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

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

NOTE 12 \. EQUITY AND EQUITY COMPENSATION

Equity

We are authorized to issue   2\.0 billion  shares of capital stock, of which up to   1\.5 billion  may be shares of common stock, par value   $0\.0001  per share, and up to   500 million  may be shares of preferred stock\.

Preferred Stock\.  We may issue preferred stock in one or more series\. The Board of Directors is authorized (1) to fix the descriptions, powers (including voting powers), preferences, rights, qualifications, limitations and restrictions with respect to any series of preferred stock and (2) to specify the number of shares of any series of preferred stock\. We have not issued any preferred stock\.

Treasury Stock\.  We generally withhold shares of Delta common stock to cover employees' portion of required tax withholdings when employee equity awards are issued or vest\. These shares are valued at cost, which equals the market price of the common stock on the date of issuance or vesting\. The weighted average cost of shares held in treasury was   $21\.19  and   $19\.40  as of  December 31, 2017  and  2016 , respectively\.

Equity Compensation

Our broad\-based equity and cash compensation plan provides for grants of restricted stock, stock options, performance awards, including cash incentive awards and other equity\-based awards (the "Plan")\. Shares of common stock issued under the Plan may be made available from authorized, but unissued, common stock or common stock we acquire\. If any shares of our common stock are covered by an award that expires, is canceled, forfeited or otherwise terminates without delivery of shares (including shares surrendered or withheld for payment of taxes related to an award), such shares will again be available for issuance under the Plan except for (i) any shares tendered in payment of an option, (ii) shares withheld to satisfy any tax withholding obligation with respect to the exercise of an option or stock appreciation right ("SAR") or (iii) shares covered by a stock\-settled SAR or other awards that were not issued upon the settlement of the award\. The Plan authorizes the issuance of up to   163 million  shares of common stock\. As of  December 31, 2017 , there were   30 million  shares available for future grants\.

 We make long\-term incentive awards annually to eligible employees under the Plan\. Generally, awards vest over time, subject to the employee's continued employment\. Equity compensation expense for these awards is recognized in salaries and related costs over the employee's requisite service period (generally, the vesting period of the award) and totaled   $108 million ,   $105 million  and   $76 million  for the years ended  December 31, 2017 ,  2016  and  2015 , respectively\. We record expense on a straight\-line basis for awards with installment vesting\. As of  December 31, 2017 , unrecognized costs related to unvested shares and stock options totaled   $82 million \. We expect substantially all unvested awards to vest and recognize any forfeitures as they occur\.

Restricted Stock \. Restricted stock is common stock that may not be sold or otherwise transferred for a period of time and is subject to forfeiture in certain circumstances\. The fair value of restricted stock awards is based on the closing price of the common stock on the grant date\. As of  December 31, 2017 , there were   2\.6  million unvested restricted stock awards\.

Stock Options\.  Stock options are granted with an exercise price equal to the closing price of Delta common stock on the grant date and generally have a 10\-year term\. We determine the fair value of stock options at the grant date using an option pricing model\. As of  December 31, 2017 , there were   1\.9 million  outstanding stock option awards with a weighted average exercise price of   $38\.59 , and   771 thousand  were exercisable\.

Performance Awards\.  Performance awards are long\-term incentive opportunities, which are payable in common stock and/or cash, and are generally contingent upon our achieving certain financial goals\.

Other\.  During 2017 and 2016, we recognized   $21 million  and   $33 million , respectively, of excess tax benefits in our income tax provision\.

 84


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

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

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

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

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

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

We utilize the market approach to measure fair value for our financial assets\. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets\. Our short\-term investments classified as Level 2 primarily utilize broker quotes in a non\-active market for valuation of these securities\. No changes in valuation techniques or inputs occurred during the year ended December 31, 2018\.

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

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

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Unrealized gains or losses on short\-term investments are recorded in accumulated other comprehensive loss at each measurement date\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | All short\-term investments are classified as available\-for\-sale and stated at fair value\. Our short\-term investments mature in one year or less except for  $877 million  of bank notes/certificates of deposit/time deposits and  $101 million  of corporate obligations\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | Long\-term investments primarily include our equity investment in China Southern Airlines, in which we presently own a  2\.2%  equity interest, and are classified in other assets on the consolidated balance sheets\. |

110


Annual Report of Southwest Airlines Co\. for year 2017

|                                                                                |                            |                            |                               |                                |                       |                       |                       |           |
| -------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------- | ----------------------------- | ------------------------------ | --------------------- | --------------------- | --------------------- | --------- |
|                                                                                | **Counterparty (CP)**      | **Counterparty (CP)**      | **Counterparty (CP)**         | **Counterparty (CP)**          | **Counterparty (CP)** | **Counterparty (CP)** | **Counterparty (CP)** |           |
| (in millions)                                                                                | **A**                      | **B**                      | **C**                         | **D**                          | **E**                 | **F**                 | **Other** (a)         | **Total** |
| Fair value of fuel derivatives                                                                                | $89                        | $44                        | $54                           | $35                            | $15                   | $6                    | $5                    | $248      |
| Cash collateral held from CP                                                                                | 15                         | —                          | —                             | —                              | —                     | —                     | —                     | 15        |
| Aircraft collateral pledged to CP                                                                                | —                          | —                          | —                             | —                              | —                     | —                     | —                     | —         |
| Letters of credit (LC)                                                                                | —                          | —                          | —                             | —                              | —                     | —                     | —                     | —         |
| Option to substitute LC for aircraft                                                                                | (200) to (600)(b)          | (100) to (500)(c)          | (150) to (550)(c)             | (150) to (550)(c)              | N/A                   | N/A                   |                       |           |
| Option to substitute LC for cash                                                                                | N/A                        | >(500)(c)               | (75) to (150) or >(550)(c) | (125) to (150) or >(550)(d) | (d)                   | N/A                   |                       |           |
| **If credit rating is investment**

**grade, fair value of fuel**

**derivative level at which:**      |                            |                            |                               |                                |                       |                       |                       |           |
| Cash is provided to CP                                                                                | (50) to (200) or >(600) | (50) to (100) or >(500) | (75) to (150) or >(550)(e) | (125) to (150) or >(550)(e) | >(125)             | >(65)(e)           |                       |           |
| Cash is received from CP                                                                                | >50(e)                  | >150(e)                 | >250(e)                    | >75(e)                      | >100(e)            | >30(e)             |                       |           |
| Aircraft or cash can be pledged to

 CP as collateral                                                         | (200) to (600)(f)          | (100) to (500)(c)          | (150) to (550)(c)             | (150) to (550)(c)              | N/A                   | N/A                   |                       |           |
| **If credit rating is non\-investment**

**grade, fair value of fuel derivative**

**level at which:** |                            |                            |                               |                                |                       |                       |                       |           |
| Cash is provided to CP                                                                                | (0) to (200) or >(600)  | (0) to (100) or >(500)  | (0) to (150) or >(550)     | (0) to (150) or >(550)      | (g)                   | (g)                   |                       |           |
| Cash is received from CP                                                                                | (g)                        | (g)                        | (g)                           | (g)                            | (g)                   | (g)                   |                       |           |
| Aircraft or cash can be pledged to

 CP as collateral                                                         | (200) to (600)             | (100) to (500)             | (150) to (550)                | (150) to (550)                 | N/A                   | N/A                   |                       |           |

(a) Individual counterparties with fair value of fuel derivatives <$5 million\.

