant unit cost pressure in 2019 following the MAX groundings\.

The Company's low\-cost strategy includes, among other elements, (i) the use of a single aircraft type, the Boeing 737, (ii) the Company's operationally efficient point\-to\-point route structure, and (iii) its highly productive Employees\. Southwest's use of a single aircraft type allows for simplified scheduling, maintenance, flight operations, and training activities\. Southwest's point\-to\-point route structure includes service to and from many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore\-Washington International, Burbank, Manchester, Oakland, San Jose, Providence, and Ft\. Lauderdale\-Hollywood\. These conveniently located airports are typically less congested than other airlines' hub airports, which has contributed to Southwest's ability to achieve high asset utilization because aircraft can be scheduled to minimize the amount of time they are on the ground\. This, in turn, has reduced the number of aircraft and gate facilities that would otherwise be required and allows for high Employee productivity (lower headcount per aircraft)\.

The Company's focus on controlling costs also includes a continued commitment to pursuing, implementing, and enhancing initiatives to reduce fuel consumption and improve fuel efficiency\. Although Fuel and oil expense for 2019 decreased compared with 2018, primarily due to lower market jet fuel prices, it nonetheless remained the Company's second largest operating cost for 2019\. As evidenced by the table below, energy prices can fluctuate significantly in a relatively short amount of time\. The table below shows the Company's average cost of jet fuel for each year beginning in 2009 and during each quarter of 2019\.

|                     |                                |                                                   |                                                             |
| ------------------- | ------------------------------ | ------------------------------------------------- | ----------------------------------------------------------- |
| **Year**            | **Cost**

**(Millions)** | **Average**

**Cost Per**

**Gallon** | **Percentage of**

**Operating**

**Expenses** |
| 2009                | $3,193                         | $2\.22                                            | 31\.2%                                                      |
| 2010                | $3,755                         | $2\.61                                            | 33\.4%                                                      |
| 2011                | $5,751                         | $3\.25                                            | 38\.2%                                                      |
| 2012                | $6,156                         | $3\.32                                            | 37\.3%                                                      |
| 2013                | $5,823                         | $3\.19                                            | 35\.3%                                                      |
| 2014                | $5,355                         | $2\.97                                            | 32\.6%                                                      |
| 2015                | $3,740                         | $1\.96                                            | 23\.6%                                                      |
| 2016                | $3,801                         | $1\.90                                            | 22\.7%                                                      |
| 2017                | $4,076                         | $1\.99                                            | 23\.0%                                                      |
| 2018                | $4,616                         | $2\.20                                            | 24\.6%                                                      |
| 2019                | $4,347                         | $2\.09                                            | 22\.3%                                                      |
| First Quarter 2019  | $1,015                         | $2\.05                                            | 21\.9%                                                      |
| Second Quarter 2019 | $1,136                         | $2\.13                                            | 23\.0%                                                      |
| Third Quarter 2019  | $1,090                         | $2\.07                                            | 22\.6%                                                      |
| Fourth Quarter 2019 | $1,105                         | $2\.09                                            | 21\.8%                                                      |

The Company focuses on reducing fuel consumption and improving fuel efficiency through fleet modernization and other fuel initiatives\. For example, the Company previously retired all Boeing 737\-300 aircraft  from its fleet and introduced service with the MAX 8 aircraft, which is more fuel\-efficient and releases fewer CO ^2^  emissions than the

5


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

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

$0\.5 billion year\-over\-year in 2016 as compared to 2015\. The following were significant working capital items in 2016:

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------- |
| • | Frequent flyer and advance purchase of miles decreased $0\.6 billion due to increased utilization of  pre\-purchased miles\. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------- |
| • | Other assets, including spare parts, increased by $0\.3 billion as part of the Company’s efforts to improve fleet reliability\.  |

|   |                                                                               |
| - | ----------------------------------------------------------------------------- |
| • | Accounts payable increased $0\.2 billion, driven by the timing of payments\.  |

***Investing Activities***

*2017 compared to 2016*

The Company’s capital expenditures were $4\.0 billion and $3\.2 billion in 2017and 2016, respectively\. The Company’s capital expenditures for both years were primarily attributable to the purchase of new aircraft, aircraft improvements, facility and fleet\-related costs and the purchase of information technology assets\.

*2016 compared to 2015*

The Company’s capital expenditures were $3\.2 billion and $2\.7 billion in 2016and 2015, respectively\. The Company’s capital expenditures for both years were primarily attributable to the purchase of aircraft, facility and fleet\-related costs and the purchase of information technology assets\.

***Financing Activities***

Significant financing events in 2017 were as follows:

Share Repurchases

The Company used $1\.8 billion of cash to purchase approximately 28 million shares of its common stock during 2017, completing its July 2016 repurchase authorization\. In December 2017, UAL’s Board of Directors authorized a new $3\.0 billion share repurchase program to acquire UAL’s common stock\. As of December 31, 2017, the Company had approximately $3\.0 billion remaining to purchase shares under its share repurchase program\.

Debt Issuances

During 2017, United received and recorded $1\.8 billion of proceeds as debt related to enhanced equipment trust certificate (“EETC”) offerings created in 2016 and 2017 to finance the purchase of aircraft\.

In 2017, UAL issued, and United guaranteed, (i) $400 million aggregate principal amount of unsecured 4\.25% Senior Notes due October 1, 2022, and (ii) $300 million aggregate principal amount of unsecured 5% Senior Notes due February 1, 2024\.

In 2017, United and UAL, as borrower and guarantor, respectively, increased the term loan under the 2017 Credit Agreement by approximately $440 million\.

During 2017, United borrowed approximately $497 million aggregate principal amount from various financial institutions to finance the purchase of several aircraft delivered in 2017\.

Debt and Capital Lease Principal Payments

During the year ended December 31, 2017, the Company made debt and capital lease principal payments of $1\.0 billion\.

