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

With respect to leveraged leases, American evaluated whether the leases had characteristics of a variable interest entity\. American concluded the leasing entities met the criteria for variable interest entities; however, American concluded it is not the primary beneficiary under these leasing arrangements and accounts for the majority of its EETC leveraged lease financings as operating leases\. American’s total future payments to the trusts of each of the relevant EETCs under these leveraged lease financings are  $177 million  as of  December 31, 2019 \.

Letters of Credit and Other

We provide financial assurance, such as letters of credit, surety bonds or restricted cash and investments, primarily to support projected workers’ compensation obligations and airport commitments\. As of  December 31, 2019 , we had  $572 million  of letters of credit and surety bonds securing various obligations\. The letters of credit and surety bonds that are subject to expiration will expire on various dates through  2022 \.

Contractual Obligations

The following table provides details of our future cash contractual obligations as of  December 31, 2019 \. Except to the extent set forth in the applicable accompanying footnotes, this table does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time\.

|                                                                   |                            |                            |                            |                            |                            |                            |                            |
| ----------------------------------------------------------------- | -------------------------- | -------------------------- | -------------------------- | -------------------------- | -------------------------- | -------------------------- | -------------------------- |
|                                                                   | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** | **Payments Due by Period** |
|                                                                   | **2020**                   | **2021**                   | **2022**                   | **2023**                   | **2024**                   | **2025 and Thereafter**    | **Total**                  |
| *American*  *^(a)^*                                               |                            |                            |                            |                            |                            |                            |                            |
| Long\-term debt:                                                  |                            |                            |                            |                            |                            |                            |                            |
| Principal amount  ^(b), (d)^  (See Note 3)                        | $2,293                     | $3,508                     | $1,551                     | $4,072                     | $1,521                     | $9,632                     | $22,577                    |
| Interest obligations  ^(c), (d)^                                  | 830                        | 721                        | 596                        | 510                        | 388                        | 885                        | 3,930                      |
| Finance lease obligations (See Note 4)                            | 153                        | 128                        | 132                        | 110                        | 116                        | 171                        | 810                        |
| Aircraft and engine purchase commitments  ^(e)^  (See Note 10(a)) | 1,629                      | 750                        | 1,599                      | 1,543                      | 2,574                      | 4,855                      | 12,950                     |
| Operating lease commitments  (See Note 4)                         | 2,013                      | 1,979                      | 1,807                      | 1,623                      | 1,227                      | 4,451                      | 13,100                     |
| Regional capacity purchase agreements  ^(f)^  (See Note 10(b))    | 1,115                      | 1,185                      | 1,126                      | 1,077                      | 1,077                      | 3,402                      | 8,982                      |
| Minimum pension obligations  ^(g)^  (See Note 8)                  | 193                        | 493                        | 607                        | 618                        | 654                        | 413                        | 2,978                      |
| Retiree medical and other postretirement benefits (See Note 8)    | 24                         | 18                         | 18                         | 17                         | 29                         | 265                        | 371                        |
| Other purchase obligations  ^(h)^  (See Note 10(a))               | 3,546                      | 3,508                      | 1,328                      | 130                        | 81                         | 77                         | 8,670                      |
| Total American Contractual Obligations                            | $11,796                    | $12,290                    | $8,764                     | $9,700                     | $7,667                     | $24,151                    | $74,368                    |
| *AAG Parent and Other AAG Subsidiaries*  *^(a)^*                  |                            |                            |                            |                            |                            |                            |                            |
| Long\-term debt:                                                  |                            |                            |                            |                            |                            |                            |                            |
| Principal amount  ^(b)^  (See Note 5)                             | $505                       | $2                         | $752                       | $2                         | $2                         | $16                        | $1,279                     |
| Interest obligations  ^(c)^                                       | 51                         | 39                         | 21                         | 1                          | 1                          | 3                          | 116                        |
| Operating lease commitments (See Note 6)                          | 16                         | 13                         | 12                         | 5                          | 2                          | 8                          | 56                         |
| Minimum pension obligations  ^(g)^  (See Note 10)                 | 3                          | 4                          | 4                          | 4                          | 5                          | 13                         | 33                         |
| Total AAG Contractual Obligations                                 | $12,371                    | $12,348                    | $9,553                     | $9,712                     | $7,677                     | $24,191                    | $75,852                    |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(a)^ | For additional information, see the Notes to AAG’s and American’s Consolidated Financial Statements in Part II, Items 8A and 8B, respectively, referenced in the table above\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(b)^ | Amounts represent contractual amounts due\. Excludes  $205 million  and  $6 million  of unamortized debt discount, premium and issuance costs as of  December 31, 2019  for American and AAG Parent, respectively\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------- |
| ^(c)^ | For variable\-rate debt, future interest obligations are estimated using the current forward rates at  December 31, 2019 \. |

63


Annual Report of Southwest Airlines Co\. for year 2018

transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings\. The Company did not have any such situations occur during 2018, 2017, or 2016\.

Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous documentation that is required at the time each hedge is designated by the Company\. This statistical analysis involves utilizing regression analyses that compare changes in the price of jet fuel to changes in the prices of the commodities used for hedging purposes\.

All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash flows in the Consolidated Statement of Cash Flows\. The following table presents the location of all assets and liabilities associated with the Company’s derivative instruments within the Consolidated Balance Sheet:

|                                                |                                            |                       |                       |                           |                           |
| ---------------------------------------------- | ------------------------------------------ | --------------------- | --------------------- | ------------------------- | ------------------------- |
|                                                |                                            | **Asset derivatives** | **Asset derivatives** | **Liability derivatives** | **Liability derivatives** |
|                                                | **Balance Sheet**                          | **Fair value at**     | **Fair value at**     | **Fair value at**         | **Fair value at**         |
| **(in millions)**                              | **location**                               | **12/31/2018**        | **12/31/2017**        | **12/31/2018**            | **12/31/2017**            |
| **Derivatives designated as hedges (a)**       |                                            |                       |                       |                           |                           |
| Fuel derivative contracts (gross)              | Prepaid expenses and other current assets  | $43                   | $112                  | $—                        | $—                        |
| Fuel derivative contracts (gross)              | Other assets                               | 95                    | 136                   | —                         | —                         |
| Interest rate derivative contracts             | Accrued liabilities                        | —                     | —                     | 2                         | —                         |
| Interest rate derivative contracts             | Other noncurrent liabilities               | —                     | —                     | 12                        | 20                        |
| **Total derivatives designated as hedges**     | **Total derivatives designated as hedges** | $138                  | $248                  | $14                       | $20                       |
| **Derivatives not designated as hedges (a)**   |                                            |                       |                       |                           |                           |
| Fuel derivative contracts (gross)              | Prepaid expenses and other current assets  | $—                    | $35                   | $—                        | $35                       |
| Interest rate derivative contracts             | Accrued liabilities                        | —                     | —                     | —                         | 1                         |
| Interest rate derivative contracts             | Other noncurrent liabilities

 | —                     | —                     | —                         | 1                         |
| **Total derivatives not designated as hedges** |                                            | $—                    | $35                   | $—                        | $37                       |
| **Total derivatives**                          |                                            | $138                  | $283                  | $14                       | $57                       |

(a) Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties\. See discussion of credit risk and collateral following in this Note\.

