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

The following table summarizes information about outstanding stock awards:

|                                |                                |                                             |                                                                                |                                                                              |
| ------------------------------ | ------------------------------ | ------------------------------------------- | -------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- |
|                                | **Number**

**of Units** | **Weighted\-Average Grant Date Fair Value** | **Weighted\-**

**Average**

**Contractual**

**Life (Years)** | **Aggregate**

**Intrinsic**

**Value (in**

**millions)** |
| Non\-vested, December 31, 2017 | 525,145                        | $85\.47                                     | 1\.6                                                                             | $39                                                                          |
| Granted                        | 401,424                        | 66\.55                                      |                                                                                |                                                                              |
| Vested                         | (310,403)                      | 73\.33                                      |                                                                                |                                                                              |
| Forfeited                      | (104,353)                      | 80\.77                                      |                                                                                |                                                                              |
| Non\-vested, December 31, 2018 | 511,813                        | $78\.75                                     | 1\.5                                                                             | $31                                                                          |

***Deferred Stock Awards***

Deferred Stock Units (DSUs) are awarded to members of the Board of Directors as part of their retainers\. The underlying common shares are issued upon retirement from the Board, but require no future service period\. As a result, the entire intrinsic value of the awards is expensed on the date of grant\.

***Employee Stock Purchase Plan***

The ESPP allows employees to purchase common stock at 85% of the stock price on the first day of the offering period or the specified purchase date, whichever is lower\. Employees may contribute up to 10% of their base earnings during the offering period to purchase stock\. Employees purchased 632,145, 406,628 and 308,920 shares in 2018, 2017 and 2016 under the ESPP\.

**NOTE 13\. OPERATING SEGMENT INFORMATION**

Alaska Air Group has two operating airlines—Alaska (including Virgin America after the single operating certificate received in January 2018) and Horizon\. Each is a regulated airline by the U\.S\. Department of Transportation’s Federal Aviation Administration\. Alaska has CPAs for regional capacity with Horizon, as well as with third\-party carriers SkyWest and PenAir, under which Alaska receives all passenger revenues\.

Under U\.S\. General Accepted Accounting Principles, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions\. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | **Mainline**  \- includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U\.S\., and in parts of Canada, Mexico, and Costa Rica\.  |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | **Regional**  \- includes Horizon's and other third\-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U\.S\. under CPAs\. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations\.  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | **Horizon**  \- includes the capacity sold to Alaska under CPA\. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs\.  |

The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information\.

The "Consolidating and Other" column reflects parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company\. The “Air Group Adjusted” column represents a non\-GAAP measure that is used by the Company CODM to evaluate performance and allocate resources\. Adjustments are further explained below in reconciling to consolidated GAAP results\.

 89


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

Passenger revenue related to our international regions  increased  6\.7%  year\-over\-year including growth in all three regions, despite reduced capacity in the Pacific and Latin America\. During 2018, we continued to expand our branded fare products and leveraged the relationships with our alliance partners to generate unit revenue increases across all three international regions\.

In the Atlantic, unit revenues increased due to year\-over\-year yield strength from business cabin traffic and the benefit provided by foreign currency fluctuations\. Yield growth was particularly strong as we continued to leverage our alliance partners' hub positions in Europe's leading business markets of Amsterdam, London and Paris\. During 2018, we initiated service on our flagship A350\-900 with Delta One suites and the Delta Premium Select cabin from Detroit to Amsterdam\. We also launched several new routes, including Los Angeles to Paris and Amsterdam, Indianapolis to Paris and Atlanta to Lisbon\.

Unit revenues increased in Latin America principally as a result of yield growth, particularly in the Caribbean which has generated seven consecutive quarters of unit revenue growth\. Key destinations impacted by the 2017 hurricane damage continue to recover\. The increase was partially offset by the impact of political and economic uncertainty and foreign currency fluctuations in Mexico, Brazil and Central America\. The negative impact of travel advisories and political uncertainty in Mexico has diminished toward the end of the year\. We benefited from our joint cooperation agreement with Aeroméxico, which marked its first anniversary during 2018\. Over that time, we have combined with Aeroméxico to launch nine new routes between the United States and Mexico, providing our customers with improved connectivity, more convenient schedules and seamless service between the two carriers\.

Unit revenues increased in the Pacific region due to yield strength, particularly in Japan and Korea, and a benefit provided by foreign currency fluctuations\. In May 2018, we launched a joint venture with Korean Air which provides more opportunities for our customers to reach destinations throughout Asia\. During 2018, we also introduced our flagship A350\-900 on routes from Los Angeles to Shanghai, Detroit to Beijing and Shanghai and Atlanta to Seoul\-Incheon, which has improved the customer experience and added premium seats to the market, resulting in unit revenue increases\.

Other Revenue

|                                   |                             |                             |                                    |                                      |
| --------------------------------- | --------------------------- | --------------------------- | ---------------------------------- | ------------------------------------ |
|                                   | **Year Ended December 31,** | **Year Ended December 31,** | **Increase**

**(Decrease)** | **% Increase**

**(Decrease)** |
| **(in millions)**                 | **2018**                    | **2017**                    | **Increase**

**(Decrease)** | **% Increase**

**(Decrease)** |
| Ancillary businesses and refinery | $1,801                      | $1,591                      | $210                               | 13\.2 %                              |
| Loyalty program                   | 1,459                       | 1,269                       | 190                                | 15\.0 %                              |
| Miscellaneous                     | 558                         | 587                         | (29)                               | (4\.9)%                              |
| Total other revenue               | $3,818                      | $3,447                      | $371                               | 10\.8 %                              |

Ancillary Businesses and Refinery\.  Ancillary businesses and refinery includes aircraft maintenance and staffing services provided to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties\.  The increase compared to 2017 primarily resulted from growth in our aircraft maintenance business of 19% on higher engine overhaul volume\.

In December 2018, we sold DAL Global Services, LLC (“DGS”), which provides aviation\-related, ground support equipment maintenance and professional security services, to a new subsidiary of Argenbright Holdings, LLC\. We received a non\-controlling  49%  equity stake in the new company and  $40 million  cash\. The new company will continue to service our customers and third parties, and is expected to continue operating at the same airport locations it currently serves\. In 2019, DGS will no longer be reflected within ancillary businesses and refinery\.  DGS generated $244 million and $214 million in third\-party revenues during 2018 and 2017, respectively\.