(b) The Company has the option of providing letters of credit in addition to aircraft collateral if the appraised value of the aircraft does not meet the collateral requirement\.

(c) The Company has the option of providing cash, letters of credit, or pledging aircraft as collateral\.

(d) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement\.

(e) Thresholds may vary based on changes in credit ratings within investment grade\.

(f) The Company has the option of providing cash or pledging aircraft as collateral\.

(g) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts\.

**11****\. FAIR VALUE MEASUREMENTS**

Accounting standards pertaining to fair value measurements establish a three\-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value\. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions\.

As of December 31, 2017, the Company held certain items that are required to be measured at fair value on a recurring basis\. These included cash equivalents, short\-term investments (primarily treasury bills and certificates of deposit), interest rate derivative contracts, fuel derivative contracts, and available\-for\-sale securities\. The majority of the Company’s short\-term investments consist of instruments classified as Level 1\. However, the Company has certificates of deposit and commercial paper that are classified as Level 2, due to the fact that the fair value for these instruments is determined utilizing observable inputs in non\-active markets\. Other available\-for\-sale securities primarily consist of investments associated with the Company’s excess benefit plan\.

99


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

*Financing Activities*

Our net cash used in financing activities was $1\.1 billion and $894 million in 2017 and 2016, respectively\.

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

Our principal financing activities in 2016 included net proceeds of $7\.7 billion from the issuance of debt, including the issuance of $2\.8 billion of EETCs, $2\.3 billion provided under the April 2016 and December 2016 Term Loan Facilities and $1\.8 billion borrowed in connection with the financing of certain aircraft\. These cash inflows were offset in part by $4\.5 billion in share repurchases, $3\.8 billion in debt repayments, including the repayment of $588 million and $970 million in remaining principal of the 2013 Citicorp Credit Facility Tranche B\-2 and Tranche B\-1 term loans, respectively, and $224 million in dividend payments\.

*2016* *Compared to* *2015*

*Operating Activities*

Our net cash provided by operating activities was $6\.5 billion and $6\.2 billion in 2016 and 2015, respectively\. While AAG’s profitability was lower in 2016 as compared to 2015, cash provided by operating activities increased $275 million driven by certain payments received related to our co\-branded credit card agreements that became effective in the third quarter of 2016\.

*Investing Activities*

Our net cash used in investing activities was $5\.7 billion and $5\.6 billion in 2016 and 2015, respectively\.

Our principal investing activities in 2016 included expenditures of $5\.7 billion for property and equipment, including 25 Airbus A321 aircraft, 24 Embraer E175 aircraft, 20 Boeing 737\-800 aircraft, 18 Bombardier CRJ 900 aircraft, eight Boeing 787 aircraft and two Boeing 777 aircraft\.

Our principal investing activities in 2015 included expenditures of $6\.2 billion for property and equipment, including 38 Airbus A320 family aircraft, 24 Embraer E175 aircraft, 20 Bombardier CRJ 900 aircraft, 17 Boeing 737\-800 aircraft, 13 Boeing 787 aircraft and two Boeing 777 aircraft and the purchase of five Boeing 757 aircraft previously being leased\. These cash outflows were offset in part by $391 million in net sales of short\-term investments\.

*Financing Activities*

Our net cash used in financing activities was $894 million and $1\.3 billion in 2016 and 2015, respectively\.

Our principal financing activities in 2016 included net proceeds of $7\.7 billion from the issuance of debt, including the issuance of $2\.8 billion of EETCs, $2\.3 billion provided under the April 2016 and December 2016 Term Loan Facilities and $1\.8 billion borrowed in connection with the financing of certain aircraft\. These cash inflows were offset in part by $4\.5 billion in share repurchases, $3\.8 billion in debt repayments, including the repayment of $588 million and $970 million in remaining principal of the 2013 Citicorp Credit Facility Tranche B\-2 and Tranche B\-1 term loans, respectively, and $224 million in dividend payments\.

Our principal financing activities in 2015 included net proceeds of $5\.0 billion from the issuance of debt, including the issuance of $2\.3 billion of EETCs, $500 million of 4\.625% senior notes and $1\.9 billion borrowed in connection with the financing of certain aircraft\. These cash inflows were offset in part by $3\.8 billion in share repurchases, $2\.2 billion in debt repayments, including the $400 million repayment of the AAdvantage loan with Citibank, and $278 million in dividend payments\.

67


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

*Operating Revenues*

|                          |                                              |                                              |                                              |                                                       |
| ------------------------ | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- | ----------------------------------------------------- |
|                          | **Year Ended**

**December 31,**       | **Year Ended**

**December 31,**       | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                          | **2016**                                     | **2015**                                     | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                          | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Mainline passenger       | $27,909                                      | $29,037                                      | $(1,128)                                     | (3\.9)                                                |
| Regional passenger       | 6,670                                        | 6,475                                        | 195                                          | 3\.0                                                  |
| Cargo                    | 700                                          | 760                                          | (60)                                         | (7\.9)                                                |
| Other                    | 4,884                                        | 4,666                                        | 218                                          | 4\.7                                                  |
| Total operating revenues | $40,163                                      | $40,938                                      | $(775)                                       | (1\.9)                                                |

Total passenger revenues declined $933 million, or 2\.6%, in 2016 from 2015 driven by a decrease in consolidated passenger yields due to competitive capacity growth, macroeconomic softness outside of the United States and foreign currency weakness\.

Cargo revenue decreased $60 million, or 7\.9%, in 2016 from 2015 driven primarily by a decrease in domestic and international freight yields\.

Other revenue primarily includes revenue associated with American’s loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services\. Other revenue increased $218 million, or 4\.7%, in 2016 from 2015 driven by higher revenues associated with American’s loyalty program\. In 2016 and 2015, loyalty program revenue was $2\.1 billion and $1\.9 billion, respectively\. Of this, $1\.9 billion and $1\.7 billion related to the marketing component of mileage sales and other marketing related payments, respectively\.

Total operating revenues in 2016decreased $775 million, or 1\.9%, from 2015 driven by lower passenger revenues offset in part by higher other revenue as described above\.