36


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

***Collateral\-Related Covenants***

Certain of our debt financing agreements contain loan to value ratio covenants and require us to appraise the related collateral annually\. Pursuant to such agreements, if the loan to value ratio exceeds a specified threshold, we are required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash collateral), or pay down such financing, in whole or in part\. As of December 31, 2018, we were in compliance with the collateral coverage tests for our term loans and revolving credit facilities as of the most recent measurement dates\. For further information regarding our collateral\-related covenants, see Note 5 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 3 to American’s Consolidated Financial Statements in Part II, Item 8B\.

***Sources and Uses of Cash***

***AAG***

*2018* *Compared to* *2017*

*Operating Activities*

Our net cash provided by operating activities was $3\.5 billion and $4\.7 billion in 2018 and 2017, respectively, a year\-over\-year decrease of $1\.2 billion\. This decrease in operating cash flows was primarily due to lower profitability in 2018 driven by an increase in fuel costs, which was offset in part by higher revenues\.

*Investing Activities*

Our net cash used in investing activities was $2\.0 billion and $3\.6 billion in 2018 and 2017, respectively\.

Our principal investing activities in 2018 included expenditures of $3\.7 billion for property and equipment, including 16 Boeing 737\-8 MAX aircraft, six Boeing 787 family aircraft and five Embraer E175 aircraft\. These cash outflows were offset in part by $1\.4 billion of net proceeds primarily from aircraft sale\-leaseback transactions and $293 million in net sales of short\-term investments\.

Our principal investing activities in 2017 included expenditures of $6\.0 billion for property and equipment, including 20 Airbus A321 aircraft, 20 Boeing 737\-800 aircraft, 16 Embraer E175 aircraft, 13 Boeing 787 family aircraft and four Boeing 737\-8 MAX aircraft\. We also made a $203 million equity investment in China Southern Airlines\. These cash outflows were offset in part by $1\.3 billion in net sales of short\-term investments, $947 million of net proceeds primarily from aircraft sale\-leaseback transactions, and a $309 million decrease in restricted short\-term investments\.

*Financing Activities*

Our net cash used in financing activities was $1\.7 billion and $1\.1 billion in 2018 and 2017, respectively\.

Our principal financing activities in 2018 included $2\.9 billion in debt repayments, consisting of $2\.4 billion in scheduled debt repayments and $513 million in the prepayment of secured loans\. We also had $837 million in share repurchases and $186 million in dividend payments\. These cash outflows were offset in part by net proceeds of $2\.4 billion from the issuance of debt, consisting of $1\.9 billion in connection with the issuance of equipment notes related to enhanced equipment trust certificates (EETCs) and the financing of certain aircraft and pre\-delivery purchase deposits, as well as an incremental $500 million on a term loan facility\.

Our principal financing activities in 2017 included $2\.3 billion in scheduled debt repayments, $1\.6 billion in share repurchases and $198 million in dividend payments\. These cash outflows were offset in part by net proceeds of $3\.1 billion from the issuance of debt, including the issuance of $2\.0 billion of EETCs and $1\.0 billion borrowed in connection with the financing of certain aircraft\.

*2017* *Compared to* *2016*

*Operating Activities*

Our net cash provided by operating activities was $4\.7 billion and $6\.5 billion in 2017 and 2016, respectively, a year\-over\-year decrease of $1\.8 billion\. This decrease in operating cash flows was primarily due to lower profitability in 2017 driven by higher fuel costs and wage rates, which were offset in part by higher revenues\.

*Investing Activities*

Our net cash used in investing activities was $3\.6 billion and $5\.7 billion in 2017 and 2016, respectively\.

66


Annual Report of Southwest Airlines Co\. for year 2017

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

**YEAR IN REVIEW**

For the 45^th^ consecutive year, the Company was profitable, recording GAAP and non\-GAAP results for 2017 and 2016 as noted in the following tables\. See Note Regarding Use of Non\-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non\-GAAP Financial Measures for additional detail regarding non\-GAAP financial measures\.

|                                         |                  |                  |                    |
| --------------------------------------- | ---------------- | ---------------- | ------------------ |
|                                         | **Year ended**   | **Year ended**   |                    |
| (in millions, except per share amounts) | **December 31,** | **December 31,** |                    |
| GAAP                                    | **2017**         | **2016**         | **Percent Change** |
| Operating income                        | $3,515           | $3,760           | (6\.5)             |
| Net income                              | $3,488           | $2,244           | 55\.4              |
| Net income per share, diluted           | $5\.79           | $3\.55           | 63\.1              |
| Non\-GAAP                               |                  |                  |                    |
| Operating income                        | $3,455           | $3,957           | (12\.7)            |
| Net income                              | $2,107           | $2,370           | (11\.1)            |
| Net income per share, diluted           | $3\.50           | $3\.75           | (6\.7)             |

Net income for the year ended December 31, 2017, was $3\.5 billion, a 55\.4 percentincrease year\-over\-year, or $5\.79 per diluted share, and non\-GAAP Net income was $2\.1 billion, an 11\.1 percentdecrease year\-over\-year, or $3\.50 per diluted share\. The increase in GAAP Net income was primarily driven by a $1\.4 billion reduction in Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re\-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21 percent\. This non\-cash item is excluded from the Company's non\-GAAP results\. Operating income for the year ended December 31, 2017 was $3\.52 billion, a decrease of 6\.5 percent year\-over\-year, and non\-GAAP Operating income was $3\.46 billion\. The decrease in Operating Income was driven by a 7\.7 percentincrease in Salaries, wages, and benefits expense, primarily due to wage rate increases resulting from amended collective\-bargaining agreements reached with multiple unionized workgroups, coupled with an 8\.0 percentincrease in Fuel and oil expense, primarily due to increases in market prices\. These factors were partially offset by a 2\.9 percentincrease in Passenger revenues driven by strong demand for low\-fare air travel and a 3\.6 percent year\-over\-year capacity growth, holding Load factor and Passenger yield constant\. Prior year results included $356 million of contract ratification bonuses accrued in Salaries, wages, and benefits expense associated with tentative collective\-bargaining agreements reached with multiple unionized workgroups\.