Loyalty Program\.  Loyalty program revenues relate to brand usage by third parties and other performance obligations embedded in mileage credits sold, including redemption of mileage credits for non\-travel awards\.  Loyalty program revenues increased compared to 2017 related to growth in our co\-brand credit card relationship with American Express through both additional card acquisitions and increased spend\.

Miscellaneous\.  Miscellaneous revenue is primarily composed of lounge access and codeshare revenues\.

 29


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

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

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

|      |                                                                                |
| ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^c)^ | Investment includes mutual funds invested  42%  in equity securities of large\-cap, mid\-cap and small\-cap U\.S\. companies,  33%  in U\.S\. treasuries and corporate bonds and  25%  in equity securities of international companies\. |

|      |                                                                                |
| ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^d)^ | Includes approximately  74%  investments in corporate debt with a S&P rating lower than A and  26%  investments in corporate debt with a S&P rating A or higher\. Holdings include  86%  U\.S\. companies,  12%  international companies and  2%  emerging market companies\. |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^e)^ | Includes approximately  61%  investments in U\.S\. domestic government securities and  39%  in emerging market government securities\. There are no significant foreign currency risks within this classification\. |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^f)^ | Includes limited partnerships that invest primarily in U\.S\. ( 95% ) and European ( 5% ) buyout opportunities of a range of privately held companies\. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated\. It is estimated that the underlying assets of these funds will be gradually liquidated over the next  one  to  ten years \. Additionally, the pension plan’s master trust has future funding commitments of approximately  $456 million  over the next  ten years \. |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^g)^ | Investment includes  73%  in an emerging market 103\-12 Investment Trust with investments in emerging country equity securities,  12%  in Canadian segregated balanced value, income growth and diversified pooled funds and  15%  in a common/collective trust investing in securities of smaller companies located outside the U\.S\., including developing markets\. Requests for withdrawals must meet specific requirements with advance notice of redemption preferred\. |

|      |                                                                                |
| ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^h)^ | Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy\. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements\. |

Changes in fair value measurements of Level 3 investments during the year ended December 31, 2017, were as follows (in millions):

|                                                     |                                            |                                                  |
| --------------------------------------------------- | ------------------------------------------ | ------------------------------------------------ |
|                                                     | **Private Equity**

**Partnerships** | **Insurance Group**

**Annuity Contracts** |
| Beginning balance at December 31, 2016              | $21                                        | $2                                               |
| Actual loss on plan assets:                         |                                            |                                                  |
| Relating to assets still held at the reporting date | (4)                                        | —                                                |
| Purchases                                           | 1                                          | —                                                |
| Sales                                               | (1)                                        | —                                                |
| Transfers out                                       | (3)                                        | —                                                |
| Ending balance at December 31, 2017                 | $14                                        | $2                                               |

Changes in fair value measurements of Level 3 investments during the year ended December 31, 2016, were as follows (in millions):

|                                           |                                            |                                                  |
| ----------------------------------------- | ------------------------------------------ | ------------------------------------------------ |
|                                           | **Private Equity**

**Partnerships** | **Insurance Group**

**Annuity Contracts** |
| Beginning balance at December 31, 2015    | $16                                        | $2                                               |
| Actual return on plan assets:             |                                            |                                                  |
| Relating to assets sold during the period | 7                                          | —                                                |
| Purchases                                 | 7                                          | —                                                |
| Sales                                     | (9)                                        | —                                                |
| Ending balance at December 31, 2016       | $21                                        | $2                                               |

113


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

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | See Note 2 to AAG’s Consolidated Financial Statements in Part II, Item 8A for further information on special items\. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Merger integration expenses included costs related to information technology, professional fees, re\-branding of aircraft and airport facilities and training\. Additionally in 2016, Merger integration expenses also included costs related to alignment of labor union contracts, the launch of re\-branded uniforms, relocation and severance, and in 2015, also included share\-based compensation related to awards granted in connection with the Merger that fully vested in December 2015\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | Fleet restructuring expenses, driven in part by the Merger, principally included the acceleration of depreciation, impairments, remaining lease payments and lease return costs for aircraft and related equipment grounded or expected to be grounded earlier than planned\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(4)^ | Employee bonus expense included costs related to the $1,000 cash bonus and associated payroll taxes granted to mainline employees as of December 31, 2017 in recognition of H\.R\. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act)\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(5)^ | Labor contract expenses primarily included one\-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid\-contract pay rate adjustments effective in the second quarter of 2017\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(6)^ | In 2015, there was no net tax effect associated with special items\. During 2015, our net deferred tax asset, which includes our NOLs, was subject to a full valuation allowance\. Accordingly, our NOLs offset our taxable income and resulted in the release of a corresponding portion of valuation allowance, which offset the tax provision dollar for dollar\. |

Additionally, the table below presents the reconciliation of mainline operating costs (GAAP measure) to mainline operating costs excluding special items and fuel (non\-GAAP measure)\. Management uses mainline operating costs excluding special items and fuel to evaluate our current operating performance and for period\-to\-period comparisons\. The price of fuel, over which we have no control, impacts the comparability of period\-to\-period financial performance\. The adjustment to exclude aircraft fuel and special items allows management an additional tool to better understand and analyze our non\-fuel costs and core operating performance\. Amounts may not recalculate due to rounding\.

|                                                                                |                             |                             |                             |
| --------------------------------------------------------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                                | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                                | **2017**                    | **2016**                    | **2015**                    |
| **Reconciliation of Mainline Operating Costs per Available Seat Mile (CASM) Excluding Special Items and Fuel:** |                             |                             |                             |
| **(In millions)**                                                                                |                             |                             |                             |
| Total operating expenses – GAAP                                                                                | $38,149                     | $34,896                     | $34,786                     |
| Less regional expenses:                                                                                |                             |                             |                             |
| Fuel and related taxes                                                                                | (1,382)                     | (1,109)                     | (1,230)                     |
| Other                                                                                | (5,164)                     | (4,935)                     | (4,753)                     |
| Total mainline operating expenses                                                                               | 31,603                      | 28,852                      | 28,803                      |
| Adjusted for: Special items, net  ^(1)^                                                                         | (712)                       | (709)                       | (1,051)                     |
| Adjusted for: Aircraft fuel and related taxes                                                                   | (6,128)                     | (5,071)                     | (6,226)                     |
| Mainline operating expenses excluding special items and fuel                                                    | $24,763                     | $23,072                     | $21,526                     |
| **(In millions)**                                                                                |                             |                             |                             |
| Available Seat Miles (ASM)                                                                                | 243,806                     | 241,734                     | 239,375                     |
| **(In cents)**                                                                                |                             |                             |                             |
| Mainline CASM                                                                                | 12\.96                      | 11\.94                      | 12\.03                      |
| Adjusted for: Special items, net per ASM                                                                        | (0\.29)                     | (0\.29)                     | (0\.44)                     |
| Adjusted for: Aircraft fuel and related taxes per ASM                                                           | (2\.51)                     | (2\.10)                     | (2\.60)                     |
| Mainline CASM excluding special items and fuel                                                                  | 10\.16                      | 9\.54                       | 8\.99                       |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | See Note 2 to AAG’s Consolidated Financial Statements in Part II, Item 8A for further information on special items\. |

43


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

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

nature of future requirements and their applicability to the Company are difficult to predict, but the financial impact to the Company and the aviation industry would likely be adverse and could be significant\.