*Mainline Operating Expenses*

|                                    |                                              |                                              |                                              |                                                       |
| ---------------------------------- | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- | ----------------------------------------------------- |
|                                    | **Year Ended**

**December 31,**       | **Year Ended**

**December 31,**       | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                                    | **2016**                                     | **2015**                                     | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                                    | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Aircraft fuel and related taxes    | $5,071                                       | $6,226                                       | $(1,155)                                     | (18\.5)                                               |
| Salaries, wages and benefits       | 10,881                                       | 9,514                                        | 1,367                                        | 14\.4                                                 |
| Maintenance, materials and repairs | 1,834                                        | 1,889                                        | (55)                                         | (2\.9)                                                |
| Other rent and landing fees        | 1,772                                        | 1,731                                        | 41                                           | 2\.4                                                  |
| Aircraft rent                      | 1,203                                        | 1,250                                        | (47)                                         | (3\.8)                                                |
| Selling expenses                   | 1,323                                        | 1,394                                        | (71)                                         | (5\.0)                                                |
| Depreciation and amortization      | 1,525                                        | 1,364                                        | 161                                          | 11\.8                                                 |
| Special items, net                 | 709                                          | 1,051                                        | (342)                                        | (32\.6)                                               |
| Other                              | 4,532                                        | 4,378                                        | 154                                          | 3\.5                                                  |
| Total mainline operating expenses  | $28,850                                      | $28,797                                      | $53                                          | 0\.2                                                  |

Mainline operating expenses increased $53 million, or 0\.2%, in 2016 from 2015\. The increase in operating expenses was primarily driven by higher wage rates resulting from new labor contracts and the addition of an employee profit sharing program; however, these costs were substantially offset by a year\-over\-year decline in fuel costs\.

Significant changes in the components of mainline operating expenses are as follows:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Aircraft fuel and related taxes  decrease d  18\.5 % primarily due to an  18\.2 %  decrease  in the average price per gallon of fuel to  $1\.41  in  2016  from  $1\.72  in  2015 \. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Salaries, wages and benefits  increase d  14\.4 % primarily due to increased costs associated with new labor contracts and the addition of an employee profit sharing program\. |

63


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

Expected Long\-Term Rate of Return\.  Our expected long\-term rate of return on plan assets is based primarily on plan\-specific investment studies using historical market return and volatility data\. Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically\. We also expect to receive a premium for investing in less liquid private markets\. We review our rate of return on plan assets assumptions annually\. Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation\. The investment strategy for our defined benefit pension plan assets is to earn a long\-term return that meets or exceeds our annualized return target while taking an acceptable level of risk and maintaining sufficient liquidity to pay current benefits and other cash obligations of the plan\. This is achieved by investing in a globally diversified mix of public and private equity, fixed income, real assets, hedge funds and other assets and instruments\. Our weighted average expected long\-term rate of return on assets for net periodic benefit cost for the year ended December 31, 2019 was 8\.97%\.

The impact of a 0\.50% change in these assumptions is shown in the table below:

|                                                                 |                                                                 |                                                                 |                                           |                                           |                                           |                                           |                                           |  |  |  |                                                                    |                                                                    |                                                                    |                                                                    |                                                                    |  |  |  |
|:--------------------------------------------------------------- |:--------------------------------------------------------------- |:--------------------------------------------------------------- |:-----------------------------------------:|:-----------------------------------------:|:-----------------------------------------:| -----------------------------------------:| -----------------------------------------:|:- |:- |:- | ------------------------------------------------------------------:| ------------------------------------------------------------------:|:------------------------------------------------------------------:|:------------------------------------------------------------------:|:------------------------------------------------------------------:|:- |:- |:- |
| Change in Assumption                                            | Change in Assumption                                            | Change in Assumption                                            |  Effect on 2020
Pension Benefit Cost |  Effect on 2020
Pension Benefit Cost |  Effect on 2020
Pension Benefit Cost |  Effect on 2020
Pension Benefit Cost |  Effect on 2020
Pension Benefit Cost |  |  |  | Effect on Accrued
Pension Liability at
December 31, 2019 | Effect on Accrued
Pension Liability at
December 31, 2019 | Effect on Accrued
Pension Liability at
December 31, 2019 | Effect on Accrued
Pension Liability at
December 31, 2019 | Effect on Accrued
Pension Liability at
December 31, 2019 |  |  |  |
| 0\.50% decrease in weighted average discount rate               | 0\.50% decrease in weighted average discount rate               | 0\.50% decrease in weighted average discount rate               |                                           |                                           |                                           |                                    $ (13) |                                   million |  |  |  |                                                             $1\.3  |                                                            billion |
| 0\.50% increase in weighted average discount rate               | 0\.50% increase in weighted average discount rate               | 0\.50% increase in weighted average discount rate               |                                           |                                           |                                           |                                      $ 9  |                                   million |  |  |  |                                                            $(1\.2) |                                                            billion |
| 0\.50% decrease in expected long\-term rate of return on assets | 0\.50% decrease in expected long\-term rate of return on assets | 0\.50% decrease in expected long\-term rate of return on assets |                                           |                                           |                                           |                                     $ 78  |                                   million |  |  |  |                                                                $—  |                                                                    |
| 0\.50% increase in expected long\-term rate of return on assets | 0\.50% increase in expected long\-term rate of return on assets | 0\.50% increase in expected long\-term rate of return on assets |                                           |                                           |                                           |                                    $ (78) |                                   million |  |  |  |                                                                $—  |                                                                    |

Life Expectancy \. Changes in life expectancy may significantly impact our benefit obligations and future net periodic benefit cost\. We use the Society of Actuaries ("SOA") published mortality data and other publicly available information to develop our best estimate of life expectancy\. The SOA publishes updated mortality tables for U\.S\. plans and updated improvement scales\. Each year we consider updates by the SOA in setting our mortality assumptions for purposes of measuring pension and other postretirement and postemployment benefit obligations\.

Funding\.  Our funding obligations for qualified defined benefit plans are governed by the Employee Retirement Income Security Act\. The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules ("Alternative Funding Rules") for defined benefit plans that are frozen\. We elected the Alternative Funding Rules under which the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17\-year period and is calculated using an 8\.85% discount rate until the 17\-year period expires for all frozen defined benefit plans by the end of 2024\.

While the Pension Protection Act makes our funding obligations for these plans more predictable, factors outside our control continue to have an impact on the funding requirements\. Estimates of future funding requirements are based on various assumptions and can vary materially from actual funding requirements\. Assumptions include, among other things, the actual and projected market performance of assets, statutory requirements and demographic data for participants\. For additional information, see Note 10 of the Notes to the Consolidated Financial Statements\.