For the twelve months ended December 31, 2017, the Company's earnings performance, combined with its actions to manage invested capital, produced a 25\.9 percent pre\-tax non\-GAAP return on invested capital ("ROIC"), compared with the Company's ROIC of 30\.0 percent for the twelve months ended December 31, 2016\. The primary cause of the year\-over\-year decline in ROIC was the decrease in Operating income for the twelve months ended December 31, 2017, compared with the twelve months ended December 31, 2016\. See the Company's calculation of ROIC in the accompanying reconciliation tables as well as the Note Regarding Use of Non\-GAAP Financial Measures\.

During 2017, the Company continued to return value to its Shareholders\. The Company returned $1\.9 billion to Shareholders through $274 million in dividend payments and $1\.6 billion through four separate accelerated share repurchase programs and other open market repurchases\. During November 2017, the Company launched the Fourth Quarter 2017 ASR Program by advancing $250 million to a financial institution in a privately negotiated transaction\. The Company received 4\.1 million shares in total under the Fourth Quarter 2017 ASR Program, which was completed in January 2018\. The purchase was recorded as a treasury share purchase for purposes of calculating earnings per share\.

39


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

Plan assets are invested in common commingled trust funds invested in equity and fixed income securities and in certain real estate assets\. The target and actual asset allocation of the funds in the qualified defined\-benefit plans, by asset category, are as follows:

|                               |                             |                             |                             |                     |                     |                     |
| ----------------------------- | --------------------------- | --------------------------- | --------------------------- | ------------------- | ------------------- | ------------------- |
|                               | **Salaried Plan** **^(a)^** | **Salaried Plan** **^(a)^** | **Salaried Plan** **^(a)^** | **All other plans** | **All other plans** | **All other plans** |
|                               | **Target**                  | **2018**                    | **2017**                    | **Target**          | **2018**            | **2017**            |
| Asset category:               |                             |                             |                             |                     |                     |                     |
| Domestic equity securities    | **5% \- 9%**                | **6%**                      | 8%                          | **25% \- 33%**      | **28%**             | 29%                 |
| Non\-U\.S\. equity securities | **1% \- 5%**                | **3%**                      | 3%                          | **10% \- 16%**      | **12%**             | 12%                 |
| Fixed income securities       | **86% \- 94%**              | **91%**                     | 89%                         | **48% \- 58%**      | **53%**             | 52%                 |
| Real estate                   | **—%**                      | **—%**                      | —%                          | **2% \- 8%**        | **7%**              | 6%                  |
| Cash equivalents              | **—%**                      | **—%**                      | —%                          | **—%**              | **—%**              | 1%                  |
| Plan assets                   |                             | **100%**                    | 100%                        |                     | **100%**            | 100%                |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | As our Salaried Plan is frozen and fully funded, our investment strategies differ significantly from that of our other outstanding plans\. Investments are in lower\-risk securities, with earnings designed to match cash outflows\.  |

The Company’s investment policy focuses on achieving maximum returns at a reasonable risk for pension assets over a full market cycle\. The Company determines the strategic allocation between equities, fixed income and real estate based on current funded status and other characteristics of the plans\. As the funded status improves, the Company increases the fixed income allocation of the portfolio and decreases the equity allocation\. Actual asset allocations are reviewed regularly and periodically rebalanced as appropriate\.

Plan assets invested in common commingled trust funds are fair valued using the net asset values of these funds to determine fair value as allowed using the practical expediency method outlined in the accounting standards\. Fair value estimates for real estate are calculated using the present value of expected future cash flows based on independent appraisals, local market conditions and current and projected operating performance\.

Plan asset by fund category (in millions):

|                                         |            |          |                          |
| --------------------------------------- | ---------- | -------- | ------------------------ |
|                                         | **2018**   | **2017** | **Fair Value Hierarchy** |
| **Fund type:**                          |            |          |                          |
| U\.S\. equity market fund               | **$431**   | $515     | 1                        |
| Non\-U\.S\. equity fund                 | **183**    | 226      | 1                        |
| Credit bond index fund                  | **1,135**  | 1,232    | 1                        |
| Plan assets in common commingled trusts | **$1,749** | $1,973   |                          |
| Real estate                             | **104**    | 97       | (a)                      |
| Cash equivalents                        | **5**      | 13       | 1                        |
| Total plan assets                       | **$1,858** | $2,083   |                          |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | In accordance with Subtopic 820\-10, certain investments that are measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy\.  |

 81


Annual Report of Southwest Airlines Co\. for year 2019

2018  Compared with  2017

The Company's comparison of  2018  results to  2017  results is included in the Company's Annual Report on Form 10\-K for the fiscal year ended  December 31, 2018 , under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations\.

47


Annual Report of Southwest Airlines Co\. for year 2017

|        |                                                                                |
| ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|        | [Supplemental Agreement No\. 98 (incorporated by reference to Exhibit 10\.1(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2016 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000029/luv-12312016xex101a.htm) [Supplemental Agreement No\. 99 (incorporated by reference to Exhibit 10\.1(b) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2016 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000029/luv-12312016xex101b.htm) [Supplemental Agreement No\. 100 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000078/luv-3312017xex101.htm) [Supplemental Agreement No\. 101 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000078/luv-3312017xex102.htm) [Supplemental Agreement No\. 102 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000146/luv-6302017xex101.htm) ; [Supplemental Agreement No\. 103 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex101.htm) ; [Supplemental Letter Agreement No\. 6\-1162\-KLK\-0059R3 (incorporated by reference to Exhibit 10\.4 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex104.htm) \. (1)

 |
| 10\.2  | [Form of Amended and Restated Executive Service Recognition Plan Executive Employment Agreement between the Company and certain Officers of the Company (incorporated by reference to Exhibit 10\.2 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex102.htm)  (2)                                                                                |
| 10\.3  | [Letter Agreement between Southwest Airlines Co\. and Gary C\. Kelly, effective as of February 1, 2011 (incorporated by reference to Exhibit 99\.1 to the Company’s Current Report on Form 8\-K filed February 1, 2011 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312511019263/dex991.htm)  (2)