See Part I, Item 1, Business\-Industry Regulation\-Environmental Regulation, of this report for additional information on environmental regulation impacting the Company\.

***The United Kingdom's withdrawal from the EU may adversely impact our operations in the United Kingdom and elsewhere\.***

In June 2016, United Kingdom ("UK") voters approved an advisory referendum for the UK to exit the EU\. The UK parliament voted in favor of allowing the government to commence negotiations to determine the future terms of the UK's relationship with the EU, including the terms of trade between the UK and the EU and other nations\. The timing of the proposed exit is currently scheduled for March 29, 2019, with a transition period potentially running through December 2020\. A withdrawal plan was presented to the UK parliament in January 2019 and rejected, creating further uncertainty in negotiations and the process of withdrawal\.

Depending on the outcome of these negotiations, we could face new challenges in our operations, such as instability in global financial and foreign exchange markets\. This instability could include volatility in the value of the British pound and European euro, additional travel restrictions on passengers traveling between the UK and other EU countries, changes to the legal status of EU\-resident employees, legal uncertainty and potentially divergent national laws and regulations\. At this time, we cannot predict the impact that an actual exit from the EU will have on our business generally and our UK and European operations more specifically, and no assurance can be given that our operating results, financial condition and prospects would not be adversely impacted by the result\.

***The Company's operating results fluctuate due to seasonality and other factors associated with the airline industry, many of which are beyond the Company's control\.***

Due to greater demand for air travel during the spring and summer months, revenues in the airline industry in the second and third quarters of the year are generally stronger than revenues in the first and fourth quarters of the year, which are periods of lower travel demand\. The Company's operating results generally reflect this seasonality, but have also been impacted by numerous other factors that are not necessarily seasonal, including, among others, extreme or severe weather, outbreaks of disease or pandemics, ATC congestion, geological events, political instability, terrorism, natural disasters, changes in the competitive environment due to industry consolidation, tax obligations, general economic conditions and other factors\. As a result, the Company's quarterly operating results are not necessarily indicative of operating results for an entire year and historical operating results in a quarterly or annual period are not necessarily indicative of future operating results\.

***Increases in insurance costs or inadequate insurance coverage may materially and adversely impact our business, operating results and financial condition\.***

The Company could be exposed to significant liability or loss if its property or operations were to be affected by a natural catastrophe or other event, including aircraft accidents\. The Company maintains insurance policies, including, but not limited to, terrorism, aviation hull and liability, workers' compensation and property and business interruption insurance, but we are not fully insured against all potential hazards and risks incident to our business\. If the Company is unable to obtain sufficient insurance with acceptable terms, the costs of such insurance increase materially, or if the coverage obtained is insufficient relative to actual liability or losses that the Company experiences, whether due to insurance market conditions, policy limitations and exclusions or otherwise, its operating results and financial condition could be materially and adversely affected\.

***The Company has a significant amount of financial leverage from fixed obligations, and insufficient liquidity may have a material adverse effect on the Company's financial condition and business\.***

The Company has a significant amount of financial leverage from fixed obligations, including aircraft lease and debt financings, leases of airport property and other facilities, and other material cash obligations\. In addition, the Company has substantial noncancelable commitments for capital expenditures, including for the acquisition of new aircraft and related spare engines\.

Although the Company's cash flows from operations and its available capital, including the proceeds from financing transactions, have been sufficient to meet these obligations and commitments to date, the Company's future liquidity could be negatively affected by the risk factors discussed in this report\. If the Company's liquidity is materially diminished, the Company might not be able to timely pay its leases and debts or comply with certain operating and financial covenants under its financing and credit card processing agreements or with other material provisions of its contractual obligations\.

The Company's substantial level of indebtedness and non\-investment grade credit rating, as well as market conditions and the availability of assets as collateral for loans or other indebtedness, may make it difficult for the Company to raise additional capital if needed to meet its liquidity needs on acceptable terms, or at all\. In addition, our variable rate indebtedness may use