Investments Valued at Net Asset Value ("NAV") Per Share\.  On an annual basis we assess the potential for adjustments to the fair value of all investments\. Certain of our investments valued using NAV as a practical expedient have a lag in the availability of data\. This primarily applies to private equity, private equity\-related strategies and real assets\. We solicit valuation updates from the investment fund managers and use their information and corroborating data from public markets to determine any needed fair value adjustments\.

Recent Accounting Standards

Standards Effective in Future Years

Credit Losses\.  In 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No\. 2016\-13, "Financial Instruments\-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments\." Under this ASU an entity is required to utilize an “expected credit loss model” on certain financial instruments, including trade and financing receivables\. This model requires consideration of a broader range of reasonable and supportable information and requires an entity to estimate expected credit losses over the lifetime of the asset\. This standard is effective for interim and annual reporting periods beginning after December 15, 2019\. We do not expect adoption of this standard to have a material impact on our consolidated financial statements\. We will adopt the standard effective January 1, 2020\.

44


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

Low\-cost carriers, including so\-called ultra\-low\-cost carriers, have a profound impact on industry revenues\. Using the advantage of low unit costs, these carriers offer lower fares in order to shift demand from larger, more established airlines, and represent significant competitors, particularly for customers who fly infrequently and are price sensitive and tend not to be loyal to any one particular carrier\. While historically these carriers have provided competition in domestic markets, we have recently experienced new competition from low\-cost carriers on international routes\. A number of these low\-cost carriers have announced growth strategies including commitments to acquire significant numbers of new aircraft for delivery in the next few years\. These low\-cost carriers are attempting to continue to increase their market share through growth and, potentially, consolidation, and could continue to have an impact on our revenues and overall performance\. In addition, we and several other large network carriers have announced “basic economy” fares designed to compete against low\-cost carriers and we cannot predict whether these initiatives will be successful or the competitive reaction of the low\-cost carriers\. Additionally, competition is also increasing from low cost airlines executing international long\-haul expansion strategies, including, for example, Icelandair, Norwegian Air Shuttle and Wow Air\. The actions of the low\-cost carriers, including those described above, could have a material adverse effect on our operations and financial performance\.

Our presence in international markets, such as Asia, is not as extensive as that of some of our competitors\. In providing international air transportation, we compete to provide scheduled passenger and cargo service between the U\.S\. and various overseas locations with U\.S\. airlines, foreign investor\-owned airlines and foreign state\-owned or state\-affiliated airlines\. Competition is increasing from foreign state\-owned and state\-affiliated airlines in the Gulf region, including Emirates, Etihad Airways and Qatar Airways\. These carriers have large numbers of international widebody aircraft in service and on order and are increasing service to the U\.S\. from locations both in and outside the Middle East\. We believe these carriers benefit from significant government subsidies, which has allowed them to grow quickly, reinvest in their product and expand their global presence\. Our international service exposes us to foreign economies and the potential for reduced demand, such as we have recently experienced in Venezuela, when any foreign country we serve suffers adverse local economic conditions\. In addition, open skies agreements with an increasing number of countries around the world provide international airlines with open access to U\.S\. markets\. See also *“Our business is subject to extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages\.”*

Certain airline alliances, joint ventures and joint businesses have been, or may in the future be, granted immunity from antitrust regulations by governmental authorities for specific areas of cooperation, such as joint pricing decisions\. To the extent alliances formed by our competitors can undertake activities that are not available to us, our ability to effectively compete may be hindered\. Our ability to attract and retain customers is dependent upon, among other things, our ability to offer our customers convenient access to desired markets\. Our business could be adversely affected if we are unable to maintain or obtain alliance and marketing relationships with other air carriers in desired markets\.

We have established antitrust\-immunized JBAs with British Airways, Iberia and Finnair, and separately with Japan Airlines\. In October 2017, American and its transatlantic partners executed an amended and restated JBA which, among other things, extends the term of the agreement\. Also, we had previously signed a revised JBA with Qantas Airways and applied for antitrust immunity with the DOT for the revised relationship, but we withdrew that application in November 2016 after it was tentatively denied by the DOT\. We intend to file a new application for antitrust immunity with the DOT this year, which, if granted, would allow us to further expand our relationship with Qantas Airways\. In addition, we have signed JBAs with certain air carriers of the LATAM Airlines Group and have applied for antitrust immunity in the relevant jurisdictions affected by such agreements, which applications have been approved in some jurisdictions, but are still pending in other jurisdictions, including the United States and Chile\. The foregoing arrangements are important aspects of our international network and we are dependent on the performance of the other airlines party to those agreements\. No assurances can be given as to any benefits that we may derive from such arrangements or any other arrangements that may ultimately be implemented\.

Additional mergers and other forms of industry consolidation, including antitrust immunity grants, may take place and may not involve us as a participant\. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with any such combinations, our competitive position relative to the post\-combination carriers or other carriers that acquire such assets could be harmed\. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks will grow, and that growth will result in greater overlap with our network, which in turn could result in lower overall market share and revenues for us\. Such consolidation is not limited to the U\.S\., but could include further consolidation among international carriers in Europe and elsewhere\.

Additionally, our AAdvantage loyalty program, which is an important element of our sales and marketing programs, faces significant and increasing competition from the loyalty programs offered by other travel companies, as well as from similar loyalty benefits offered by banks and other financial services companies\. Competition among loyalty programs is intense regarding the rewards, fees, required usage, and other terms and conditions of these programs\. These competitive factors

16


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

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

If the Company does not timely pay its leases and debts or comply with such covenants, a variety of adverse consequences could result\. These potential adverse consequences include an increase of required reserves under credit card processing agreements, withholding of credit card sale proceeds by its credit card service providers, loss of undrawn lines of credit, the occurrence of one or more events of default under the relevant agreements, the acceleration of the maturity of debt and/or the exercise of other remedies by its creditors and equipment lessors that could result in a material adverse effect on the Company’s financial position and results of operations\. The Company cannot provide assurance that it would have sufficient liquidity to repay or refinance such debt if it were accelerated\. In addition, an event of default or acceleration of debt under certain of its financing agreements could result in one or more events of default under certain of the Company’s other financing agreements due to cross default and cross acceleration provisions\.

Furthermore, insufficient liquidity may limit the Company’s ability to withstand competitive pressures and downturns in the travel business and the economy in general\.

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\.

See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report for additional information regarding the Company’s liquidity\.

***Increases in insurance costs or reductions in insurance coverage may materially and adversely impact the Company’s results of operations 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 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 results of operations and financial condition could be materially and adversely affected\.

***The Company’s results of operations fluctuate due to seasonality and other factors associated with the airline industry\.***

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 results of operations generally reflect this seasonality, but have also been impacted by numerous other factors that are not necessarily seasonal, including, among others, the imposition of excise and similar taxes, extreme or severe weather, ATC congestion, geological events, natural disasters, changes in the competitive environment due to industry consolidation, 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\.