The following table presents the amounts recorded on the Consolidated Balance Sheet related to fair value hedges:

|                                           |                                               |                                               |                                                                                |                                                                                |
| ----------------------------------------- | --------------------------------------------- | --------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- |
| **Balance Sheet location of hedged item** | **Carrying amount of the hedged liabilities** | **Carrying amount of the hedged liabilities** | **Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)** | **Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)** |
|                                           | **December 31,**                              | **December 31,**                              | **December 31,**                                                                                | **December 31,**                                                                                |
| **(in millions)**                         | **2018**                                      | **2017**                                      | **2018**                                                                                | **2017**                                                                                |
| Long\-term debt less current maturities   | $791                                          | $791                                          | $11                                                                                | $12                                                                                |

(a) At December 31, 2018 and 2017, these amounts include the cumulative amount of fair value hedging adjustments remaining for which hedge accounting has been discontinued of $20 million and $21 million, respectively\.

99


Annual Report of Southwest Airlines Co\. for year 2018

events could cause system interruptions, delays, and loss of critical data, and could prevent the Company from processing Customer transactions or providing services, which could make the Company's business and services less attractive and subject the Company to liability\. Any of these events could damage the Company's reputation and be expensive to remedy\.

***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, 2018\. In addition, as of December 31, 2018, 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 impacted, and continue to impact, the Company's results of operations, some of which are negotiated items, include hiring/retention rates, pay rates, outsourcing, 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 (i) if it were unable to obtain timely or sufficient delivery of aircraft or other equipment from Boeing or other suppliers or adequate maintenance or other support from any of these suppliers, (ii) in the event of a mechanical or regulatory issue associated with the Company's aircraft or equipment, or (iii) in the event the pricing and operational attributes of the Company's aircraft or 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 or other services\. 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 were unable to acquire additional aircraft from Boeing, or if Boeing were unable or unwilling to make timely or adequate 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 or limited suppliers for aircraft engines and certain other aircraft parts and services and would, therefore, also be materially adversely affected in the event of the unavailability of, inadequate support for, 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\.

***Developing and expanding data security and privacy requirements could increase the Company's operating costs, and any failure of the Company to maintain the security of certain Customer, Employee, and business\-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 continually evolving risk of intrusion, tampering, and theft\. Although the Company maintains systems to prevent or defend against these risks, these systems require ongoing monitoring and updating as technologies change, and security could be compromised, personal or 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\.

24


Annual Report of Southwest Airlines Co\. for year 2019

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

The following information regarding the Company’s executive officers is as of February 1, 2020\.

|                        |                                                                           |         |
| ---------------------- | ------------------------------------------------------------------------- | ------- |
| **Name**               | **Position**                                                              | **Age** |
| Gary C\. Kelly         | Chairman of the Board & Chief Executive Officer                           | 64      |
| Thomas M\. Nealon      | President                                                                 | 58      |
| Michael G\. Van de Ven | Chief Operating Officer                                                   | 58      |
| Robert E\. Jordan      | Executive Vice President Corporate Services                               | 59      |
| Tammy Romo             | Executive Vice President & Chief Financial Officer                        | 57      |
| Mark R\. Shaw          | Executive Vice President & Chief Legal & Regulatory Officer

 | 57      |
| Andrew M\. Watterson   | Executive Vice President & Chief Commercial Officer                       | 53      |
| Gregory D\. Wells      | Executive Vice President Daily Operations                                 | 61      |

Set forth below is a description of the background of each of the Company’s executive officers\.

Gary C\. Kelly  has served as the Company's Chairman of the Board since May 2008 and as its Chief Executive Officer since July 2004\. Mr\. Kelly also served as President from July 2008 to January 2017, Executive Vice President & Chief Financial Officer from June 2001 to July 2004, and Vice President Finance & Chief Financial Officer from 1989 to 2001\. Mr\. Kelly joined the Company in 1986 as its Controller\.

Thomas M\. Nealon  has served as the Company's President since January 2017\. Mr\. Nealon also served as Executive Vice President Strategy & Innovation from January 2016 to January 2017\. Prior to becoming an executive officer of the Company, Mr\. Nealon served on the Company’s Board of Directors from December 2010 until November 2015\. Mr\. Nealon has also served as Group Executive Vice President of J\.C\. Penney Company, Inc\., a retail company, from August 2010 until December 2011\. In this role Mr\. Nealon was responsible for Strategy, jcp\.com, Information Technology, Customer Insights, and Digital Ventures\. Mr\. Nealon also served as J\.C\. Penney’s Executive Vice President & Chief Information Officer from September 2006 until August 2010\. Prior to joining J\.C\. Penney, Mr\. Nealon was a partner with The Feld Group, a provider of information technology consulting services, where he served in a consultant capacity as Senior Vice President & Chief Information Officer for the Company from 2002 to 2006\. Mr\. Nealon also served as Chief Information Officer for Frito\-Lay, a division of PepsiCo, Inc\., from 1996 to 2000, and in various software engineering, systems engineering, and management positions for Frito\-Lay from 1983 to 1996\.

Michael G\. Van de Ven  has served as the Company's Chief Operating Officer since May 2008\. Mr\. Van de Ven also served as Executive Vice President & Chief Operating Officer from May 2008 to January 2017, Chief of Operations from September 2006 to May 2008, Executive Vice President Aircraft Operations from November 2005 through August 2006, Senior Vice President Planning from August 2004 to November 2005, Vice President Financial Planning & Analysis from 2001 to 2004, Senior Director Financial Planning & Analysis from 2000 to 2001, and Director Financial Planning & Analysis from 1997 to 2000\. Mr\. Van de Ven joined the Company in 1993 as its Director Internal Audit\.

Robert E\. Jordan  has served as the Company's Executive Vice President Corporate Services since July 2017\. Mr\. Jordan also served as Executive Vice President & Chief Commercial Officer from September 2011 to July 2017, Executive Vice President Strategy & Planning from May 2008 to September 2011, Executive Vice President Strategy & Technology from September 2006 to May 2008, Senior Vice President Enterprise Spend Management from August 2004 to September 2006, Vice President Technology from 2002 to 2004, Vice President Purchasing from 2001 to 2002, Controller from 1997 to 2001, Director Revenue Accounting from 1994 to 1997, and Manager Sales Accounting from 1990 to 1994\. Mr\. Jordan joined the Company in 1988 as a programmer\.

Tammy Romo  has served as the Company's Executive Vice President & Chief Financial Officer since July 2015\. Ms\. Romo also served as Senior Vice President Finance & Chief Financial Officer from September 2012 to July 2015, Senior Vice President of Planning from February 2010 to September 2012, Vice President of Financial Planning from September 2008 to February 2010, Vice President Controller from February 2006 to August 2008, Vice President Treasurer from September 2004 to February 2006, Senior Director of Investor Relations from March 2002 to September  2004, Director of Investor Relations from December 1994 to March 2002, Manager of Investor Relations from September 1994 to December 1994, and Manager of Financial Reporting from September 1991 to September 1994\.