                                                                                |
| 10\.4  | [Southwest Airlines Co\. Amended and Restated Severance Plan for Directors (as amended and restated effective May 19, 2009) (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2009 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238009000027/ex10_1.htm)

                                                                                |
| 10\.5  | [Southwest Airlines Co\. Outside Director Incentive Plan (as amended and restated effective May 16, 2007) (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2007 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238007000024/ex10_2.htm)

                                                                                |
| 10\.6  | [Southwest Airlines Co\. 2002 SWAPIA Non\-Qualified Stock Option Plan (incorporated by reference to Exhibit 4\.1 to the Company’s Registration Statement on Form S\-8 filed October 30, 2002 (File No\. 333\-100862))\.](http://www.sec.gov/Archives/edgar/data/92380/000095013402013128/d00561exv4w1.txt)                                                                                |
| 10\.7  | [Southwest Airlines Co\. Amended and Restated 2007 Equity Incentive Plan (incorporated by reference to Exhibit 99\.1 to the Company’s Current Report on Form 8\-K filed May 18, 2015(File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312515191553/d927261dex991.htm)  (2)                                                                                |
| 10\.8  | [Southwest Airlines Co\. 2007 Equity Incentive Plan Form of Notice of Grant and Terms and Conditions for Stock Option Grant (incorporated by reference to Exhibit 10\.31 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2007 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000095013408001572/d53331exv10w31.htm) (2)                                                                                |
| 10\.9  | [Southwest Airlines Co\. Excess Benefit Plan (incorporated by reference to Exhibit 10\.32 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex1032.htm)  (2)                                                                                |
| 10\.10 | [Amendment No\. 1 to the Southwest Airlines Co\. Excess Benefit Plan (incorporated by reference to Exhibit 10\.33 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex1033.htm) (2)                                                                                |
| 10\.11 | [Amendment No\. 2 to the Southwest Airlines Co\. Excess Benefit Plan (incorporated by reference to Exhibit 10\.34 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex1034.htm)  (2)                                                                                |
| 10\.12 | [Amended and Restated Southwest Airlines Co\. 2005 Excess Benefit Plan (as amended and restated, effective as of January 1, 2018) (incorporated by reference to Exhibit 10\.5 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017ex105.htm)  (2)                                                                                |
| 10\.13 | [Form of Indemnification Agreement between the Company and its Directors (incorporated by reference to Exhibit 10\.1 to the Company’s Current Report on Form 8\-K filed January 22, 2009 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509009729/dex101.htm)                                                                                |

120


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

Company will elect the package of practical expedients available under the standard that allows for no reassessment of expired contracts for leases, no reassessment of lease classification for existing leases, and no reassessment of initial direct costs for existing leases\.

The most significant impact to the financial statements from the new lease accounting standard is associated with aircraft\. Although not significant, other leases including certain real estate, equipment, and software will be capitalized\. The Company has operating leases for airport and terminal space, however these leases are not expected to have a significant impact on the balance sheet since variable lease payments are excluded from the measurement of the lease liability\. At this time, the Company estimates the adoption of the standard will result in the recognition of lease assets and lease liabilities of approximately $1\.75 billion to $1\.85 billion\. The new standard also eliminates prior build\-to\-suit lease accounting guidance\. As a result, we will derecognize build\-to\-suit assets and liabilities that exist on the balance sheet of approximately $150 million each\. The difference between the net assets and liabilities will be recorded as an adjustment to retained earnings and is not expected to be significant\. The new standard will not result in more than a nominal impact on the pattern or amount of expense recognized on the statement of operations, statement of cash flows, nor on any existing debt covenants\. The new standard will require significant new disclosures about our leasing activities\.

In August 2017, the FASB issued ASU 2017\-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities\." The ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging relationships\. The ASU is effective for the Company beginning January 1, 2019\.

**NOTE 2\. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS**

**Revenue Recognition and Retirement Benefits Accounting Standards**

In May 2014, the FASB issued ASU 2014\-09*,* "Revenue from Contracts with Customers (Topic 606)\." The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method\. Adoption of the new standard resulted in changes to accounting policies for revenue recognition related to frequent flyer activity, certain ancillary revenues such as change fees, air traffic liabilities, and sales and marketing expenses\. As a result of adoption, the Company also changed certain financial statement line item disclosure captions, which are outlined below\.

Although less significant, in March 2017 the FASB issued ASU 2017\-07, "Compensation \- Retirement Benefits (Topic 715)," which requires the Company to present the service cost component of net periodic benefit cost as Wages and benefits in the statement of operations\. The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method\. Under this new standard, all components of net periodic benefit cost are presented in Nonoperating income (expense), except service cost, which remains in Wages and benefits\.

Certain line item captions on the balance sheet and statement of operations changed as a result of the newly implemented standards\. Accordingly, historical financial information presented below as reported has been presented using the new captions\. The cumulative impact to retained earnings at January 1, 2016 as a result of the new revenue recognition standard was $170 million\. Below are the impacts of these newly adopted accounting standards to the financial statements\.

 66


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

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

UNITED AIRLINES HOLDINGS, INC\.