***The Company may never realize the full value of its intangible assets or its long\-lived assets causing it to record impairments that may negatively affect its financial position and results of operations\.***

In accordance with applicable accounting standards, the Company is required to test its indefinite\-lived intangible assets for impairment on an annual basis, or more frequently if conditions indicate that an impairment may have occurred\. In addition, the Company is required to test certain of its other assets for impairment if conditions indicate that an impairment may have occurred\.

18


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

Losses recognized for hedges that settled during the year were $16 million in 2016, compared to losses of $19 million in 2015\. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement\.

***Aircraft Maintenance***

Aircraft maintenance costs increased by $17 million, or 7%, compared to 2015\. Maintenance costs increased primarily due to more engine and airframe maintenance events than in 2015\. Additionally, in 2015 we received vendor credits, which offset expense, for engine maintenance that had been previously completed on the B737 fleet\.

***Aircraft Rent***

Aircraft rent expense increased by $9 million, or 9%, compared to 2015, primarily due to the addition of rent expense on the 53 Airbus aircraft leased by Virgin America for the period December 14, 2016 to December 31, 2016\.

***Landing Fees and Other Rentals***

Landing fees and other rental expenses increased$24 million, or 8%, primarily due to increased flying in 2016 as we increased capacity and entered into new markets\.

***Contracted Services***

Contracted services increased$33 million, or 15%, when compared to 2015\. The increase was primarily due to increased flying at stations where we use vendors to assist us\. Additionally, wage rates for our vendor employees have increased due in part to higher minimum wage laws in many locations we serve\. We also had several information technology and facilities projects that required contracted support\.

***Selling Expenses***

Selling expenses increased by $14 million, or 7%, compared to 2015, mostly due to increased promotional and advertising activities, as well as new sponsorships which became effective in 2016\.

***Depreciation and Amortization***

Depreciation and amortization expenses increased by $43 million, or 13%, compared to 2015\. The increase was primarily due to the addition of 19 B737\-900ERs to our fleet since December 31, 2015, partially offset by a change in the estimated useful lives of certain B737 operating aircraft and related parts from 20 years to 25 years, which became effective October 1, 2016\.

***Food and Beverage Service***

Food and beverage service expenses increased by $13 million, or 12%, due to the increased number of passengers and upgrades to our onboard menu, offering higher quality food and beverage products\.

***Third\-Party Regional Carrier Expense***

Third\-party regional carrier expense, which represents payments made to SkyWest and PenAir under our CPAs, increased$23 million, or 32%, in 2016 compared to 2015\. The increase was primarily due to the significant increase in regional capacity in 2016 through the introduction of E175 flying\.

***Other Operating Expenses***

Other operating expenses increased$9 million, or 3%, compared to 2015\. The increase was primarily due to increases in property and other taxes, personnel costs for our flight crews and an increase in fines and penalties\.

***Special Items—Merger\-Related Costs and Other***

We recorded special items of $117 million for merger\-related costs associated with our acquisition of Virgin America\. These costs consisted primarily of legal expenses, investment banking fees and severance costs\. Our 2015 special items of $32 million consisted of a non\-cash pension settlement expense and costs related to ongoing litigation\.

 50


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

**AIR GROUP**

Our airlines operate different aircraft and missions\. Alaska operates a fleet of narrowbody passenger jets on primarily longer\-haul capacity\. Alaska contracts with Horizon, SkyWest Airlines, Inc\. (SkyWest) and Peninsula Aviation Services, Inc\. (PenAir), a subsidiary of RAVN Air Group, Inc\., for shorter\-haul capacity, such that Alaska receives all passenger revenue from those flights\. Horizon operates Embraer 175 (E175) regional jet aircraft and Bombardier Q400 turboprop aircraft and sells all of its capacity to Alaska pursuant to a CPA\. The majority of our revenues are generated by transporting passengers\. The percentage of revenues by category is as follows:

|                            |          |          |                    |          |          |
| -------------------------- | -------- | -------- | ------------------ | -------- | -------- |
|                            | **2018** | **2017** | **2016** **^(a)^** | **2015** | **2014** |
| Passenger revenue          | 93%      | 93%      | 91%                | 85%      | 85%      |
| Mileage Plan other revenue | 5%       | 5%       | 6%                 | (b)      | (b)      |
| Cargo and other            | 2%       | 2%       | 3%                 | (b)      | (b)      |
| Other revenue              | (b)      | (b)      | (b)                | 13%      | 13%      |
| Freight and Mail revenue   | (b)      | (b)      | (b)                | 2%       | 2%       |
| Total                      | 100%     | 100%     | 100%               | 100%     | 100%     |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------- |
| (a) | Includes information for Virgin America for the period December 14, 2016 through December 31, 2016\. |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | As a result of the new revenue recognition standards, certain financial statement line items were modified to address new requirements\. We did not apply this change to fiscal years 2015 and 2014, and have left the captioning above as it was presented in those respective fiscal years\.  |

We deploy aircraft into the network in ways that we believe will best optimize our revenues and profitability and reduce the impacts of seasonality\.

The percentage of our capacity by region is as follows:

|                       |          |          |                    |          |          |
| --------------------- | -------- | -------- | ------------------ | -------- | -------- |
|                       | **2018** | **2017** | **2016** **^(a)^** | **2015** | **2014** |
| West Coast ^(b)^      | 27%      | 28%      | 34%                | 36%      | 36%      |
| Transcon/midcon       | 44%      | 43%      | 29%                | 24%      | 22%      |
| Hawaii and Costa Rica | 14%      | 13%      | 17%                | 18%      | 18%      |
| Alaska                | 10%      | 10%      | 14%                | 15%      | 15%      |
| Mexico                | 4%       | 5%       | 5%                 | 6%       | 6%       |
| Canada                | 1%       | 1%       | 1%                 | 1%       | 3%       |
| Total                 | 100%     | 100%     | 100%               | 100%     | 100%     |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------- |
| (a) | Includes information for Virgin America for the period December 14, 2016 through December 31, 2016\. |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | Category represents flying within the West Coast\. Departures from the West Coast to other regions are captured in other categories\.  |

**MAINLINE**

Our Mainline operations include Boeing 737 (B737) and Airbus family (A319, A320, and A321neo) jet service offered by Alaska\. We offer extensive passenger service from the western U\.S\. throughout the contiguous United States, Alaska, Hawaii, Canada, Mexico, and Costa Rica\. Our largest concentrations of departures are in Seattle, Portland, and the Bay Area\. We also offer cargo service throughout our network and have dedicated cargo aircraft that operate primarily to and within the state of Alaska\.