33


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

We may face additional regulation of aircraft emissions in the U\.S\. and abroad and become subject to further taxes, charges or additional requirements to obtain permits or purchase allowances or emission credits for greenhouse gas emissions in various jurisdictions\. Additional regulation could result in taxation, regulatory or permitting requirements from multiple jurisdictions for the same operations and significant costs for us and the airline industry\. In addition to direct costs, such regulation could result in increased fuel costs passed through from fuel suppliers affected by any such regulations\. We are monitoring and evaluating the potential impact of such legislative and regulatory developments\.

We seek to minimize the impact of carbon emissions from our operations through reductions in our fuel consumption and other efforts, and have realized reductions in our carbon emission levels since 2005\. We have reduced the fuel needs of our aircraft fleet through the retirement of older aircraft and replacement with newer, more fuel efficient aircraft\. In addition, we have implemented fuel saving procedures in our flight and ground support operations that further reduce carbon emissions\. We are also supporting efforts to develop alternative fuels and efforts to modernize the air traffic control system in the U\.S\. as part of our efforts to reduce our emissions and minimize our impact on the environment\.

Noise \. The Airport Noise and Capacity Act of 1990 recognizes the rights of operators of airports with noise problems to implement local noise abatement programs so long as such programs do not interfere unreasonably with interstate or foreign commerce or the national air transportation system\. This statute generally provides that local noise restrictions on Stage 3 aircraft first effective after October 1, 1990, require FAA approval\. While we have had sufficient scheduling flexibility to accommodate local noise restrictions in the past, our operations could be adversely impacted if locally\-imposed regulations become more restrictive or widespread\. In addition, foreign governments may allow airports to enact similar restrictions, which could adversely impact our international operations or require significant expenditure in order for our aircraft to comply with the restrictions\.

Refinery Matters \. Monroe's operation of the Trainer refinery is subject to numerous environmental laws and extensive regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures and greenhouse gas and other air emissions\.

Under the Energy Independence and Security Act of 2007, the EPA has adopted Renewable Fuel Standards ("RFS") that mandate the blending of renewable fuels into gasoline and on\-road diesel ("Transportation Fuels")\. Renewable Identification Numbers ("RINs") are assigned to renewable fuels produced or imported into the U\.S\. that are blended into Transportation Fuels to demonstrate compliance with this obligation\. A refiner may meet its obligation under RFS by blending the necessary volumes of renewable fuels with Transportation Fuels or by purchasing RINs in the open market or through a combination of blending and purchasing RINs\. Because Monroe blends only a small amount of renewable fuels, it must purchase the majority of its RINs requirement in the secondary market or obtain a waiver from the EPA\. Market prices for RINs have been volatile, marked by periods of sharp increases and decreases\.

Other Environmental Matters \. We are subject to certain environmental laws and contractual obligations governing the management and release of regulated substances, which may require the investigation and remediation of affected sites\. Soil and/or ground water impacts have been identified at certain of our current or former leaseholds at several domestic airports\. To address these impacts, we have a program in place to investigate and, if appropriate, remediate these sites\. Although the ultimate outcome of these matters cannot be predicted with certainty, we believe that the resolution of these matters will not have a material adverse effect on our Consolidated Financial Statements\.

Civil Reserve Air Fleet Program

We participate in the Civil Reserve Air Fleet program (the "CRAF Program"), which permits the U\.S\. military to use the aircraft and crew resources of participating U\.S\. airlines during airlift emergencies, national emergencies or times of war\. We have agreed to make available under the CRAF Program a portion of our international aircraft during the contract period ending September 30, 2020\. The CRAF Program has only been activated twice since it was created in 1951\.

 9


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

***Our ability to utilize our NOL Carryforwards may be limited\.***

Under the Internal Revenue Code of 1986, as amended (the Code), a corporation is generally allowed a deduction for NOLs carried over from prior taxable years (NOL Carryforwards)\. As of December 31, 2017, we had available NOL Carryforwards of approximately $10\.0 billion for regular federal income tax purposes that will expire, if unused, beginning in 2022, and approximately $3\.4 billion for state income tax purposes that will expire, if unused, between 2018 and 2037\. Our NOL Carryforwards are subject to adjustment on audit by the Internal Revenue Service and the respective state taxing authorities\.

A corporation’s ability to deduct its federal NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Code (Section 382) if it undergoes an “ownership change” as defined in Section 382 (generally where cumulative stock ownership changes among material stockholders exceed 50 percent during a rolling three\-year period)\. We experienced an ownership change in connection with our emergence from the Chapter 11 Cases and US Airways Group experienced an ownership change in connection with the Merger\. The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy\. We elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9\.0 billion (with $8\.4 billion of unlimited NOL still remaining at December 31, 2017) of our federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382\. If the special rules are determined not to apply, our ability to utilize such federal NOL Carryforwards may be subject to limitation\. Substantially all of our remaining federal NOL Carryforwards (attributable to US Airways Group and its subsidiaries) are subject to limitation under Section 382 as a result of the Merger; however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation\. Similar limitations may apply for state income tax purposes\.

Notwithstanding the foregoing, an ownership change subsequent to our emergence from the Chapter 11 Cases may severely limit or effectively eliminate our ability to utilize our NOL Carryforwards and other tax attributes\. To reduce the risk of a potential adverse effect on our ability to utilize our NOL Carryforwards, our Restated Certificate of Incorporation (Certificate of Incorporation) contains transfer restrictions applicable to certain substantial stockholders\. These restrictions may adversely affect the ability of certain holders of AAG common stock to dispose of or acquire shares of AAG common stock\. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, no assurance can be given that an ownership change will not occur even with these restrictions in place\.

Our ability to use our NOL Carryforwards also will depend on the amount of taxable income generated in future periods\. The NOL Carryforwards may expire before we can generate sufficient taxable income to use them\.

***We have a significant amount of goodwill, which is assessed for impairment at least annually\. In addition, we may never realize the full value of our intangible assets or long\-lived assets, causing us to record material impairment charges\.***

Goodwill and indefinite\-lived intangible assets are not amortized, but are assessed for impairment at least annually, or more frequently if conditions indicate that an impairment may have occurred\. In accordance with applicable accounting standards, we first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test\. In addition, we are required to assess certain of our other long\-lived assets for impairment if conditions indicate that an impairment may have occurred\.

Future impairment of goodwill or other long\-lived assets could be recorded in results of operations as a result of changes in assumptions, estimates, or circumstances, some of which are beyond our control\. There can be no assurance that a material impairment charge of goodwill or tangible or intangible assets will be avoided\. The value of our aircraft could be impacted in future periods by changes in supply and demand for these aircraft\. Such changes in supply and demand for certain aircraft types could result from grounding of aircraft by us or other airlines\. An impairment charge could have a material adverse effect on our business, results of operations and financial condition\.