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

|                                                                                |                             |                             |                             |
| ----------------------------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                                | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                                | **2019**                    | **2018 (a)**                | **2017 (a)**                |
| Operating Activities:                                                               |                             |                             |                             |
| Net income                                                                          | $3,009                      | $2,122                      | $2,143                      |
| Adjustments to reconcile net income to net cash provided by operating activities \- |                             |                             |                             |
| Deferred income taxes                                                               | 882                         | 512                         | 957                         |
| Depreciation and amortization                                                       | 2,288                       | 2,165                       | 2,096                       |
| Special charges, non\-cash portion                                                  | 175                         | 416                         | 35                          |
| Unrealized (gains) losses on investments                                            | (153

)               | 5                           | —                           |
| Other operating activities                                                          | 185                         | 161                         | 142                         |
| Changes in operating assets and liabilities \-                                      |                             |                             |                             |
| (Increase) decrease in receivables                                                  | 44                          | 17                          | (73

)                |
| (Increase) decrease in other assets                                                 | (252

)               | 265                         | (432

)               |
| Increase in advance ticket sales                                                    | 438                         | 441                         | 145                         |
| Increase (decrease) in frequent flyer deferred revenue                              | 271                         | 222                         | (107

)               |
| Increase in accounts payable                                                        | 324                         | 130                         | 66                          |
| Decrease in advanced purchase of miles                                              | —                           | —                           | (942

)               |
| Decrease in other liabilities                                                       | (302

)               | (292

)               | (556

)               |
| Net cash provided by operating activities                                           | 6,909                       | 6,164                       | 3,474                       |
| Investing Activities:                                                               |                             |                             |                             |
| Capital expenditures                                                                | (4,528

)             | (4,070

)             | (3,870

)             |
| Purchases of short\-term and other investments                                      | (2,897

)             | (2,552

)             | (3,241

)             |
| Proceeds from sale of short\-term and other investments                             | 2,996                       | 2,616                       | 3,177                       |
| Loans made to others                                                                | (174

)               | (466

)               | (30

)                |
| Investment in affiliates                                                            | (36

)                | (139

)               | (2

)                 |
| Other, net                                                                          | 79                          | 156                         | 163                         |
| Net cash used in investing activities                                               | (4,560

)             | (4,455

)             | (3,803

)             |
| Financing Activities:                                                               |                             |                             |                             |
| Repurchases of common stock                                                         | (1,645

)             | (1,235

)             | (1,844

)             |
| Proceeds from issuance of long\-term debt                                           | 1,847                       | 1,594                       | 2,537                       |
| Payments of long\-term debt                                                         | (1,240

)             | (1,727

)             | (901

)               |
| Principal payments under finance leases                                             | (151

)               | (79

)                | (84

)                |
| Capitalized financing costs                                                         | (61

)                | (37

)                | (80

)                |
| Other, net                                                                          | (30

)                | (17

)                | (11

)                |
| Net cash used in financing activities                                               | (1,280

)             | (1,501

)             | (383

)               |
| Net increase (decrease) in cash, cash equivalents and restricted cash               | 1,069                       | 208                         | (712

)               |
| Cash, cash equivalents and restricted cash at beginning of year                     | 1,799                       | 1,591                       | 2,303                       |
| Cash, cash equivalents and restricted cash at end of year                           | $2,868                      | $1,799                      | $1,591                      |
| Investing and Financing Activities Not Affecting Cash:                              |                             |                             |                             |
| Property and equipment acquired through the issuance of debt                        | $493                        | $143                        | $897                        |
| Right\-of\-use assets acquired through operating leases                             | 498                         | 663                         | 319                         |
| Property and equipment acquired through finance lease                               | 22                          | 17                          | 16                          |
| Lease modifications and lease conversions                                           | (2

)                 | 52                          | —                           |
| Debt associated with termination of a maintenance service agreement                 | —                           | 163                         | —                           |
| Investment in Republic Airways Holdings Inc\. received from bankruptcy claims       | —                           | —                           | 92                          |
| Cash Paid During the Period for:                                                    |                             |                             |                             |
| Interest                                                                            | $648                        | $651                        | $571                        |
| Income taxes                                                                        | 29                          | 19                          | 20                          |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2016\-02,  Leases (Topic 842) \. See Note 1 to the financial statements contained in Part II, Item 8 of this report for additional information\.

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements\.

47


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

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

|        |            |                                                                                |
| ------:|:---------- |:---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|        |            | **Section 1350 Certifications**                                                                                |
|  32\.1 | UAL        | [Certification of the Chief Executive Officer and Chief Financial Officer of United Continental Holdings, Inc\. pursuant to 18 U\.S\.C\. 1350 (Section 906 of the Sarbanes\-Oxley Act of 2002) ](https://www.example.com/d471340dex321.htm)                                                                                |
|  32\.2 | United     | [Certification of the Chief Executive Officer and Chief Financial Officer of United Airlines, Inc\. pursuant to 18 U\.S\.C\. 1350 (Section 906 of the Sarbanes\-Oxley Act of 2002) ](https://www.example.com/d471340dex322.htm)                                                                                |
|        |            | **Interactive Data File**                                                                                |
|    101 | UAL United | The following materials from each of United Continental Holdings, Inc\.‘s and United Airlines, Inc\.‘s Annual Reports on Form  10\-K for the year ended December 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Statements of Consolidated Operations, (ii) the Statements of Consolidated Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Statements of Consolidated Cash Flows, (v) the Statements of Consolidated Stockholders’ Equity (Deficit) and (vi) the Combined Notes to Consolidated Financial Statements\. |

|    |                     |
| -- | ------------------- |
| \* | Previously filed\.  |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| † | Indicates management contract or compensatory plan or arrangement\. Pursuant to Item 601(b)(10), United is permitted to omit certain compensation\-related exhibits from this report and therefore only UAL is identified as the registrant for purposes of those items\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------- |
| ^ | Confidential portion of this exhibit has been omitted and filed separately with the SEC pursuant to a request for confidential treatment\.  |