In 2018, we carried 36 million revenue passengers in our Mainline operations\. At December 31, 2018, our Mainline operating fleet consisted of 162 Boeing 737 jet aircraft and 71 Airbus A320 family jet aircraft compared to 154 B737 aircraft and 67 Airbus aircraft as of December 31, 2017\.

 7


Annual Report of Southwest Airlines Co\. for year 2018

**Non\-GAAP Return on Invested Capital (ROIC) (in millions) (unaudited)**

|                                                             |                       |     |                       |     |                       |     |
| ----------------------------------------------------------- | --------------------- | --- | --------------------- | --- | --------------------- | --- |
|                                                             | **Year Ended**        |     | **Year Ended**        |     | **Year Ended**        |     |
|                                                             | **December 31, 2018** |     | **December 31, 2017** |     | **December 31, 2016** |     |
| **Operating income, as reported**                           | $3,206                |     | $3,407                |     | $3,522                |     |
| Contract ratification bonuses                               | —                     |     | —                     |     | 356                   |     |
| Net impact from fuel contracts                              | (14)                  |     | (156)                 |     | (201)                 |     |
| Asset impairment                                            | —                     |     | —                     |     | 21                    |     |
| Lease termination expense                                   | —                     |     | 33                    |     | 22                    |     |
| Aircraft grounding charge                                   | —                     |     | 63                    |     | —                     |     |
| Gain on sale of grounded aircraft                           | (25)                  |     | —                     |     | —                     |     |
| **Operating income, non\-GAAP**                             | 3,167                 |     | 3,347                 |     | 3,720                 |     |
| Net adjustment for aircraft leases (a)                      | 99                    |     | 110                   |     | 110                   |     |
| **Adjusted operating income, non\-GAAP (A)**                | $3,266                |     | $3,457                |     | $3,830                |     |
| **Non\-GAAP tax rate (B)**                                  | 22\.1%                | (d) | 36\.1%                | (e) | 36\.7%                | (f) |
| **Net operating profit after\-tax, NOPAT (A\* (1\-B) = C)** | $2,545                |     | $2,210                |     | $2,424                |     |
| Debt, including capital leases (b)                          | $3,521                |     | $3,259                |     | $3,304                |     |
| Equity (b)                                                  | 9,853                 |     | 8,194                 |     | 7,195                 |     |
| Net present value of aircraft operating leases (b)          | 584                   |     | 785                   |     | 1,015                 |     |
| **Average invested capital**                                | $13,958               |     | $12,238               |     | $11,514               |     |
| Equity adjustment for hedge accounting (c)                  | (144)                 |     | 296                   |     | 886                   |     |
| **Adjusted average invested capital (D)**                   | $13,814               |     | $12,534               |     | $12,400               |     |
| **Non\-GAAP ROIC, pre\-tax (A/D)**                          | 23\.6%                |     | 27\.6%                |     | 30\.9%                |     |
| **Non\-GAAP ROIC, after tax (C/D)**                         | 18\.4%                |     | 17\.6%                |     | 19\.5%                |     |

As of January 1, 2018, the Company adopted ASU 2014\-09: Revenue from Contracts with Customers, ASU 2017\-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, and ASU 2017\-12: Targeted Improvements to Accounting for Hedging Activities\. As a result, certain prior period results have been recast due to the transition methods applied\. See Note 2 to the Consolidated Financial Statements for further information\.

(a) Net adjustment related to presumption that all aircraft in fleet are owned (i\.e\., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft)\. The Company makes this adjustment to enhance comparability to other entities that have different capital structures by utilizing alternative financing decisions\.

(b) Calculated as an average of the five most recent quarter end balances or remaining obligations\. The Net present value of aircraft operating leases represents the assumption that all aircraft in the Company’s fleet are owned, as it reflects the remaining contractual commitments discounted at the Company's estimated incremental borrowing rate as of the time each individual lease was signed\.

(c) The Equity adjustment for hedge accounting in the denominator adjusts for the cumulative impacts, in AOCI and Retained earnings, of gains and/or losses associated with hedge accounting related to fuel hedge derivatives that will settle in future periods\. The current period impact of these gains and/or losses is reflected in the Net impact from fuel contracts in the numerator\.

(d) The GAAP annual tax rate as of December 31, 2018, was 22\.1 percent, and the annual Non\-GAAP tax rate was also 22\.1 percent\. See Note Regarding Use of Non\-GAAP Financial Measures for additional information

(e) The GAAP annual tax rate as of December 31, 2017, was a 2\.8 percent tax benefit due to the significant impact the Tax Cuts and Jobs Act legislation enacted in December 2017 had on corporate tax rates, and the annual Non\-GAAP tax rate was 36\.1 percent\. See Note Regarding Use of Non\-GAAP Financial Measures for additional information\.

(f) The GAAP annual tax rate as of December 31, 2016, was 36\.7 percent, and the annual Non\-GAAP tax rate was also 36\.7 percent\. See Note Regarding Use of Non\-GAAP Financial Measures for additional information\.

**Note Regarding Use of Non\-GAAP Financial Measures**

The Company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP")\. These GAAP financial statements include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult\.

As a result, the Company also provides financial information in this filing that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP\. The Company provides supplemental non\-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results\. The non\-GAAP measures provided that relate to the Company’s performance on an economic fuel cost basis include Fuel and oil expense, non\-GAAP; Total operating expenses, non\-GAAP; Operating income, non\-GAAP; Adjusted operating income, non\-GAAP; Income tax rate, non\-GAAP; Provision for income taxes, non\-GAAP; Net income, non\-GAAP; Net income per share, diluted, non\-GAAP; and Operating expenses per ASM, non\-GAAP, excluding profitsharing and Fuel and oil expense\. The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts \- all reflected within Fuel and oil expense in the period of settlement\. Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts\. Any net premium costs paid related to option contracts that are designated as hedges are reflected as a component of Fuel and oil expense, for both GAAP and non\-GAAP (including economic) purposes in the period of contract settlement\. The Company believes these economic results provide further insight on the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense\. This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year\-over\-year or quarter\-over\-quarter basis after considering all efforts in place to manage fuel expense\. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner\. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies\.

Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark\-to\-market gains or losses from derivative instruments is included in Note 2 and Note 10 to the Consolidated Financial Statements, which also discusses the Company's January 1, 2018 adoption of the New Hedging Standard\.