17


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

**AMERICAN AIRLINES GROUP INC\.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In millions)**

|                                                                                |                  |                  |                  |
| -------------------------------------------------------------------------------- | ---------------- | ---------------- | ---------------- |
|                                                                                | **December 31,** | **December 31,** | **December 31,** |
|                                                                                | **2018**         | **2017**         | **2016**         |
| **Cash flows from operating activities:**                                        |                  |                  |                  |
| Net income                                                                       | $1,412           | $1,282           | $2,584           |
| Adjustments to reconcile net income to net cash provided by operating activities |                  |                  |                  |
| Depreciation and amortization                                                    | 2,159            | 2,017            | 1,818            |
| Debt discount and lease amortization                                             | (92)             | (114)            | (119)            |
| Special items, non\-cash                                                         | 458              | 272              | 270              |
| Pension and postretirement                                                       | (300)            | (132)            | (68)             |
| Deferred income tax provision                                                    | 440              | 2,089            | 1,556            |
| Share\-based compensation                                                        | 86               | 90               | 100              |
| Other, net                                                                       | (64)             | (39)             | (18)             |
| **Changes in operating assets and liabilities:**                                 |                  |                  |                  |
| Decrease (increase) in accounts receivable                                       | 222              | (190)            | (160)            |
| Increase in other assets                                                         | (390)            | (433)            | (184)            |
| Increase (decrease) in accounts payable and accrued liabilities                  | (147)            | 299              | 307              |
| Increase in air traffic liability                                                | 297              | 65               | 158              |
| Increase (decrease) in loyalty program liability                                 | (283)            | (308)            | 417              |
| Contributions to pension plans                                                   | (475)            | (286)            | (32)             |
| Increase (decrease) in other liabilities                                         | 210              | 132              | (105)            |
| Net cash provided by operating activities                                        | 3,533            | 4,744            | 6,524            |
| **Cash flows from investing activities:**                                        |                  |                  |                  |
| Capital expenditures and aircraft purchase deposits                              | (3,745)          | (5,971)          | (5,731)          |
| Proceeds from sale of property and equipment and sale\-leaseback transactions    | 1,207            | 947              | 125              |
| Purchases of short\-term investments                                             | (3,412)          | (4,633)          | (6,241)          |
| Sales of short\-term investments                                                 | 3,705            | 5,915            | 6,092            |
| Proceeds from sale of investments                                                | 207              | —                | —                |
| Decrease in restricted short\-term investments                                   | 72               | 309              | 53               |
| Purchase of equity investment                                                    | —                | (203)            | —                |
| Other investing activities                                                       | (7)              | —                | —                |
| Net cash used in investing activities                                            | (1,973)          | (3,636)          | (5,702)          |
| **Cash flows from financing activities:**                                        |                  |                  |                  |
| Proceeds from issuance of long\-term debt                                        | 2,354            | 3,058            | 7,701            |
| Payments on long\-term debt and finance leases                                   | (2,941)          | (2,332)          | (3,827)          |
| Deferred financing costs                                                         | (59)             | (85)             | (77)             |
| Treasury stock repurchases                                                       | (837)            | (1,615)          | (4,500)          |
| Dividend payments                                                                | (186)            | (198)            | (224)            |
| Other financing activities                                                       | (3)              | 27               | 33               |
| Net cash used in financing activities                                            | (1,672)          | (1,145)          | (894)            |
| Net decrease in cash and restricted cash                                         | (112)            | (37)             | (72)             |
| Cash and restricted cash at beginning of year                                    | 398              | 435              | 507              |
| Cash and restricted cash at end of year  ^(a)^                                   | $286             | $398             | $435             |

^(a)^ The following table provides a reconciliation of cash and restricted cash to amounts reported within the consolidated balance sheets:

|                                                                         |      |      |      |
| ----------------------------------------------------------------------- | ---- | ---- | ---- |
| Cash                                                                    | $275 | $295 | $322 |
| Restricted cash included in restricted cash and short\-term investments | 11   | 103  | 113  |
| Total cash and restricted cash                                          | $286 | $398 | $435 |

See accompanying notes to consolidated financial statements\.

84


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

NOTE 18 \. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table summarizes our unaudited results of operations on a quarterly basis\. The quarterly earnings per share amounts for a year will not add to the earnings per share for that year due to the weighting of shares used in calculating per share data\.

We recast certain 2018 quarterly amounts to conform with the adoption of the lease standard effective January 1, 2018\.

|                                             |                         |                         |                         |                         |
| ------------------------------------------- | ----------------------- | ----------------------- | ----------------------- | ----------------------- |
| **As recast for lease accounting standard** | **Three Months Ended,** | **Three Months Ended,** | **Three Months Ended,** | **Three Months Ended,** |
| **(in millions, except per share data)**    | **March 31**            | **June 30**             | **September 30**        | **December 31**         |
| **2018**                                    |                         |                         |                         |                         |
| Operating revenue                           | $9,968                  | $11,775                 | $11,953                 | $10,742                 |
| Operating income                            | 844                     | 1,684                   | 1,645                   | 1,090                   |
| Net income                                  | 557                     | 1,036                   | 1,322                   | 1,019                   |
| Basic earnings per share                    | $0\.79                  | $1\.49                  | $1\.93                  | $1\.50                  |
| Diluted earnings per share                  | $0\.79                  | $1\.49                  | $1\.92                  | $1\.49                  |

|                                          |                         |                         |                         |
| ---------------------------------------- | ----------------------- | ----------------------- | ----------------------- |
| **As previously reported**               | **Three Months Ended,** | **Three Months Ended,** | **Three Months Ended,** |
| **(in millions, except per share data)** | **March 31**            | **June 30**             | **September 30**        |
| **2018**                                 |                         |                         |                         |
| Operating revenue                        | $9,968                  | $11,775                 | $11,953                 |
| Operating income                         | 840                     | 1,680                   | 1,642                   |
| Net income                               | 547                     | 1,025                   | 1,312                   |
| Basic earnings per share                 | $0\.78                  | $1\.47                  | $1\.91                  |
| Diluted earnings per share               | $0\.77                  | $1\.47                  | $1\.91                  |

As disclosed in our 2018 Form 10\-Qs, we recast certain 2017 quarterly amounts to conform with the adoption of the revenue recognition and retirement benefits standards\.

|                                          |                         |                         |                         |                         |
| ---------------------------------------- | ----------------------- | ----------------------- | ----------------------- | ----------------------- |
|                                          | **Three Months Ended,** | **Three Months Ended,** | **Three Months Ended,** | **Three Months Ended,** |
| **(in millions, except per share data)** | **March 31**            | **June 30**             | **September 30**        | **December 31**         |
| **2017**                                 |                         |                         |                         |                         |
| Operating revenue                        | $9,101                  | $10,747                 | $11,061                 | $10,229                 |
| Operating income                         | 999                     | 1,982                   | 1,823                   | 1,162                   |
| Net income                               | 561                     | 1,186                   | 1,159                   | 299                     |
| Basic earnings per share                 | $0\.77                  | $1\.63                  | $1\.62                  | $0\.42                  |
| Diluted earnings per share               | $0\.77                  | $1\.62                  | $1\.61                  | $0\.42                  |

 97


Annual Report of Southwest Airlines Co\. for year 2018

have resulted in a $63 million, or less than one percent, change in Passenger revenues recognized for the year ended December 31, 2018\.

Events and circumstances outside of historical fare sale activity or historical Customer travel patterns can result in actual spoiled tickets differing significantly from estimates\. The Company evaluates its estimates within a narrow range of acceptable amounts\. If actual spoilage results in an amount outside of this range, estimates and assumptions are reviewed and adjustments to Air traffic liability and to Passenger revenue are recorded, as necessary\. Additional factors that may affect estimated spoiled tickets include, but may not be limited to, changes to the Company’s ticketing policies, the Company’s refund, exchange, and unused funds policies, the mix of refundable and nonrefundable fares, promotional fare activity, events leading to significant flight cancellations, and the impact of the economic environment on Customer behavior\. The Company’s estimation techniques have been consistently applied from year to year; however, as with any estimates, actual spoiled tickets may vary from estimated amounts\.