131


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

**CONSOLIDATED BALANCE SHEETS** ***(continued)***

|                                                                                |             |          |
| --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | -------- |
| **As of December 31**  ***(in millions except share amounts)***                                                                                | **2017**    | **2016** |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                |             |          |
| **Current Liabilities**                                                                                |             |          |
| Accounts payable                                                                                | **$120**    | $92      |
| Accrued wages, vacation and payroll taxes                                                                                | **418**     | 397      |
| Air traffic liability                                                                                | **937**     | 849      |
| Other accrued liabilities                                                                                | **918**     | 878      |
| Current portion of long\-term debt                                                                                | **307**     | 319      |
| **Total Current Liabilities**                                                                                | **2,700**   | 2,535    |
| **Long\-Term Debt, Net of Current Portion**                                                                                | **2,262**   | 2,645    |
| **Other Liabilities and Credits**                                                                                |             |          |
| Deferred income taxes                                                                                | **454**     | 463      |
| Deferred revenue                                                                                | **699**     | 640      |
| Obligation for pension and postretirement medical benefits                                                                                | **453**     | 331      |
| Other liabilities                                                                                | **451**     | 417      |
| **Total Other Liabilities and Credits**                                                                                | **2,057**   | 1,851    |
| **Commitments and Contingencies (Note 8)**                                                                                |
      |
   |
| **Shareholders' Equity**                                                                                |             |          |
| Preferred stock, $0\.01 par value, Authorized: 5,000,000 shares, none issued or outstanding                                                                                | **—**       | —        |
| Common stock, $0\.01 par value, Authorized: 400,000,000 shares, Issued: 2017 \- 129,903,498 shares; 2016 \- 129,189,634 shares, Outstanding: 2017 \- 123,060,638 shares; 2016 \- 123,328,051 shares | **1**       | 1        |
| Capital in excess of par value                                                                                | **164**     | 110      |
| Treasury stock (common), at cost: 2017 \- 6,842,860 shares; 2016 \- 5,861,583 shares                                                                                | **(518)**   | (443)    |
| Accumulated other comprehensive loss                                                                                | **(380)**   | (305)    |
| Retained earnings                                                                                | **4,454**   | 3,568    |
|                                                                                | **3,721**   | 2,931    |
| **Total Liabilities and Shareholders' Equity**                                                                                | **$10,740** | $9,962   |

See accompanying notes to consolidated financial statements\.

 63


Annual Report of Southwest Airlines Co\. for year 2017

As of December 31, 2017, the Company was in compliance with all credit card processing agreements\. The inability to enter into credit card processing agreements would have a material adverse effect on the business of the Company\. The Company believes that it will be able to continue to renew its existing credit card processing agreements or will be able to enter into new credit card processing agreements with other processors in the future\.

70


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

**ITEM 8B\. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES, INC\.**

**Report of Independent Registered Public Accounting Firm**

To the Stockholder and Board of Directors

American Airlines, Inc\.:

*Opinion on the Consolidated Financial Statements*

We have audited the accompanying consolidated balance sheets of American Airlines, Inc\. and subsidiaries (American) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, cash flows, and stockholder’s equity for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements)\. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of American as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U\.S\. generally accepted accounting principles\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), American’s internal control over financial reporting as of December 31, 2018, based on criteria established in *Internal Control \- Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2019 expressed an unqualified opinion on the effectiveness of American’s internal control over financial reporting\.

*Change in Accounting Principle*

As discussed in Note 1 to the consolidated financial statements, American changed its method of accounting for revenue from contracts with customers and leases in 2018 due to the full retrospective adoption of Accounting Standards Update (ASU) 2014\-09, *Revenue from Contracts with Customers (Topic 606)*, as amended, and the modified retrospective adoption of ASU 2016\-02, *Leases (Topic 842)*, as amended\.

*Basis for Opinion*

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

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

/s/ KPMG LLP

We have served as American’s auditor since 2014\.

Dallas, Texas

February 25, 2019

129


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

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

***Extended interruptions or disruptions in service at major airports where we operate could have a material adverse impact 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 impact on our business, financial condition and results of operation\.

We operate principally through our domestic hubs in at Newark, Chicago O'Hare, Denver, Houston Bush, LAX, Guam, SFO and Washington Dulles\. Substantially all of our flights either originate in or fly into one of these locations\. A significant interruption or disruption in service at one of our hubs or other airports where we have a significant presence resulting from ATC delays, weather conditions, natural disasters, growth constraints, relations with third\-party service providers, failure of computer systems, disruptions to government agencies or personnel, disruptions at airport facilities or other key facilities used by us to manage our operations, labor relations, power supplies, fuel supplies, terrorist activities, international hostilities or otherwise could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a material impact on our business, operating results and financial condition\. We have minimal control over the operation, quality or maintenance of these services or whether vendors will improve or continue to provide services that are essential to our business\.

***The airline industry is subject to extensive government regulation, which imposes significant costs and may adversely impact our business, operating results and financial condition\.***

Airlines are subject to extensive regulatory and legal oversight\. Compliance with U\.S\. and international regulations imposes significant costs and may have adverse effects on the Company\. Laws, regulations, taxes and airport rates and charges, both domestically and internationally, have been proposed from time to time that could significantly increase the cost of airline operations or reduce airline revenue\.

United provides air transportation under certificates of public convenience and necessity issued by the DOT\. If the DOT altered, amended, modified, suspended or revoked these certificates, it could have a material adverse effect on the Company's business\. The FAA regulates the safety of United's operations\. United operates pursuant to an air carrier operating certificate issued by the FAA\. The FAA's regulations include stringent pilot flight and duty time requirements under Part 117 of the Federal Aviation Regulations, as well as minimum qualifications for air carrier first officers\. These regulations have caused mainline airlines to hire regional pilots, while simultaneously significantly reducing the pool of new pilots from which regional carriers themselves can hire\. Although this is an industry issue, it directly affects the Company and has required it to reduce regional partner flying, as several regional partners have experienced difficulty flying their schedules due to reduced pilot availability\. From time to time, the FAA also issues orders, airworthiness directives and other regulations relating to the maintenance and operation of aircraft that require material expenditures or operational restrictions by the Company\. These FAA orders and directives could include the temporary grounding of an entire aircraft type if the FAA identifies design, manufacturing, maintenance or other issues requiring immediate corrective action\. These FAA directives or requirements could have a material adverse effect on the Company\.