The Company’s GAAP results in the applicable periods include other charges or benefits that are also deemed "special items," that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends\. Financial measures identified as non\-GAAP (or as excluding special items) have been adjusted to exclude special items\. Special items include:

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 1\. | Contract ratification bonuses recorded for certain workgroups\. As the bonuses would only be paid at ratification of the associated tentative agreement and would not represent an ongoing expense to the Company, management believes its results for the associated periods are more usefully compared if the impacts of ratification bonus amounts are excluded from results\. Generally, union contract agreements cover a specified three\- to five\- year period, although such contracts officially never expire, and the agreed upon terms remain in place until a revised agreement is reached, which can be several years following the amendable date; |

52


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

Aircraft fuel expense increased$616 million, or 74% compared to 2016\. On a Combined Comparative basis, aircraft fuel expense increased $323 million, or 29%\. The elements of the change are illustrated in the following table:

|                                                    |                                      |                                      |                                      |                                      |                                      |                                      |
| -------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                    | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                    | **2017**                             | **2017**                             | **2016 as Reported**                 | **2016 as Reported**                 | **2016 Combined**                    | **2016 Combined**                    |
| ***(in millions, except for per gallon amounts)*** | **Dollars**                          | **Cost/Gal**                         | **Dollars**                          | **Cost/Gal**                         | **Dollars**                          | **Cost/Gal**                         |
| Raw or "into\-plane" fuel cost                     | **$1,437**                           | **$1\.80**                           | $828                                 | $1\.49                               | $1,105                               | $1\.49                               |
| Losses on settled hedges                           | **17**                               | **0\.02**                            | 16                                   | 0\.03                                | 34                                   | 0\.05                                |
| Consolidated economic fuel expense                 | **$1,454**                           | **$1\.82**                           | $844                                 | $1\.52                               | $1,139                               | $1\.54                               |
| Mark\-to\-market fuel hedge adjustments            | **(7)**                              | **—**                                | (13)                                 | (0\.02)                              | (15)                                 | (0\.02)                              |
| GAAP fuel expense                                  | **$1,447**                           | **$1\.82**                           | $831                                 | $1\.50                               | $1,124                               | $1\.52                               |
| Fuel gallons                                       | **797**                              |                                      | 554                                  |                                      | 739                                  |                                      |

On a Combined Comparative basis, raw fuel expense per gallon increased21% due primarily to higher West Coast jet fuel prices\. West Coast jet fuel prices are impacted by both the price of crude oil, as well as the refining margins associated with the conversion of crude oil to jet fuel\. The increase in raw fuel price per gallon during 2017 was driven by a 38% increase in refining margins and a 17% increase in crude oil prices, compared to the prior year\. Fuel gallons consumed increased by 58 million, or 8%, consistent with the increase in capacity of 7% on a Combined Comparative basis\.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts\. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio\. When we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms\. We believe this is the best measure of the effect that fuel prices have on our business because it most closely approximates the net cash outflow associated with purchasing fuel for our operations\. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans\.

Losses recognized for hedges that settled during the year were $17 million in 2017, compared to losses of $16 million in 2016\. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement\.

As of the date of this filing we expect our economic fuel price per gallon to increase approximately 21% in the first quarter of 2018 as compared to the first quarter of 2017 due to higher crude oil prices and refining margins\. As both oil prices and refining margins are volatile, we are unable to forecast the full\-year cost with any certainty\.

 42


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

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

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders and Board of Directors of United Continental Holdings, Inc\.

**Opinion on Internal Control over Financial Reporting**

We have audited United Continental Holdings, Inc\.’s (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control\-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria)\. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements as of and for the year ended December 31, 2017 of the Company and our report dated February 22, 2018 expressed an unqualified opinion thereon\.

**Basis for Opinion**

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting in Item 9A\. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit\. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U\.S\. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB\.

We conducted our audit in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects\.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances\. We believe that our audit provides a reasonable basis for our opinion\.

**Definition and Limitations of Internal Control Over Financial Reporting**

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

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

/s/ Ernst & Young LLP

Chicago, Illinois

February 22, 2018

103


Annual Report of Southwest Airlines Co\. for year 2017

***The Company's business is labor intensive; therefore, the Company would be adversely affected if it were unable to maintain satisfactory relations with its Employees or its Employees' Representatives\.***

The airline business is labor intensive\. Salaries, wages, and benefits represented approximately 41 percent of the Company's operating expenses for the year ended December 31, 2017\. In addition, as of December 31, 2017, approximately 83 percent of the Company's Employees were represented for collective bargaining purposes by labor unions, making the Company particularly exposed in the event of labor\-related job actions\. Employment\-related issues that have, and continue to, impact the Company's results of operations, some of which are negotiated items, include hiring/retention rates, pay rates, outsourcing costs, work rules, health care costs, and retirement benefits\.

***The Company is currently dependent on single aircraft and engine suppliers, as well as single suppliers of certain other parts; therefore, the Company would be materially adversely affected if it were unable to obtain additional equipment or support from any of these suppliers, in the event of a mechanical or regulatory issue associated with their equipment, or in the event the pricing and operational attributes of the Company's equipment become less competitive\.***

The Company is dependent on Boeing as its sole supplier for aircraft and many of its aircraft parts and is dependent on other suppliers for certain other aircraft parts\. Although the Company is able to purchase some aircraft from parties other than Boeing, most of its purchases are directly from Boeing\. Therefore, if the Company was unable to acquire additional aircraft from Boeing, or if Boeing was unable or unwilling to make timely deliveries of aircraft or to provide adequate support for its products, the Company's operations would be materially adversely affected\. In addition, the Company would be materially adversely affected in the event of a mechanical or regulatory issue associated with the Boeing 737 aircraft type, whether as a result of downtime for part or all of the Company's fleet, increased maintenance costs, or because of a negative perception by the flying public\. The Company believes, however, that its years of experience with the Boeing 737 aircraft type, as well as the efficiencies Southwest has historically achieved by operating with a single aircraft type, continue to outweigh the risks associated with its single aircraft supplier strategy\. The Company is also dependent on sole suppliers for aircraft engines and certain other aircraft parts and would therefore also be materially adversely affected in the event of the unavailability of, or a mechanical or regulatory issue associated with, engines and other parts\. The Company could also be materially adversely affected if the pricing or operational attributes of its equipment were to become less competitive\.

***Any failure of the Company to maintain the security of certain Customer\-related information could result in damage to the Company's reputation and could be costly to remediate\.***

The Company must receive information related to its Customers in order to run its business, and the Company's operations depend upon secure retention and the secure transmission of information over public networks, including information permitting cashless payments\. This information is subject to the risk of intrusion, tampering, and theft\. Although the Company maintains systems to defend against this from occurring, these systems require ongoing monitoring and updating as technologies change, and security could be compromised, confidential information could be misappropriated, or system disruptions could occur\. In the ordinary course of its business, the Company also provides certain confidential, proprietary, and personal information to third parties\. While the Company seeks to obtain assurances that these third parties will protect this information, there is a risk the security of data held by third parties could be breached\. A compromise of the Company's security systems could adversely affect the Company's reputation and disrupt its operations and could also result in litigation against the Company or the imposition of penalties\. In addition, it could be costly to remediate\. Although the Company has not experienced cyber incidents that are individually, or in the aggregate, material, the Company has experienced cyber\-attacks in the past, which have thus far been mitigated by preventative, detective, and responsive measures put in place by the Company\.