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

***Accounting for Long\-Lived Assets***

Flight equipment and related assets make up the majority of the Company’s long\-lived assets\. Flight equipment primarily relates to the 699 Boeing 737 aircraft in the Company’s fleet at December 31, 2018, which are either owned or on capital lease\. The remaining 51 Boeing 737 aircraft in the Company’s fleet at December 31, 2018, are operated under operating leases\. The Company also has 85 B717 aircraft, which are part of the lease/sublease with Delta\. As these aircraft were not in service for the Company, they were not included in the fleet count as of December 31, 2018 or 2017\. In accounting for long\-lived assets, the Company must make estimates about the expected useful lives of the assets, the expected residual values of the assets, and the potential for impairment based on the fair value of the assets and their future expected cash flows\.

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

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

 residual value  |
| Airframes and engines             | 25 years               | 15 percent                        |
| Spare aircraft engines            | 25 years               | 20 percent                        |
| Aircraft parts                    | Fleet life             | 4 percent                         |
| Assets constructed for others (a) | 5 to 30 years          | 17 to 75 percent                  |
| Ground property and equipment     | 5 to 30 years          | 0 to 10 percent                   |

(a) Within the given range, LFMP and HOU assets are at the high end of the range, while the FLL and LAX assets are at the low end of the range\. See Note 4 for further information on the Company's Assets constructed for others\.

In estimating the lives and expected residual values of its aircraft, the Company primarily has relied upon actual experience with the same or similar aircraft types, current and projected future market information provided by independent third parties, and recommendations from Boeing\. Flight equipment estimated useful lives are based on the number of "cycles" flown (one take\-off and landing) as well as the aircraft age\. The Company has made a conversion of cycles into years based on both historical and anticipated future utilization of the aircraft\. Subsequent revisions to these estimates, which can be significant, could be caused by changes to aircraft maintenance programs, changes in utilization of the aircraft (actual cycles during a given period of time), governmental regulations on aging aircraft, and changing market prices of new and used aircraft of the same or similar types\. The Company evaluates its estimates and assumptions each reporting period and, when warranted, adjusts these estimates and assumptions\. Generally, these

59


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

legroom, early boarding, premium snacks and a complimentary alcoholic beverage\. Additionally, in 2017 we increased the distance between seats in our first class cabins on the Alaska B737\-900 and B737\-900ER fleet, providing significantly more space for guests flying in the First Class cabin\. We expect to fully complete the First Class cabin upgrades on the B737\-900 and B737\-900ER fleet in early 2018\.

Starting in 2018, we will begin reconfiguring the interior and livery of the Airbus fleet\. The new livery and interior reconfiguration will provide guests a consistent brand experience across the Mainline fleet\. The projects are expected to be complete in late 2019\.

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

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

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

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

Domestic airline capacity is dominated by four large carriers, representing over 80% of total seats\. Accordingly, if these carriers discount their fares or enter into our core markets, we must match those fares in order to maintain our load factors, often resulting in year\-over\-year decreases in our yields\. We will defend our core markets and, if necessary, redeploy capacity to better match supply with demand\. We believe the restructuring we've completed over the past decade has decreased our costs, enabling us to offer competitive fares while still earning returns for our shareholders\.

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

We also compete with other airlines based on markets served, the frequency of service to those markets and frequent flyer opportunities\. Some airlines have more extensive route structures than we do, and they offer significantly more international routes\. In order to expand opportunities for our guests, we enter into codesharing and interline relationships with other airlines that provide reciprocal frequent flyer mileage credit and redemption privileges\. These relationships allow us to offer our guests access to more destinations than we can on our own, gain exposure in markets we don't serve and allow our guests more opportunities to earn and redeem frequent flyer miles\. The Mileage Plan™ offers some of the most comprehensive benefits to our members with the ability to earn and redeem miles on 18 partner carriers\.

In addition to domestic or foreign airlines that we compete with on most of our routes, we compete with ground transportation in our short\-haul markets\. To some extent, our airlines also compete with technology, such as video conferencing and internet\-based meeting tools that have changed the need for, or frequency of, face\-to\-face business meetings\.

**TICKET DISTRIBUTION**

Our tickets are distributed through three primary channels:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | *Direct to customer:*  It is less expensive for us to sell through our direct channels at alaskaair\.com and virginamerica\.com\. As a result, we continue to take steps to drive more business to our websites\. In addition, we believe these channels are preferable from a branding and customer\-relationship standpoint in that we can establish ongoing communication with the customer and tailor offers accordingly\. |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Traditional and online travel agencies:*  Both traditional and online travel agencies typically use Global Distribution Systems (GDS) to obtain their fare and inventory data from airlines\. Bookings made through these agencies result in a fee  |

 12


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

The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, customers', employees' or business partners' information or failure to comply with regulatory or contractual obligations with respect to such information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business\. The costs to remediate breaches and similar system compromises that do occur could be material\. In addition, as cybercriminals become more sophisticated, the cost of proactive defensive measures may increase\.

Disruptions of our information technology infrastructure could interfere with our operations, possibly having a material adverse effect on our business\.

Disruptions in our information technology network could result from a technology error or failure impacting our internal systems, whether hosted internally at our data centers or externally at third\-party locations, or large scale external interruption in technology infrastructure support on which we depend, such as power, telecommunications or the internet\. For example, we experienced a power outage at our data center in 2016 that disrupted our operations even though it was quickly addressed\. The operation of our technology systems and the use of related data may also be vulnerable to a variety of other sources of interruption, including natural disasters, terrorist attacks, computer viruses, hackers and other security issues\. A significant individual, sustained or repeated failure of our network, including third\-party networks we utilize and on which we depend, could impact our customer service and result in increased costs\. While we have in place initiatives to prevent disruptions and disaster recovery plans (including the creation of a back\-up data center since 2016) and continue to invest in improvements to these initiatives and plans, these measures may not be adequate to prevent a business disruption and its adverse financial and reputational consequences to our business\.

Failure of our technology to perform effectively could have an adverse effect on our business\.

We are dependent on technology initiatives to provide customer service and operational effectiveness in order to compete in the current business environment\. For example, we have made and continue to make significant investments in customer facing technology such as delta\.com, mobile device applications, check\-in kiosks, customer service applications, application of biometric technology, airport information displays and related initiatives, including security for these initiatives\. We are also investing in significant upgrades to technology infrastructure and other supporting systems\. The performance, reliability and security of the technology are critical to our ability to serve customers\. If our technology does not perform effectively, our business and operations would be negatively affected, which could be material\.

Agreements governing our debt, including credit agreements, include financial and other covenants\. Failure to comply with these covenants could result in events of default\.