***The price of AAG common stock has recently been and may in the future be volatile\.***

The market price of AAG common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------- |
| • | AAG’s operating and financial results failing to meet the expectations of securities analysts or investors; |

|   |                                                                           |
| - | ------------------------------------------------------------------------- |
| • | changes in financial estimates or recommendations by securities analysts; |

|   |                                                  |
| - | ------------------------------------------------ |
| • | material announcements by us or our competitors; |

30


Annual Report of Southwest Airlines Co\. for year 2017

On October 3, 2007, grantor trusts established by the Company issued $500 million Pass Through Certificates consisting of $412 million6\.15 percent Series A certificates and $88 million6\.65 percent Series B certificates\. A separate trust was established for each class of certificates\. The trusts used the proceeds from the sale of certificates to acquire equipment notes in the same amounts, which were issued by the Company on a full recourse basis\. Payments on the equipment notes held in each trust will be passed through to the holders of certificates of such trust\. The equipment notes were issued for each of 16 Boeing 737\-700 aircraft owned by the Company and are secured by a mortgage on each aircraft\. Beginning February 1, 2008, principal and interest payments on the equipment notes held for both series of certificates are due semi\-annually until the balance of the certificates mature on August 1, 2022\. Prior to their issuance, the Company also entered into swap agreements to hedge the variability in interest rates on the Pass Through Certificates\. The swap agreements were accounted for as cash flow hedges, and resulted in a payment by the Company of $20 million upon issuance of the Pass Through Certificates\. The effective portion of the hedge is being amortized to interest expense concurrent with the amortization of the debt and is reflected in the above table as a reduction in the debt balance\. The ineffectiveness of the hedge transaction was immaterial\.

During February 2005, the Company issued $300 million senior unsecured notes due 2017\. The notes bore interest at 5\.125 percent, payable semi\-annually in arrears\. The notes matured and were redeemed in full on March 1, 2017, utilizing available cash on hand\.

In fourth quarter 2004, the Company entered into four identical 13\-year floating\-rate financing arrangements, whereby it borrowed a total of $112 million from French banking partnerships\. Although the interest rates on the borrowings float, the Company estimated at inception that, considering the full effect of the "net present value benefits" included in the transactions, the effective economic yield over the 13\-year term of the loans will be approximately LIBOR minus 45 basis points\. Principal and interest are payable semi\-annually on June 30 and December 31 for each of the loans, and the Company may terminate the arrangements in any year on either of those dates, under certain conditions\. The Company pledged four aircraft as collateral for the transactions\.

On February 28, 1997, the Company issued $100 million of senior unsecured 7\.375 percent debentures due March 1, 2027\. Interest is payable semi\-annually on March 1 and September 1\. The debentures may be redeemed, at the option of the Company, in whole at any time or in part from time to time, at a redemption price equal to the greater of the principal amount of the debentures plus accrued interest at the date of redemption or the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the date of redemption at the comparable treasury rate plus20 basis points, plus accrued interest at the date of redemption\.

The Company is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business\. Although the letters of credit are an off\-balance sheet item, the majority of the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet\. Outstanding letters of credit totaled $167 million at December 31, 2017\.

The Company has pledged a total of up to 77 of its Boeing 737\-700 and 7 of its Boeing 737\-800 aircraft at a net book value of $1\.8 billion, as collateral for the Company’s secured borrowings at December 31, 2017\. In addition, the Company has pledged a total of up to 82 of its Boeing 737\-700 and 37 of its Boeing 737\-800 aircraft at a net book value of $2\.8 billion, in the case that it has obligations related to its fuel derivative instruments with counterparties that exceed certain thresholds\. See Note 10 for further information on these collateral arrangements\.

As of December 31, 2017, aggregate annual principal maturities of debt and capital leases (not including amounts associated with interest rate swap agreements, interest on capital leases, amortization of capital lease incentives, and amortization of purchase accounting adjustments) for the five\-year period ending December 31, 2022, and thereafter, were $335 million in 2018, $586 million in 2019, $817 million in 2020, $169 million in 2021, $473 million in 2022, and $1\.2 billion thereafter\.

89


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

ITEM 8A\. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES GROUP INC\.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

American Airlines Group Inc\.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of American Airlines Group Inc\. and subsidiaries (the Company) as of  December 31, 2019  and  2018 , the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity (deficit) for each of the years in the three\-year period ended  December 31, 2019 , and the related notes (collectively, the consolidated financial statements)\. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of  December 31, 2019  and  2018 , and the results of its operations and its cash flows for each of the years in the three\-year period ended  December 31, 2019 , in conformity with U\.S\. generally accepted accounting principles\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of  December 31, 2019 , based on criteria established in  Internal Control  –  Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated  February 19, 2020  expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting\.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2018 due to the modified retrospective adoption of Accounting Standards Update 2016\-02, Leases (Topic 842), as amended\.

Basis for Opinion

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

70


Annual Report of Southwest Airlines Co\. for year 2019

As of  December 31, 2019 , the Company held aircraft leases with remaining terms ranging from   one month  to   12 years \. The aircraft leases generally can be renewed for  one  to   six years  at rates based on fair market value at the end of the lease term\. Residual value guarantees included in the Company's lease agreements are not material\. On July 9, 2012, the Company signed an agreement with Delta Air Lines, Inc\. and Boeing Capital Corp\. to lease or sublease   88  AirTran Airways, Inc\. Boeing 717\-200 aircraft ("B717s") to Delta at agreed\-upon lease rates\.   Three  operating leases expired during 2018\. Of the   85  B717s remaining at the beginning of 2019,   ten  owned B717s were sold in 2019\. The proceeds from the sale, which were not material, were netted within Capital expenditures in the Consolidated Statement of Cash Flows\. Excluding the   eight  aircraft for which operating leases expired during 2019, the following remained:   65  on operating leases and   two  on finance leases\. The sublease terms for the   65  B717s on operating lease and the   two  B717s on finance lease coincide with the Company's remaining lease terms for these aircraft from the original lessor, which have remaining lease terms ranging from approximately   one month  to   five years \. The Company's future sublease income associated with the   65  B717s on operating lease as of  December 31, 2019  was as follows:   $78 million  in 2020,   $41 million  in 2021,   $17 million  in 2022,   $7 million  in 2023, and   $1 million  in 2024\. The   two  B717s classified by the Company as finance leases are accounted for as direct financing leases, and the remaining   65  subleases are accounted for as operating leases\. There are   no  contingent payments and   no  significant residual value conditions associated with the transaction\.

At each airport where the Company conducts flight operations, the Company has lease agreements, generally with a governmental unit or authority, for the use of airport terminals, airfields, office space, cargo warehouses, gates, and/or maintenance facilities\. These leases are classified as operating lease agreements and have lease terms remaining ranging from   one month  to   27 years \. Certain leases can be renewed from one to   ten years \. The majority of the airport terminal leases contain certain provisions for periodic adjustments to rates that depend upon airport operating costs or use of the facilities, and are reset at least annually\. Due to the nature and variability of the rates, the majority of these leases are not recorded on the Consolidated Balance Sheet\.

The Company also leases certain technology assets, fuel storage tanks, and various other equipment that qualify as leases under the New Lease Standard\. The remaining lease terms range from   two months  to   seven years \. Certain leases can be renewed from   six months  to   five years \.