In 2018, the U\.S\. Congress approved a five\-year reauthorization for the FAA, which encompasses significant aviation tax and policy\-related issues\. The law includes a range of policy changes related to airline customer service and aviation safety which, depending on how they are implemented, could impact our operations and costs\. Additionally, the U\.S\. Congress may fail to continue to fund the operations of one or more federal government agencies which could negatively impact the Company and the airline industry\.

The Company's operations may also be adversely impacted due to the existing antiquated ATC system utilized by the U\.S\. government and regulated by the FAA\. During peak travel periods in certain markets, the current ATC system's inability to handle demand has led to short\-term capacity constraints imposed by government agencies and resulted in delays and disruptions of air traffic\. In addition, the current system will not be able to effectively handle projected future air traffic growth\. The outdated technologies also cause the ATC to be less resilient in the event of a failure, causing flight cancellations and delays\. Imposition of these ATC constraints on a long\-term basis may have a material adverse effect on the Company's operations\. Failure to update the ATC system in a timely manner, and the substantial funding requirements of a modernized ATC system that may be imposed on air carriers may have an adverse impact on the Company's financial condition or operating results\.

Access to landing and take\-off rights, or "slots," at several major U\.S\. airports and many foreign airports served by the Company are, or recently have been, subject to government regulation\. Certain of the Company's major hubs are among the most congested airports in the United States and have been or could be the subject of regulatory action that might limit the number of flights and/or increase costs of operations at certain times or throughout the day\. The FAA may limit the Company's

15


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

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

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

***(i) Goodwill***

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

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill\. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill\. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded\. Based upon our annual assessment, there was no goodwill impairment in 2018\. The carrying value of the goodwill on our consolidated balance sheets was $4\.1 billion as of December 31, 2018 and 2017\.

***(j) Other Intangibles, Net***

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

*Finite\-Lived Intangible Assets*

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

The following table provides information relating to our amortizable intangible assets as of December 31, 2018 and 2017 (in millions):

|                               |                  |                  |
| ----------------------------- | ---------------- | ---------------- |
|                               | **December 31,** | **December 31,** |
|                               | **2018**         | **2017**         |
| Domestic airport slots        | $365             | $365             |
| Customer relationships        | 300              | 300              |
| Marketing agreements          | 105              | 105              |
| Tradenames                    | 35               | 35               |
| Airport gate leasehold rights | 137              | 137              |
| Accumulated amortization      | (663)            | (622)            |
| Total                         | $279             | $320             |

Certain domestic airport slots and airport gate leasehold rights are amortized on a straight\-line basis over 25 years\. The customer relationships and marketing agreements were identified as intangible assets subject to amortization and are amortized on a straight\-line basis over approximately nine years and 30 years, respectively\. Tradenames are fully amortized\.

We recorded amortization expense related to these intangible assets of $41 million, $44 million and $76 million for the years ended December 31, 2018, 2017 and 2016, respectively\. We expect to record annual amortization expense for these intangible assets as follows (in millions):

91


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

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

settle award redemptions while taking into consideration such factors as redemption pattern, cabin class, loyalty status and geographic region\. The estimated selling price of miles is adjusted by breakage that considers a number of factors, including redemption patterns of various customer groups\. The Company reviews its breakage estimates annually based upon the latest available information regarding redemption and expiration patterns\. The Company's estimate of the expected expiration of miles requires significant management judgment\. Current and future changes to expiration assumptions or to the expiration policy, or to program rules and program redemption opportunities, may result in material changes to the deferred revenue balance as well as recognized revenues from the program\. For the portion of the outstanding miles that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining miles are redeemed\.

*Co\-Brand Agreement*\. United has a significant contract (the "Co\-Brand Agreement") to sell MileagePlus miles to its co\-branded credit card partner Chase Bank USA, N\.A\. ("Chase")\. Chase awards miles to MileagePlus members based on their credit card activity\. United identified the following significant separately identifiable performance obligations in the Co\-Brand Agreement:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | MileagePlus miles awarded – United has a performance obligation to provide MileagePlus cardholders with miles to be used for air travel and non\-travel award redemptions\. The Company records Passenger revenue related to the travel awards when the transportation is provided and records Other revenue related to the non\-travel awards when the goods or services are delivered\. The Company records the cost associated with non\-travel awards in Other operating revenue\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Marketing – United has a performance obligation to provide Chase access to its customer list and the use of its brand\. Marketing revenue is recorded to Other operating revenue as miles are delivered to Chase\.  |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Advertising – United has a performance obligation to provide advertising in support of the MileagePlus card in various customer contact points such as United's website, email promotions, direct mail campaigns, airport advertising and in\-flight advertising\. Advertising revenue is recorded to Other operating revenue as miles are delivered to Chase\.  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Other travel\-related benefits – United's performance obligations are comprised of various items such as waived bag fees, seat upgrades and lounge passes\. Lounge passes are recorded to Other operating revenue as customers use the lounge passes\. Bag fees and seat upgrades are recorded to Passenger revenue at the time of the associated travel\.  |

We account for all the payments received (including monthly and one\-time payments) under the Co\-Brand Agreement by allocating them to the separately identifiable performance obligations\. The fair value of the separately identifiable performance obligations is determined using management's estimated selling price of each component\. The objective of using the estimated selling price based methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand\-alone basis\. Accordingly, we determine our best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, volume discounts, published selling prices, number of miles awarded and number of miles redeemed\. The Company estimated the selling prices and volumes over the term of the Co\-Brand Agreement in order to determine the allocation of proceeds to each of the components to be delivered\. We also evaluate volumes on an annual basis, which may result in a change in the allocation of the estimated consideration from the Co\-Brand Agreement on a prospective basis\.