Our primary credit facility has various financial and other covenants that require us to maintain a minimum fixed charge coverage ratios and a minimum asset coverage ratio\. We have other smaller facilities, some of which are secured and also contain collateral coverage ratios\. A decline in the value of our assets supporting these facilities from factors that are not under our control could affect one or more of the ratios\. In addition, the credit facilities contain other negative covenants customary for such financings\. These covenants are subject to important exceptions and qualifications\. If we fail to comply with these covenants and are unable to remedy or obtain a waiver or amendment, an event of default would result\.

The credit facilities also contain other events of default customary for such financings\. If an event of default were to occur, the lenders could, among other things, declare outstanding amounts due and payable\. In addition, an event of default or declaration of acceleration under any of the credit facilities could also result in an event of default under other of our financing agreements\. The acceleration of significant amounts of debt could require us to renegotiate, repay or refinance the obligations under the credit facilities or other financing arrangements\.

Employee strikes and other labor\-related disruptions may adversely affect our  operations\.

Our business is labor intensive, utilizing large numbers of pilots, flight attendants, aircraft maintenance technicians, ground support personnel and other personnel\. As of  December 31, 2018 , approximately  19%  of our workforce, primarily pilots, was unionized\. Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act, which provides that a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date\. The Railway Labor Act generally prohibits strikes or other types of self help actions both before and after a collective bargaining agreement becomes amendable, unless and until the collective bargaining processes required by the Railway Labor Act have been exhausted\. Monroe's relations with unions representing its employees are governed by the NLRA, which generally allows self help after a collective bargaining agreement expires\.

 14


Annual Report of Southwest Airlines Co\. for year 2017

On January 31, 2018, the Company launched a new accelerated share repurchase program by advancing $500 million to a financial institution in a privately negotiated transaction ("First Quarter 2018 ASR Program")\. The specific number of shares that the Company ultimately will repurchase under the First Quarter 2018 ASR Program will be determined based generally on a discount to the volume\-weighted average price per share of the Company's common stock during a calculation period to be completed no later than May 2018\. The purchase will be recorded as a treasury share purchase for purposes of calculating earnings per share\. Subsequent to the launch of the First Quarter 2018 ASR Program, the Company has $850 million remaining under its May 2017 $2\.0 billion share repurchase authorization\. See Part II, Item 5 for further information on the Company's share repurchase authorizations\.

**Company Overview**

During 2017, the Company began scheduled service to new international destinations of Grand Cayman Island and Providenciales, Turks & Caicos, as well as new domestic service to Cincinnati/Northern Kentucky International airport\. With the addition of these new markets, the Company now serves 100 destinations across 40 states and ten near\-international countries, and operates over 4,000 departures a day\. Additionally, the Company announced plans to begin selling tickets in 2018 for service to Hawaii, subject to requisite governmental approvals, including approval from the FAA for Extended Operations ("ETOPS"), a regulatory requirement to operate between the U\.S\. mainland and the Hawaiian Islands\.

During 2017, the Company took delivery of 39 new 737\-800 aircraft from Boeing, 13 new 737 MAX 8 aircraft from Boeing, and 18 pre\-owned Boeing 737\-700 aircraft from third parties\. The Company also retired its remaining 87 Boeing 737\-300 ("Classic") aircraft, which included 61 Classic aircraft grounded in September 2017 as part of an accelerated retirement schedule\. The Company recorded a charge of $63 million related to the leased portion of the Classic fleet, representing the remaining net lease payments due and certain lease return requirements that could have to be performed on these leased aircraft prior to their return to the lessors, as of the cease\-use date\. For 2018, the Company's current firm aircraft commitments would result in 750 aircraft by year\-end 2018\. See Part I, Item 2 for further information\.

The Company became the first airline in North America to offer scheduled service utilizing Boeing’s new, more fuel\-efficient, 737 MAX 8 aircraft, which entered service in fourth quarter 2017\. The Company is scheduled to be the launch customer for the Boeing 737 MAX 7 series aircraft, with deliveries expected to begin in 2019\. Currently, the Company has firm orders in place for 197 737 MAX 8 aircraft and 30 737 MAX 7 aircraft\. See Part I, Item 2 for further information\.

The Company plans to continue its route network and schedule optimization efforts through the addition of new markets and itineraries, while also pruning less profitable flights from its schedule\. The Company currently plans to grow its 2018 available seat miles in the low five percent range, year\-over\-year, with first half 2018 year\-over\-year growth in the low three percent range and second half 2018 year\-over\-year growth in the low seven percent range\. The Company continues to expect the retirement of its Classic aircraft to produce significant incremental cost savings and improvements in pre\-tax results of at least $200 million, cumulatively, by the end of 2020\.

On May 9, 2017, the Company completed a multi\-year initiative to completely transition its reservation system to the Amadeus Altéa Passenger Service System\. The new reservation system, which represented the largest technology project in the Company's history, was designed to improve flight scheduling and inventory management, enable operational enhancements to manage flight disruptions, such as those caused by extreme weather conditions, enable revenue enhancements, further schedule optimization, support additional international growth, and enable other foundational and operational capabilities\. The Company continues to expect the new reservation system to produce incremental benefits in pretax results of approximately $200 million in 2018\.

During November 2017, the Company's Facilities Maintenance Technicians, represented by Aircraft Mechanics Fraternal Association ("AMFA"), ratified a tentative collective\-bargaining agreement with the Company\. The newly ratified contract becomes amendable in November 2022\.

40


Annual Report of Southwest Airlines Co\. for year 2018

the notes remained at floating rates\. The following table displays the characteristics of the Company’s secured fixed rate debt as of December 31, 2018:

|                     |                                                            |                                       |                                 |                                       |
| ------------------- | ---------------------------------------------------------- | ------------------------------------- | ------------------------------- | ------------------------------------- |
|                     | **Principal**

**amount**

 **(in millions)**  | **Effective**

 **fixed rate**  | **Final**

 **maturity**  | **Underlying collateral**             |
| Term Loan Agreement | $23                                                        | 6\.315%                               | 5/6/2019                        | 14 specified Boeing 737\-700 aircraft |
| Term Loan Agreement | 10                                                         | 4\.84%                                | 7/1/2019                        | 4 specified Boeing 737\-700 aircraft  |
| Term Loan Agreement | 187                                                        | 5\.223%                               | 5/9/2020                        | 21 specified Boeing 737\-700 aircraft |

The carrying value of the Company’s floating rate debt totaled $994 million, and this debt had a weighted\-average maturity of 2\.12 years at floating rates averaging 3\.48 percent for the year ended December 31, 2018\. In total, the Company’s fixed\-rate debt and floating rate debt represented 11 percent and 5 percent, respectively, of its consolidated noncurrent assets at December 31, 2018\.