Lease\-related assets and liabilities recorded on the Consolidated Balance Sheet were as follows:

|                         |                                                                                |                       |
| ----------------------- | ----------------------------------------------------------------------------------- | --------------------- |
| **(** **in millions)**  | **Balance Sheet location**                                                          | **December 31, 2019** |
| **Assets**              |                                                                                |                       |
| Operating               | Operating lease right\-of\-use assets (net)                                         | $1,349                |
| Finance                 | Property and equipment (net of allowance for depreciation and amortization of $455) | 779                   |
| Total lease assets      |                                                                                | $2,128                |
| **Liabilities**         |                                                                                |                       |
| Current                 |                                                                                |                       |
| Operating               | Current operating lease liabilities                                                 | $353                  |
| Finance                 | Current maturities of long\-term debt                                               | 85                    |
| Noncurrent              |                                                                                |                       |
| Operating               | Noncurrent operating lease liabilities                                              | 978                   |
| Finance                 | Long\-term debt less current maturities                                             | 542                   |
| Total lease liabilities |                                                                                | $1,958                |

87


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

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

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Unrealized gains and 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\. American’s short\-term investments as of  December 31, 2019  mature in one year or less except for   $1\.1 billion  of bank notes/certificates of deposit/time deposits and   $95 million  of corporate obligations\.  |

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

Fair Value of Debt

The fair value of American’s long\-term debt was estimated using quoted market prices or discounted cash flow analyses, based on American’s current estimated incremental borrowing rates for similar types of borrowing arrangements\. If American’s long\-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy\.

The carrying value and estimated fair value of American’s long\-term debt, including current maturities, were as follows (in millions):

|                                               |                               |                           |                               |                           |
| --------------------------------------------- | ----------------------------- | ------------------------- | ----------------------------- | ------------------------- |
|                                               | **December 31, 2019**         | **December 31, 2019**     | **December 31, 2018**         | **December 31, 2018**     |
|                                               | **Carrying**

**Value** | **Fair**

**Value** | **Carrying**

**Value** | **Fair**

**Value** |
| Long\-term debt, including current maturities | $22,372                       | $23,196                   | $22,503                       | $22,497                   |

8\. Employee Benefit Plans

American sponsors defined benefit and defined contribution pension plans for eligible employees\. The defined benefit pension plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement\. Effective November 1, 2012, substantially all of American’s defined benefit pension plans were frozen and American began providing enhanced benefits under its defined contribution pension plans for certain employee groups\. American uses a December 31 measurement date for all of its defined benefit pension plans\. American also provides certain retiree medical and other postretirement benefits, including health care and life insurance benefits, to retired employees\. Effective November 1, 2012, American modified its retiree medical and other postretirement benefits plans to eliminate the company subsidy for employees who retire on or after November 1, 2012\. As a result of modifications to its retiree medical and other postretirement benefits plans in 2012, American recognized a negative plan amendment of   $1\.9 billion , which is included as a component of prior service benefit in accumulated other comprehensive income (loss) (AOCI) and will be amortized over the future service life of the active plan participants for whom the benefit was eliminated, or approximately   eight years \. As of  December 31, 2019 ,   $150 million  of prior service benefit remains, which will be fully amortized in 2020\.

141


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

**ADOPTION OF NEW ACCOUNTING STANDARDS**

We adopted the new revenue recognition and retirement benefit accounting standards on January 1, 2018, utilizing a full retrospective transition method\. Accordingly, information for 2017 and 2016 in the following comparative discussions have been recast to reflect the new standards\.

**2018** **COMPARED WITH** **2017**

Our consolidated net income for 2018 was $437 million, or $3\.52 per diluted share, compared to net income of $960 million, or $7\.75 per diluted share, in 2017\.

Excluding the impact of merger\-related costs, mark\-to\-market fuel hedge adjustments, a contract termination fee, and one\-time bonuses paid to employees as a result of tax reform, our adjusted consolidated net income for 2018 was $554 million, or $4\.46 per diluted share, compared to an adjusted consolidated net income of $791 million, or $6\.38 per share, in 2017\. The following table reconciles our adjusted net income and earnings per diluted share (EPS) during the full year 2018 and 2017 to amounts as reported in accordance with GAAP\.

|                                                               |                                      |                                      |                                      |                                      |
| ------------------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                               | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                               | **2018**                             | **2018**                             | **2017**                             | **2017**                             |
| ***(in millions, except per\-share amounts)***                | **Dollars**                          | **Diluted EPS**                      | **Dollars**                          | **Diluted EPS**                      |
| Reported GAAP net income and diluted EPS                      | **$437**                             | **$3\.52**                           | $960                                 | $7\.75                               |
| Mark\-to\-market fuel hedge (benefit)/expense                 | **22**                               | **0\.18**                            | (7)                                  | (0\.06)                              |
| Special items—merger\-related costs ^(a)^                     | **87**                               | **0\.70**                            | 116                                  | 0\.94                                |
| Special items \- other  ^(a)^                                 | **45**                               | **0\.36**                            | —                                    | —                                    |
| Income tax effect on special items and fuel hedge adjustments | **(37)**                             | **(0\.30)**                          | (41)                                 | (0\.33)                              |
| Special tax (benefit)/expense ^(b)^                           | **—**                                | **—**                                | (237)                                | (1\.92)                              |
| Non\-GAAP adjusted net income and diluted EPS                 | **$554**                             | **$4\.46**                           | $791                                 | $6\.38                               |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------- |
| (a) | Refer to  **Note 11**  to the consolidated financial statement for the description of special items\. |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | Special tax (benefit)/expense in 2017 is due to the remeasurement of deferred tax liabilities as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, offset by certain state tax law enactments\.  |

CASM is summarized below:

|                                                   |                                      |                                      |                                      |
| ------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                   | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                   | **2018**                             | **2017**                             | **% Change**                         |
| **Consolidated:**                                 |                                      |                                      |                                      |
| Total CASM                                        | **11\.66¢**                          | 10\.77¢                              | 8\.3 %                               |
| Less the following components:                    |                                      |                                      |                                      |
| Aircraft fuel, including hedging gains and losses | **2\.96**                            | 2\.33                                | 27\.0 %                              |
| Special items—merger\-related costs ^(a)^         | **0\.13**                            | 0\.19                                | (31\.6)%                             |
| Special items—other ^(a)^                         | **0\.07**                            | —                                    | NM                                   |
| CASM, excluding fuel and special items            | **8\.50¢**                           | 8\.25¢                               | 3\.0 %                               |
| **Mainline:**                                     |                                      |                                      |                                      |
| Total CASM                                        | **10\.78¢**                          | 9\.94¢                               | 8\.5 %                               |
| Less the following components:                    |                                      |                                      |                                      |
| Aircraft fuel, including hedging gains and losses | **2\.83**                            | 2\.24                                | 26\.3 %                              |
| Special items—merger\-related costs ^(a)^         | **0\.14**                            | 0\.20                                | (30\.0)%                             |
| Special items—other ^(a)^                         | **0\.08**                            | —                                    | NM                                   |
| CASM, excluding fuel and special items            | **7\.73¢**                           | 7\.50¢                               | 3\.1 %                               |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------- |
| (a) | Refer to  **Note 11**  to the consolidated financial statement for the description of special items\. |

 35


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

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

to annual adjustments\. The fees for carrier costs are based on specific rates for various operating expenses of the regional carriers, such as crew expenses, maintenance and aircraft ownership, some of which are multiplied by specific operating statistics (e\.g\., block hours, departures), while others are fixed monthly amounts\. Under these CPAs, the Company is responsible for all fuel costs incurred, as well as landing fees and other costs, which are either passed through by the regional carrier to the Company without any markup or directly incurred by the Company, and, in some cases, the Company owns or leases some or all of the aircraft subject to the CPA, and leases or subleases, as applicable, such aircraft to the regional carrier\. In return, the regional carriers operate the capacity of the aircraft included within the scope of such CPA exclusively for United, on schedules determined by the Company\. The Company also determines pricing and revenue management, assumes the inventory and distribution risk for the available seats and permits mileage accrual and redemption for regional flights through its MileagePlus^®^ loyalty program\.