*Frequent flyer deferred revenue\.*Miles in MileagePlus members' accounts are combined into one homogeneous pool and are thus not separately identifiable, for award redemption purposes, between miles earned in the current period and those in their beginning balance\. Of the miles expected to be redeemed, the Company expects the majority of these miles to be redeemed within two years\. The table below presents a roll forward of Frequent flyer deferred revenue (in millions):

|                                                            |                                           |                                           |
| ---------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- |
|                                                            | **Twelve Months Ended
December 31,** | **Twelve Months Ended
December 31,** |
|                                                            | **2018**                                  | **2017**                                  |
| Total Frequent flyer deferred revenue \- beginning balance | $4,783                                    | $4,889                                    |
| Total miles awarded                                        | 2,451                                     | 2,077                                     |
| Travel miles redeemed (Passenger revenue)                  | (2,068)                                   | (2,004)                                   |
| Non\-travel miles redeemed (Other operating revenue)       | (161)                                     | (179)                                     |
| Total Frequent flyer deferred revenue \- ending balance    | $5,005                                    | $4,783                                    |

56


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

replace most existing revenue recognition guidance in U\.S\. GAAP\. In March 2016, the FASB issued ASU 2016\-08, "Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations" to clarify the guidance on determining whether the Company is considered the principal or the agent in a revenue transaction where a third party is providing goods or services to a customer\. Entities are permitted to use either a full retrospective or cumulative effect transition method, and are required to adopt all parts of the new revenue standard using the same transition method\. The new standard became effective for the Company on January 1, 2018\.

Under the new standard, the Company estimates a net increase to Mileage Plan™ deferred revenues of approximately $345 million to $365 million as of the beginning of the retroactive reporting period (January 1, 2016) at the time of adoption\. Additionally, the Company estimates the change in ticket breakage methodology will not have a significant impact on the statements of operations, but will decrease air traffic liability by approximately $70 million to $80 million at adoption of the standard\. The overall impact to equity as of the beginning of the retroactive reporting period, including these, as well as other less material changes, is expected to be between $165 million and $175 million\.

In January 2016, the FASB issued ASU No\. 2016\-01, "Financial Instruments—Overall (Subtopic 825\-10)\." This standard makes several changes, including the elimination of the available\-for\-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income\. It is effective for the Company beginning January 1, 2018\. The Company does not expect the adoption of ASU 2016\-01 to have a material impact on its consolidated financial statements\.

In February 2016, the FASB issued ASU 2016\-02, "Leases" (Topic 842), which requires lessees to recognize assets and liabilities for leases currently classified as operating leases\. Under the new standard a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right\-of\-use\-asset representing its right to use the underlying asset for the lease term\. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities\. At this time, the Company believes the most significant impact to the financial statements will relate to the recording of a right of use asset associated with leased aircraft\. Other leases, including airports and real estate, equipment, software and other miscellaneous leases continue to be assessed for impact as it relates to the ASU\. The new standard is effective for the Company on January 1, 2019\. The Company will not early adopt the standard\.

In March 2016, the FASB issued ASU 2016\-09, "Compensation—Stock Compensation" (Topic 718), which simplifies several aspects of accounting for employee share\-based payment awards, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows\. The ASU was adopted prospectively as of January 1, 2017\. Prior periods have not been adjusted\. The adoption of the standard did not have a material impact on the Company's statements of operations or financial position\.

In January 2017, the FASB issued ASU 2017\-04, "Intangibles—Goodwill and Other" (Topic 350), which eliminates step 2 from the goodwill impairment test\. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill\. The ASU is effective for the Company beginning January 1, 2019\. Early adoption of the standard is permitted\. In 2017, the Company performed an impairment test for goodwill arising from its acquisition of Virgin America and adopted the standard effective January 1, 2017\.

In March 2017, the FASB issued ASU 2017\-07, "Compensation—Retirement Benefits" (Topic 715), which will require the Company to present the service cost component of net periodic benefit cost as Wages and benefits in the statements of operations\. All other components of net periodic benefit cost will be required to be presented in Nonoperating income (expense) in the statements of operations\. These components will not be eligible for capitalization\. The ASU is effective for the Company beginning January 1, 2018\. Changes to the statements of operations under the ASU are applicable retrospectively\. The adoption of this standard will have no impact on Income before income tax or Net income for the periods subject to retrospective reclassification\. See Note 7 for the current components of the Company's net periodic benefit costs\.

In August 2017, the FASB issued ASU 2017\-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities\." The ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging relationships\. The ASU is effective for the Company beginning January 1, 2019\. The Company will not early adopt the standard\.

 73


Annual Report of Southwest Airlines Co\. for year 2018

**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\.

Effective as of January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No\. 2014\-09, Revenue from Contracts with Customers (the "New Revenue Standard"), ASU No\. 2017\-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the "New Retirement Standard"), and ASU No\. 2017\-12, Targeted Improvements to Accounting for Hedging Activities (the "New Hedging Standard")\. All amounts and disclosures set forth in this Form 10\-K reflect the adoption of these ASUs\. See Note 2 for further information\.

The Company reclassified $198 million and $229 million from Aircraft rentals to Other operating expenses in the Consolidated Statement of Income for the years ended December 31, 2017 and 2016, respectively, to be comparative with the current period's presentation\. Aircraft rentals expense included in Other operating expenses for the year ended December 31, 2018, was $161 million\. This reclassification had no impact on Operating income, Net income, the Consolidated Balance Sheet, or the Consolidated Statement of Cash Flows\.

***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, 2018, no cash collateral deposits were provided by or 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, 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\. 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,

72