The Company also has some risk associated with changing interest rates due to the short\-term nature of its invested cash, which totaled $1\.9 billion, and short\-term investments, which totaled $1\.8 billion at December 31, 2018\. See Notes 1 and 11 to the Consolidated Financial Statements for further information\. The Company currently invests available cash in certificates of deposit, highly rated money market instruments, investment grade commercial paper, treasury securities, U\.S\. government agency securities, and other highly rated financial instruments, depending on market conditions and operating cash requirements\. Because of the short\-term nature of these investments, the returns earned parallel closely with short\-term floating interest rates\. The Company has not undertaken any additional actions to cover interest rate market risk and is not a party to any other material market interest rate risk management activities\.

A hypothetical 10 percent change in market interest rates as of December 31, 2018, would not have a material effect on the fair value of the Company’s fixed\-rate debt instruments\. See Note 11 to the Consolidated Financial Statements for further information on the fair value of financial instruments\. A change in market interest rates could, however, have a corresponding effect on earnings and cash flows associated with the Company’s floating\-rate debt, invested cash (excluding cash collateral deposits held, if applicable), floating\-rate aircraft leases, and short\-term investments because of the floating\-rate nature of these items\. Assuming floating market rates in effect as of December 31, 2018 were held constant throughout a 12\-month period, a hypothetical 10 percent change in those rates would have an immaterial impact on the Company’s net earnings and cash flows\. Utilizing these assumptions and considering the Company’s cash balance (excluding the impact of cash collateral deposits held from or provided to counterparties, if applicable), short\-term investments, and floating\-rate debt outstanding at December 31, 2018, an increase in rates would have a net positive effect on the Company’s earnings and cash flows, while a decrease in rates would have a net negative effect on the Company’s earnings and cash flows\. However, a 10 percent change in market rates would not impact the Company’s earnings or cash flow associated with the Company’s publicly traded fixed\-rate debt\.

The Company is also subject to a financial covenant included in its revolving credit facility, and is subject to credit rating triggers related to its credit card transaction processing agreements, the pricing related to any funds drawn under its revolving credit facility, and some of its hedging counterparty agreements\. Certain covenants include the maintenance of minimum credit ratings and/or triggers that are based on changes in these ratings\. The Company’s revolving credit facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre\-tax income to fixed obligations, as defined\. As of December 31, 2018, the Company was in compliance with this covenant and there were no amounts outstanding under the revolving credit facility\. However, if conditions change and the Company fails to meet the minimum standards set forth in the revolving credit facility, there could be a reduction in the availability of cash under the facility, or an increase in the costs to keep the facility intact as written\. The Company’s hedging counterparty agreements contain ratings triggers in which cash collateral could be required to be posted with the counterparty if the Company’s credit rating were to fall below investment grade by two of the three major rating agencies, and if the Company was in a net liability position with the counterparty\. See Note 10 to the Consolidated Financial Statements for further information\.

65


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

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

Supplemental Information

We sometimes use information ("non\-GAAP financial measures") that is derived from the Consolidated Financial Statements but that is not presented in accordance with GAAP\. Under the U\.S\. Securities and Exchange Commission rules, non\-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results\.

The following table shows a reconciliation of pre\-tax income (a GAAP measure) to pre\-tax income, adjusted for special items (a non\-GAAP financial measure)\. We adjust pre\-tax income for the following items to determine pre\-tax income, adjusted for special items, for the reasons described below:

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *MTM adjustments and settlements\.*  MTM adjustments are defined as fair value changes recorded in periods other than the settlement period\. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period\. Settlements represent cash received or paid on hedge contracts settled during the period\. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period\. Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown\. |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| *•* | *Investment MTM adjustments* \. We record our proportionate share of earnings from our equity investments in Virgin Atlantic and Aeroméxico in non\-operating expense\. We adjust for Virgin Atlantic's and Aeroméxico's MTM adjustments to allow investors to better understand and analyze our core financial performance in the periods shown\.  |

|                                             |                             |                             |
| ------------------------------------------- | --------------------------- | --------------------------- |
|                                             | **Year Ended December 31,** | **Year Ended December 31,** |
| **(in millions)**                           | **2017**                    | **2016**                    |
| Pre\-tax income                             | $5,701                      | $6,636                      |
| Adjusted for:                               |                             |                             |
| MTM adjustments and settlements             | (259)                       | (450)                       |
| Investment MTM adjustments                  | 8                           | (115)                       |
| Pre\-tax income, adjusted for special items | $5,450                      | $6,071                      |

The following table shows a reconciliation of CASM (a GAAP measure) to CASM\-Ex, including profit sharing (a non\-GAAP financial measure)\. We adjust CASM for the following items to determine CASM\-Ex, including profit sharing for the reasons described below:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | *Aircraft fuel and related taxes\.*  The volatility in fuel prices impacts the comparability of year\-over\-year financial performance\. The adjustment for aircraft fuel and related taxes (including our regional carriers) allows investors to better understand and analyze our non\-fuel costs and year\-over\-year financial performance\. |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| *•* | *Other expenses\.*  Other expenses include aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery cost of sales to third parties\. Because these businesses are not related to the generation of a seat mile, we adjust for the costs related to these sales to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry\. |

|                                    |                             |                             |
| ---------------------------------- | --------------------------- | --------------------------- |
|                                    | **Year Ended December 31,** | **Year Ended December 31,** |
|                                    | **2017**                    | **2016**                    |
| CASM (cents)                       | 13\.81¢                     | 12\.98¢                     |
| Adjusted for:                      |                             |                             |
| Aircraft fuel and related taxes    | (2\.66)                     | (2\.38)                     |
| Other expenses                     | (0\.58)                     | (0\.47)                     |
| CASM\-Ex, including profit sharing | 10\.57¢                     | 10\.13¢                     |

 45


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

Loyalty Program

Our SkyMiles loyalty program generates customer loyalty by rewarding customers with incentives to travel on Delta\. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and other airlines that participate in the loyalty program\. When traveling, customers earn redeemable mileage credits based on the passenger's loyalty program status and travel fare paid\. Customers can also earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies\. To facilitate transactions with participating companies, we sell mileage credits to non\-airline businesses, customers and other airlines\. Mileage credits are redeemable by customers in future periods for air travel on Delta and other participating airlines, membership in our Sky Club and other program awards\.