***Alliances\.*** United is a member of Star Alliance, a global integrated airline network and the largest and most comprehensive airline alliance in the world\. As of January 1, 2019, Star Alliance carriers served over 1,300 airports in 193 countries with 18,800 daily departures\. Star Alliance members, in addition to United, are Adria Airways, Aegean Airlines, Air Canada, Air China, Air India, Air New Zealand, All Nippon Airways ("ANA"), Asiana Airlines, Austrian Airlines, Aerovías del Continente Americano S\.A\. ("Avianca"), Avianca Brasil, Brussels Airlines, Copa Airlines, Croatia Airlines, EGYPTAIR, Ethiopian Airlines, EVA Air, LOT Polish Airlines, Lufthansa, SAS Scandinavian Airlines, Shenzhen Airlines, Singapore Airlines, South African Airways, SWISS, TAP Air Portugal, THAI Airways International and Turkish Airlines\. In addition to its members, Star Alliance includes Shanghai\-based Juneyao Airlines as a connecting partner\.

United has a variety of bilateral commercial alliance agreements and obligations with Star Alliance members, addressing, among other things, reciprocal earning and redemption of frequent flyer miles, access to airport lounges and, with certain Star Alliancemembers, codesharing of flight operations (whereby one carrier's selected flights can be marketed under the brand name of another carrier)\. In addition to the alliance agreements with Star Alliance members, United currently maintains independent marketing alliance agreements with other air carriers, including Aeromar, Aer Lingus, Air Dolomiti, Azul Linhas Aéreas Brasileiras S\.A\. ("Azul"), Boutique Air, Cape Air, Eurowings, Hawaiian Airlines, and Silver Airways\. In addition to the marketing alliance agreements with air partners, United also offers a train\-to\-plane codeshare and frequent flyer alliance with Amtrak from Newark on select city pairs in the northeastern United States\.

United also participates in four passenger joint business arrangements ("JBAs"): one with Air Canada and the Lufthansa Group (which includes Lufthansa and its affiliates Austrian Airlines, Brussels Airlines, Eurowings and SWISS) covering transatlantic routes, one with ANA covering certain transpacific routes, one with Air New Zealand covering certain routes between the United States and New Zealand and one with Avianca and Copa Airlines, which, upon receipt of regulatory approvals will cover routes between the United States and Central and South America, excluding Brazil\. These passenger JBAs enable the participating carriers to integrate the services they provide in the respective regions, capturing revenue synergies and delivering enhanced customer benefits, such as highly competitive flight schedules, fares and services\. United also participates in cargo JBAs with ANA for transpacific cargo services and with Lufthansa for transatlantic cargo services\. These cargo JBAs offer expanded and more seamless access to cargo space across the carriers' respective combined networks\.

***Loyalty Program\.*** United's MileagePlus loyalty program builds customer loyalty by offering awards, benefits and services to program participants\. Members in this program earn miles for flights on United, United Express, Star Alliance members and certain other airlines that participate in the program\. Members can also earn miles by purchasing the goods and services of our network of non\-airline partners, such as domestic and international credit card issuers, retail merchants, hotels and car rental companies\. Members can redeem miles for free (other than taxes and government imposed fees), discounted or upgraded travel and non\-travel awards\.

United has an agreement with Chase Bank USA, N\.A\. ("Chase"), pursuant to which members of United's MileagePlus loyalty program who are residents of the United States can earn miles for making purchases using a MileagePlus credit card issued by Chase (the "Co\-Brand Agreement")\. The Co\-Brand Agreement also provides for joint marketing and other support for the MileagePlus credit card and provides Chase with other benefits such as permission to market to the Company's customer database\.

Approximately 5\.6 million and 5\.4 million MileagePlus flight awards were used on United in 2018 and 2017, respectively\. These awards represented 7\.1% and 7\.5% of United's total revenue passenger miles in 2018 and 2017, respectively\. Total miles redeemed for flights on United in 2018, including class\-of\-service upgrades, represented approximately 86% of the total miles redeemed\. In addition, excluding miles redeemed for flights on United, MileagePlus members redeemed miles for approximately 2\.4 million other awards in 2018 as compared to 2\.3 million other awards in 2017\. These awards include United Club memberships, car and hotel awards, merchandise and flights on other air carriers\.

4


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

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

***The Company's business relies extensively on third\-party service providers, including certain technology providers\. Failure of these parties to perform as expected, or interruptions in the Company's relationships with these providers or their provision of services to the Company, could have an adverse effect on the Company's business, operating results and financial condition\.***

The Company has engaged third\-party service providers to perform a large number of functions that are integral to its business, including regional operations, operation of customer service call centers, distribution and sale of airline seat inventory, provision of information technology infrastructure and services, transmitting or uploading of data, provision of aircraft maintenance and repairs, provision of various utilities, performance of aircraft fueling operations and catering services, among other vital functions and services\. The Company does not directly control these third\-party service providers, although it does enter into agreements that define expected service performance\.

Any of these third\-party service providers, however, may materially fail to meet its service performance commitments to the Company or may suffer disruptions to its systems that could impact its services\. For example, failures in certain third\-party technology or communications systems may cause flight delays or cancellations\. The failure of any of the Company's third\-party service providers to perform its service obligations adequately, or other interruptions of services, may reduce the Company's revenues and increase its expenses, prevent the Company from operating its flights and providing other services to its customers or result in adverse publicity or harm to its brand\. In addition, the Company's business and financial performance could be materially harmed if its customers believe that its services are unreliable or unsatisfactory\.

The Company may also have disagreements with such providers or such contracts may be terminated or may not be extended or renewed\. For example, the number of flight reservations booked through third\-party GDSs or online travel agents ("OTAs") may be adversely affected by disruptions in the business relationships between the Company and these suppliers\. Such disruptions, including a failure to agree upon acceptable contract terms when contracts expire or otherwise become subject to renegotiation, may cause the Company's flight information to be limited or unavailable for display by the affected GDS or OTA operator, significantly increase fees for both the Company and GDS/OTA users and impair the Company's relationships with its customers and travel agencies\. Any such disruptions or contract terminations may adversely impact our operations and financial results\.

If we are not able to negotiate or renew agreements with third\-party service providers, or if we renew existing agreements on less favorable terms, our operations and financial results may be adversely affected\.