***The Company's results of operations could be adversely impacted if it is unable to grow or to effectively execute its strategic plans\.***

Southwest has historically been regarded as a growth airline\. However, organic growth remains challenging because (i) the opportunities for domestic expansion are limited; (ii) the Company's international network is relatively small

24


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

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

ASU 2016\-13: Financial Instruments  –  Credit Losses (Topic 326)

This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates\. For trade receivables, loans and held\-to \- maturity debt securities, an estimate of lifetime expected credit losses is required\. For available\-for\-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset\. This standard is effective for interim and annual reporting periods beginning after December 15, 2019\. While American has not completed its evaluation of the impact of adoption of this standard, American does not expect it to have a material impact on its consolidated financial statements\.

(c) Short\-term Investments

Short\-term investments are classified as available\-for\-sale and stated at fair value\. Realized gains and losses are recorded in nonoperating expense on American’s consolidated statements of operations\. Unrealized gains and losses are recorded in accumulated other comprehensive loss on American’s consolidated balance sheets\.

(d) Restricted Cash and Short\-term Investments

American has restricted cash and short\-term investments related primarily to collateral held to support workers’ compensation obligations\.

(e) Aircraft Fuel, Spare Parts and Supplies, Net

Aircraft fuel is recorded on a first\-in, first\-out basis\. Spare parts and supplies are recorded at average costs less an allowance for obsolescence\. These items are expensed when used\.

(f) Operating Property and Equipment

Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or the lease term, whichever is less, using the straight\-line method\. Residual values for aircraft, engines and related rotable parts are generally   5%  to   10%  of original cost\. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated or amortized over the estimated useful life of the asset or the lease term, whichever is less\. The estimated useful lives for the principal property and equipment classifications are as follows:

|                                                     |                           |
| --------------------------------------------------- | ------------------------- |
| **Principal Property and Equipment Classification** | **Estimated Useful Life** |
| Aircraft, engines and related rotable parts         | 20 – 30 years             |
| Buildings and improvements                          | 5 – 30 years              |
| Furniture, fixtures and other equipment             | 3 – 10 years              |
| Capitalized software                                | 5 – 10 years              |

American assesses impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired\. An asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the carrying amount of the assets and the net book value of the assets exceeds their estimated fair value\. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets\. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell\.

Total depreciation and amortization expense was   $2\.5 billion ,   $2\.4 billion  and   $2\.1 billion  for the years ended  December 31, 2019 ,  2018  and  2017 , respectively\.

(g) Leases

American determines if an arrangement is a lease at inception\. Operating leases are included in operating lease right\-of\-use (ROU) assets, current operating lease liabilities and noncurrent operating lease liabilities in American’s consolidated balance sheet\. Finance leases are included in property and equipment, current maturities of long\-term debt and finance leases and long\-term debt and finance leases, net of current maturities, in American’s consolidated balance sheets\.

ROU assets represent American’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease\. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term\.

123


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

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

|         |                   |                                                                                |
| ------- | ----------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.168 | UAL
United   | [Amended and Restated Credit and Guaranty Agreement, dated as of March 29, 2017, among United Airlines, Inc\., as borrower, United Continental Holdings, Inc\., as parent and a guarantor, the subsidiaries of United Continental Holdings, Inc\. from time to time party thereto other than the borrower party thereto from time to time, as guarantors, the lenders from time to time party thereto and JPMorgan Chase Bank, N\.A\., as administrative agent (filed as Exhibit 10\.1 to UAL's Form 8\-K filed April 3, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015517000006/e77015399ex10_1.htm) |
| 10\.169 | UAL
United   | [First Amendment, dated as of November 15, 2017, to Amended and Restated Credit Guaranty Agreement (filed as Exhibit 10\.219 to UAL's Form 10\-K for the year ended December 31, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312518054235/d471340dex10219.htm)                                                                                |
| 10\.170 | UAL
United   | [Second Amendment, dated as of May 16, 2018, to Amended and Restated Credit Guaranty Agreement filed as Exhibit 10\.1 to UAL's Form 10\-Q for the quarter ended June 30, 2018, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000010051718000012/ual_06301810qex101.htm)                                                                                |
|         |                   | **List of Subsidiaries**                                                                                |
| 21      | UAL

United | [List of United Continental Holdings, Inc\. and United Airlines, Inc\. Subsidiaries](https://www.example.com/ual_12311810kex21.htm)                                                                                |
|         |                   | **Consents of Experts and Counsel**                                                                                |
| 23\.1   | UAL               | [Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for United Continental Holdings, Inc\.](https://www.example.com/ual_12311810kex231.htm)                                                                                |
| 23\.2   | United            | [Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for United Airlines, Inc\.](https://www.example.com/ual_12311810kex232.htm)                                                                                |
|         |                   | **Rule 13a\-14(a)/15d\-14(a) Certifications**                                                                                |
| 31\.1   | UAL               | [Certification of the Principal Executive Officer of United Continental Holdings, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual_12311810kex311.htm)                                                                                |
| 31\.2   | UAL               | [Certification of the Principal Financial Officer of United Continental Holdings, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual_12311810kex312.htm)                                                                                |
| 31\.3   | United            | [Certification of the Principal Executive Officer of United Airlines, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual_12311810kex313.htm)                                                                                |
| 31\.4   | United            | [Certification of the Principal Financial Officer of United Airlines, Inc\. pursuant to 15 U\.S\.C\. 78m(a) or 78o(d) (Section 302 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual_12311810kex314.htm)                                                                                |
|         |                   | **Section 1350 Certifications**                                                                                |
| 32\.1   | UAL               | [Certification of the Chief Executive Officer and Chief Financial Officer of United Continental Holdings, Inc\. pursuant to 18 U\.S\.C\. 1350 (Section 906 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual_12311810kex321.htm)                                                                                |
| 32\.2   | United            | [Certification of the Chief Executive Officer and Chief Financial Officer of United Airlines, Inc\. pursuant to 18 U\.S\.C\. 1350 (Section 906 of the Sarbanes\-Oxley Act of 2002)](https://www.example.com/ual_12311810kex322.htm)                                                                                |
|         |                   | **Interactive Data File**                                                                                |
| 101     | UAL

United | The following materials from each of United Continental Holdings, Inc\.'s and United Airlines, Inc\.'s Annual Reports on Form 10\-K for the year ended December 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Statements of Consolidated Operations, (ii) the Statements of Consolidated Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Statements of Consolidated Cash Flows, (v) the Statements of Consolidated Stockholders' Equity (Deficit) and (vi) the Combined Notes to Consolidated Financial Statements\.                                                                                |

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

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

108