To reflect the mileage credits earned, the loyalty program includes two types of transactions that are considered revenue arrangements with multiple performance obligations: (1) mileage credit earned with travel and (2) mileage credit sold to participating companies\.

Passenger Ticket Sales Earning Mileage Credits\.  Passenger ticket sales earning mileage credits under our loyalty program provide customers with (1) mileage credits earned and (2) air transportation\. We value each performance obligation on a standalone basis\. To value the mileage credits earned, we consider the quantitative value a passenger receives by redeeming miles for a ticket rather than paying cash, which is referred to as equivalent ticket value ("ETV")\. Our estimate of ETV is adjusted for mileage credits that are not likely to be redeemed ("breakage")\. Management uses statistical models to estimate breakage based on historical redemption patterns\. A change in assumptions as to the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years\. We recognize breakage proportionally during the period in which the remaining mileage credits are actually redeemed\.

We defer revenue for the mileage credits when earned and recognize loyalty travel awards in passenger revenue as the miles are redeemed and services are provided\. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize passenger revenue when we provide transportation or if the ticket goes unused\.

Sale of Mileage Credits\.  Customers may earn mileage credits based on their spending with participating companies such as credit card companies, hotels and car rental agencies with which we have marketing agreements to sell mileage credits\. Our contracts to sell mileage credits under these marketing agreements have multiple performance obligations\. Payments are typically due monthly based on the volume of miles sold during the period, and the terms of our marketing contracts are generally from one to eight years\.  During the years ended  December 31, 2018  and  2017 , total cash sales from marketing agreements were   $3\.5 billion  and   $3\.2 billion , respectively, which are allocated to travel and other performance obligations, as discussed below\.

Our most significant contract to sell mileage credits relates to our co\-brand credit card relationship with American Express\. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta\-American Express co\-branded credit card holders ("cardholders") and American Express Membership Rewards program participants, and allow American Express to market using our customer database\. Cardholders earn mileage credits for making purchases using co\-branded cards, may check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive other benefits while traveling on Delta\. Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the loyalty program\. We sell mileage credits at agreed\-upon rates to American Express which are then provided to their customers under the co\-brand credit card program and the Membership Rewards program\.

We account for marketing agreements, including American Express, consistent with the accounting method that allocates the consideration received to the individual products and services delivered\. We allocate the value based on the relative selling prices of those products and services, which generally consist of award travel, baggage fee waivers, lounge access and the use of our brand\. We determined our best estimate of the selling prices by considering discounted cash flow analyses using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) ETV for the award travel obligation, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value\.

 66


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

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

|                                            |                                                                                |
| ------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|                                            | ***Indefinite\-lived Intangible Assets (Route Authorities) Impairment Analysis***                                                                                |
| *Description of the Matter*                | At December 31, 2019, the Company's route authorities indefinite\-lived intangible assets were $1\.15 billion\. As discussed in Note 1 of the consolidated financial statements, indefinite\-lived assets are reviewed for impairment on an annual basis as of October 1, or on an interim basis whenever a triggering event occurs\.                                                                                |
| *Description of the Matter*                | Auditing management's annual route authorities indefinite\-lived intangibles impairment test was complex and highly judgmental due to the significant estimation required in determining the fair value\. The fair value estimate was sensitive to significant assumptions such as revenue growth rate, cost per available seat mile and the discount rate, each of which is affected by expectations about future market or economic conditions\. As a result of the subjectivity of the assumptions, adverse changes to management's estimates could reduce the underlying cash flows used to estimate fair value and trigger impairment charges\.                                                                                |
| *How We Addressed the Matter in Our Audit* | We tested the Company's design and operating effectiveness of internal controls that address the risk of material misstatement relating to the estimate of fair value of route authorities used in the annual impairment test\. This included testing controls over management's review of the significant assumptions used in the discounted cash flow methodology, including revenue growth rate, cost per available seat mile and the discount rate\.                                                                                |
| *How We Addressed the Matter in Our Audit* | To test the estimated fair value of the Company's route authorities indefinite\-lived intangibles, we performed audit procedures that included, among others, assessing the fair value methodology used by management and evaluating the significant assumptions used in the valuation model\. We compared significant assumptions to current industry, market and economic trends, and to the Company's historical results\. We assessed the historical accuracy of management's estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the intangible assets that would result from changes in assumptions\. We also involved a valuation specialist to assist in our evaluation of the Company's valuation methodology and discount rate\. |

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2009\.

Chicago, Illinois

February 24, 2020

41


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

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

***The airline industry may undergo further restructuring, consolidation, or the creation or modification of alliances or joint ventures, any of which could have a material adverse effect on our business, financial condition and results of operations\.***

We continue to face strong competition from other carriers due to restructuring, consolidation, and the creation and modification of alliances and joint ventures\. Since deregulation, both the U\.S\. and international airline industries have experienced consolidation through a number of mergers and acquisitions\. Carriers may also improve their competitive positions through airline alliances, slot swaps/acquisitions and/or joint ventures\. Certain airline joint ventures further competition by allowing airlines to coordinate routes, pool revenues and costs, and enjoy other mutual benefits, achieving many of the benefits of consolidation\.

***Our concentration in certain markets could cause us to be disproportionately impacted by adverse changes in circumstances in those locations\.***

Our strategy includes being the premier carrier for people living on the West Coast\. This results in a high concentration of our business in key West Coast markets\. A significant portion of our flights occur to and from our Seattle, Portland, and Bay Area hubs\. In 2017, passengers to and from Seattle, Portland, and the Bay Area accounted for 81% of our total guests\.

We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions\. As a result, we remain highly dependent on our key markets\. Our business could be harmed by any circumstances causing a reduction in demand for air transportation in our key markets\. An increase in competition in our key markets could also cause us to reduce fares or take other competitive measures that, if sustained, could harm our business, financial condition and results of operations\.

***We are dependent on a limited number of suppliers for aircraft and parts\.***

Alaska is dependent on Boeing as its sole supplier for aircraft and many aircraft parts\. Virgin America is similarly dependent on Airbus, and Horizon is dependent on Bombardier and Embraer\. Additionally, each carrier is dependent on sole suppliers for aircraft engines for each aircraft type\. As a result, we are more vulnerable to issues associated with the supply of those aircraft and parts including design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA\. Additionally, further consolidation amongst aircraft and aircraft parts manufacturers could further limit the number of suppliers\. This could result in an inability to operate our aircraft or instability in the foreign countries, in which the aircraft and its parts are manufactured\.

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

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

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

 24