***The Company could experience adverse publicity, harm to its brand, reduced travel demand and potential tort liability as a result of an accident, catastrophe or incident involving its aircraft or its operations, the aircraft or operations of its regional carriers, the aircraft or operations of its codeshare partners, or the aircraft or operations of another airline, which may result in a material adverse effect on the Company's business, operating results and financial condition\.***

An accident, catastrophe or incident involving an aircraft that the Company operates, or an aircraft that is operated by a codeshare partner, one of the Company's regional carriers or another airline, or an incident involving the Company's operations, or the operations of a codeshare partner, one of the Company's regional carriers or of another airline, could have a material adverse effect on the Company if such accident, catastrophe or incident created a public perception that the Company's operations, or the operations of its codeshare partners or regional carriers, are not safe or reliable, or are less safe or reliable than other airlines\. Such public perception could, in turn, result in adverse publicity for the Company, cause harm to the Company's brand and reduce travel demand on the Company's flights, or the flights of its codeshare partners or regional carriers\.

In addition, any such accident, catastrophe or incident involving the Company, its regional carriers or its codeshare partners could expose the Company to significant tort liability\. Although the Company currently maintains liability insurance in amounts and of the type the Company believes to be consistent with industry practice to cover damages arising from any such accident, catastrophe or incident, and the Company's codeshare partners and regional carriers carry similar insurance and generally indemnify the Company for their operations, if the Company's liability exceeds the applicable policy limits or the ability of another carrier to indemnify it, the Company could incur substantial losses from an accident, catastrophe or incident which may result in a material adverse effect on the Company's operating results and financial condition\.

***Terrorist attacks, international hostilities or other security events, or the fear of terrorist attacks or hostilities, even if not made directly on the airline industry, could negatively affect the Company and the airline industry\.***

Terrorist attacks or international hostilities, even if not made on or targeted directly at the airline industry, or the fear of or the precautions taken in anticipation of such attacks (including elevated national threat warnings, travel restrictions, selective cancellation or redirection of flights and new security regulations) could materially and adversely affect the Company and the airline industry\. Security events pose a significant risk to our passenger and cargo operations\. These events could include acts of violence in public areas that we cannot control\. The Company's financial resources may not be sufficient to absorb the

11


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

Deferred Income Taxes

For federal income tax purposes, the majority of our assets are fully depreciated over a seven\-year life using an accelerated depreciation method or bonus depreciation, if available\. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight\-line basis\. This difference has created a significant deferred tax liability\. At some point in the future the depreciation basis will reverse, potentially resulting in an increase in income taxes paid\.

While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long\-term cash flows with reasonable accuracy\. Taxable income and cash taxes payable in the short\-term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices), usage of net operating losses, whether bonus depreciation provisions are available, any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control\.

In 2019, we made tax payments, net of refunds, totaling $31 million, and had an effective tax rate of 24\.3%\. We believe that we will have the liquidity available to make our future tax payments\.

45


Annual Report of Southwest Airlines Co\. for year 2017

**PART I**

|               |                 |
| ------------- | --------------- |
|  **Item 1\.** | ***Business***  |

**Company Overview**

Southwest Airlines Co\. (the "Company" or "Southwest") operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near\-international markets\. For the 45th consecutive year, the Company was profitable, earning $3\.5 billion in net income\.

Southwest commenced service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities: Dallas, Houston, and San Antonio\. At December 31, 2017, Southwest operated a total of 706 Boeing 737 aircraft and served 100 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and ten near\-international countries: Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos\.

The Company expanded its international footprint during 2017, with the commencement of service to Owen Roberts International Airport in Grand Cayman and Providenciales International Airport in Turks and Caicos, both from Fort Lauderdale\-Hollywood International Airport\. The Company also commenced service to Cincinnati/Northern Kentucky International Airport in 2017, giving the Company’s Customers access to a full complement of the top 50 markets across the 48 contiguous United States\.

During 2017, the Company announced plans to begin selling tickets in 2018 for service to Hawaii, subject to requisite governmental approvals, including approval from the Federal Aviation Administration ("FAA") for Extended Operations ("ETOPS"), a regulatory requirement to operate between the U\.S\. mainland and the Hawaiian Islands\. The Company further announced its decision to cease service at Bishop International Airport in Flint, Michigan, with the last day of service on June 6, 2018\. In January 2018, the Company announced its intent to begin service at a new commercial aircraft facility at Paine Field in Everett, Washington, scheduled to be completed in 2018\.

In 2017, the Company completed its deployment of a new single reservation system, the largest technology project in the Company's history\. The new reservation system was designed to improve flight scheduling and inventory management, enable revenue enhancements, support additional international growth, and enable other foundational and operational capabilities\.

Further, in 2017, the Company became the first airline in North America to offer scheduled service utilizing Boeing's new, more fuel efficient, 737 MAX 8 aircraft\. The Company also retired its remaining Boeing 737\-300 aircraft\.

Based on the most recent data available from the U\.S\. Department of Transportation (the "DOT"), as of September 30, 2017, Southwest was the largest domestic air carrier in the United States, as measured by the number of domestic originating passengers boarded\.

**Industry**

The airline industry has historically been an extremely volatile industry subject to numerous challenges\. Among other things, it has been cyclical, energy intensive, labor intensive, capital intensive, technology intensive, highly regulated, heavily taxed, and extremely competitive\. The airline industry has also been particularly susceptible to detrimental events such as acts of terrorism, poor weather, and natural disasters\.

The U\.S\. airline industry benefited from modest economic growth during 2017 and was further aided by a relatively stable fuel environment\. In recent years, the U\.S\. airline industry, including Southwest, has increased available seat miles (also referred to as "capacity," an available seat mile is one seat, empty or full, flown one mile and is a measure of space available to carry passengers in a given period), and has increased the number of seats per trip (or "gauge") through slimline seat retrofits and the use of larger aircraft\. Strategic capacity increases are expected to continue in 2018\.

In 2017, the airline industry continued to be impacted by the significant growth of "Ultra\-Low Cost Carriers" ("ULCCs")\. ULCCs offer "unbundled" service offerings, which enable them to appeal to price\-sensitive travelers through promotion to consumers of an extremely low relative base fare for a seat, while separately charging for related services and products\. In response, certain major U\.S\. airlines (sometimes referred to as "legacy" or "network" carriers) have introduced new fare products, such as a "Basic Economy" product\. The Basic Economy product provides for a lower

4


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

[Table of Contents](https://www.example.com#i_0_7)

PART I

|                       |                       |                       |
| --------------------- | --------------------- | --------------------- |
| ITEM 1\. OUR BUSINESS | ITEM 1\. OUR BUSINESS | ITEM 1\. OUR BUSINESS |

Alaska Air Group is a Delaware corporation incorporated in 1985 that operates two airlines, Alaska and Horizon\. Alaska was organized in 1932 and incorporated in 1937 in the state of Alaska\. Horizon is a Washington corporation that was incorporated and began service in 1981, and was acquired by Air Group in 1986\. Virgin America was a member of Air Group since it was acquired in 2016 until 2018, when Alaska and Virgin America combined operating certificates to become a single airline, and legally merged into a single entity\. The Company also includes McGee Air Services, an aviation services provider that was established as a wholly\-owned subsidiary of Alaska in 2016\.

Alaska and Horizon operate as separate airlines, with individual business plans, competitive factors and economic risks\. Together with our regional airline partners, we fly to 115 destinations with over 1,300 daily departures through an expansive network across the U\.S\., Mexico, Canada, and Costa Rica\. With global airline partners, we provide our guests with a network of more than 800 destinations worldwide\. During 2019, we carried an all\-time high 47 million guests and earned consolidated net income under Generally Accepted Accounting Principles (GAAP) of $769 million compared to net income of $437 million in 2018\. Our adjusted net income was $798 million, which excludes merger\-related costs and mark\-to\-market fuel hedge adjustments\. Refer to "Results of Operations" in Management's Discussion and Analysis for our reconciliation of Non\-GAAP measures to the most directly comparable GAAP measure\.

We organize the business and review financial operating performance by aggregating our business in three operating segments, which are as follows:

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

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

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

Our purpose is "creating an airline people love\." The "ing" is to recognize that we are never done; we are continually working to improve\. We believe our success depends on our ability to provide safe air transportation, develop relationships with guests by providing exceptional customer service and low fares, and maintain a low cost structure to compete effectively\. It is important to us that we achieve our objective as a socially responsible company that values not just performance, but also our people, the communities we serve, and the environment\.

We marked the 16th consecutive year of profitability on an adjusted basis in 2019\. Our liquidity and capital position remain strong, positioning us among other high\-quality industrial companies\. Due to our strong financial health and outlook, we are one of only three U\.S\. airlines with investment grade credit ratings\. The cash generated by our continued success enables us to invest in our business to deliver profitable growth, enhance our guests' experience, and improve our financial position\.

We are active in the communities we serve and strive to be an industry leader in environmental and community stewardship\. In 2019, Air Group donated $15 million in cash and in\-kind travel to over 1,200 charitable organizations, and our employees volunteered more than 41,000 hours of community service related to youth and education, medical research and transportation\. One of our leadership principles is to "give back" and we are proud of the efforts and voluntarism of our employees\. Also in 2019, we launched LIFT, our social and environmental impact program aimed at uniting all of our social and environmental impact efforts\. Through this program, our guests also showed great generosity, donating 72 million miles in 2019 for donation to charitable organizations\. As recognition of our community leadership, financial stability and the fact that our combined fleet is one of the youngest and most fuel\-efficient in North America, we ranked higher than any other North American airline for the third year in a row on the Dow Jones Sustainability Index\.

In 2019, we completed the majority of the remaining integration milestones from our acquisition of Virgin America\. During the year, Alaska flight attendants began flying as integrated crews and our pilots adopted an integrated seniority list\. In July 2019, Alaska aircraft maintenance technicians, represented by the Aircraft Mechanics Fraternal Association (AMFA), ratified an

4


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

|                                                                     |                                      |                                      |                                      |                                      |
| ------------------------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                                     | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                                     | **2017**                             | **2017**                             | **2016**                             | **2016**                             |
| ***(in millions, except per\-share amounts)***                      | **Dollars**                          | **Diluted EPS**                      | **Dollars**                          | **Diluted EPS**                      |
| Reported GAAP net income and diluted EPS                            | **$1,034**                           | **$8\.35**                           | $814                                 | $6\.54                               |
| Mark\-to\-market fuel hedge (benefit)/expense                       | **(7)**                              | **(0\.06)**                          | (13)                                 | (0\.11)                              |
| Special items—merger\-related costs and other ^(a)^                 | **118**                              | **0\.95**                            | 117                                  | 0\.94                                |
| Income tax effect on special items and fuel hedge adjustments ^(b)^ | **(42)**                             | **(0\.34)**                          | (24)                                 | (0\.19)                              |
| Special tax (benefit)/expense ^(c)^                                 | **(280)**                            | **(2\.26)**                          | 17                                   | 0\.14                                |
| Non\-GAAP adjusted net income and diluted EPS                       | **$823**                             | **$6\.64**                           | $911                                 | $7\.32                               |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------- |
| (a) | Refer to  Note 10  to the consolidated financial statement for the description of special items\. |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | Certain merger\-related costs are non\-deductible for tax purposes, resulting in a smaller income tax effect for 2016 adjusting items\.  |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (c) | Special tax (benefit)/expense in 2017 is due to the remeasurement of deferred tax liabilities as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, offset by certain state tax law enactments\. In 2016 it represents discrete impacts of adjustments to our position on income sourcing in various states\. |

CASM is summarized below:

|                                                     |                                      |                                      |                                      |
| --------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                     | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                     | **2017**                             | **2016**                             | **% Change**                         |
| **Consolidated:**                                   |                                      |                                      |                                      |
| Total CASM                                          | **10\.75¢**                          | 10\.38¢                              | 3\.6 %                               |
| Less the following components:                      |                                      |                                      |                                      |
| Aircraft fuel, including hedging gains and losses   | **2\.33**                            | 1\.88                                | 23\.9 %                              |
| Special items—merger\-related costs and other ^(a)^ | **0\.19**                            | 0\.27                                | (29\.6)%                             |
| CASM, excluding fuel and special items              | **8\.23¢**                           | 8\.23¢                               | — %                                  |
| **Mainline:**                                       |                                      |                                      |                                      |
| Total CASM                                          | **9\.92¢**                           | 9\.39¢                               | 5\.6 %                               |
| Less the following components:                      |                                      |                                      |                                      |
| Aircraft fuel, including hedging gains and losses   | **2\.24**                            | 1\.79                                | 25\.1 %                              |
| Special items—merger\-related costs and other ^(a)^ | **0\.21**                            | 0\.30                                | (30\.0)%                             |
| CASM, excluding fuel and special items              | **7\.47¢**                           | 7\.30¢                               | 2\.3 %                               |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------- |
| (a) | Refer to  Note 10  to the consolidated financial statement for the description of special items\. |

**Impact of Accounting Changes**

The following discussion of 2017 compared with 2016 results reflects balances as reported within this 10\-K\. On January 1, 2018 we will implement ASU 2014\-09, "Revenue from Contracts with Customers," and ASU 2017\-07, "Compensation\- Retirement Benefits\." We have elected to apply both standards using the full retrospective approach, which will require us to restate prior period financial information under the new standards\. When providing forward looking guidance on line items that will be recast under the new standards, we have included provisional recast amounts herein\.

Under the new revenue recognition standard, the primary changes to our financial information relate to Mileage Plan™ accounting, ticket breakage, and ancillary revenue geography\.

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Mileage Plan™ miles earned through travel have historically been accounted for using the incremental cost approach\. Under the new standard, we will allocate a portion of the ticket price to deferred revenue\.  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Ticket breakage was historically recognized at time of expiration\. Under the new standard, ticket breakage will be recorded based on an estimate at the original departure date\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Ancillary revenues related to passenger travel, which were historically presented as Other revenue, will be reclassified to Passenger Revenue\.  |

As a result of the new revenue recognition standard, we expect to restate 2017 and 2016 financial information in our future filings\. We expect 2017 reported revenues will be reduced by approximately $41 million, and reported non\-fuel operating costs will increase by approximately $13 million, resulting in a net reduction of $54 million to reported adjusted pretax profit\. We expect a similar impact in 2018\.

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