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

ITEM 9\. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None\.

ITEM 9A\. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a\-15(e) and 15d\-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)\. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure\. An evaluation of the effectiveness of AAG’s and American’s disclosure controls and procedures as of  December 31, 2019  was performed under the supervision and with the participation of AAG’s and American’s management, including AAG’s and American’s CEO and CFO\. Based on that evaluation, AAG’s and American’s management, including AAG’s and American’s CEO and CFO, concluded that AAG’s and American’s disclosure controls and procedures were effective as of  December 31, 2019  at the reasonable assurance level\.

Changes in Internal Control over Financial Reporting

On December 9, 2013, AAG acquired US Airways Group and its subsidiaries\. We are still in the process of integrating certain processes, technology and operations for the post\-Merger combined company, and we will continue to evaluate the impact of any related changes to our internal control over financial reporting\. For the three months ended  December 31, 2019 , there have been no changes in AAG’s or American’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, AAG’s and American’s internal control over financial reporting\.

Limitation on the Effectiveness of Controls

We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected\. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and, as noted above, the CEO and CFO of AAG and American believe that our disclosure controls and procedures were effective at the reasonable assurance level as of  December 31, 2019 \.

Management’s Annual Report on Internal Control over Financial Reporting

Management of AAG and American is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a\-15(f) and 15d\-15(f) under the Exchange Act\. AAG’s and American’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP\. AAG’s and American’s internal control over financial reporting includes policies and procedures that:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of AAG or American, respectively; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of AAG or American are being made only in accordance with authorizations of management and directors of AAG or American, respectively; and |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of AAG’s or American’s assets that could have a material effect on the financial statements\. |

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

Management assessed the effectiveness of AAG’s and American’s internal control over financial reporting as of  December 31, 2019 \. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control – Integrated Framework (2013 Framework)\.

158


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

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

defendants’ motion and cross\-motion for summary judgment\. Briefing of the parties’ respective motions concluded on September 1, 2017; a hearing date has not yet been set\. American believes this lawsuit is without merit and intends to vigorously defend against the allegations\.

*DOJ Investigation Related to the United States Postal Service*\. In April 2015, the DOJ informed American of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air\. In October 2015, American received a CID from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis\. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes\. American is cooperating fully with the DOJ with regard to its investigation\.

*General*\. In addition to the specifically identified legal proceedings, American and its subsidiaries are also engaged in other legal proceedings from time to time\. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within American’s control\. Therefore, although American will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on American are uncertain but could be material\. See Part I, Item 1A\. Risk Factors –*“We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity”* for unaudited additional discussion\.

***(f) Guarantees and Indemnifications***

American is a party to many routine contracts in which it provides general indemnities in the normal course of business to third parties for various risks\. American is not able to estimate the potential amount of any liability resulting from the indemnities\. These indemnities are discussed in the following paragraphs\.

In its aircraft financing agreements, American generally indemnifies the financing parties, trustees acting on their behalf and other relevant parties against liabilities (including certain taxes) resulting from the financing, manufacture, design, ownership, operation and maintenance of the aircraft regardless of whether these liabilities (or taxes) relate to the negligence of the indemnified parties\.

American’s loan agreements and other LIBOR\-based financing transactions (including certain leveraged aircraft leases) generally obligate American to reimburse the applicable lender for incremental costs due to a change in law that imposes (i) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (ii) any tax, duty or other charge with respect to the loan (except standard income tax) or (iii) capital adequacy requirements\. In addition, American’s loan agreements and other financing arrangements typically contain a withholding tax provision that requires American to pay additional amounts to the applicable lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law\.

In certain transactions, including certain aircraft financing leases and loans, the lessors, lenders and/or other parties have rights to terminate the transaction based on changes in foreign tax law, illegality or certain other events or circumstances\. In such a case, American may be required to make a lump sum payment to terminate the relevant transaction\.

American has general indemnity clauses in many of its airport and other real estate leases where American as lessee indemnifies the lessor (and related parties) against liabilities related to American’s use of the leased property\. Generally, these indemnifications cover liabilities resulting from the negligence of the indemnified parties, but not liabilities resulting from the gross negligence or willful misconduct of the indemnified parties\. In addition, American provides environmental indemnities in many of these leases for contamination related to American’s use of the leased property\.

Under certain contracts with third parties, American indemnifies the third\-party against legal liability arising out of an action by the third\-party, or certain other parties\. The terms of these contracts vary and the potential exposure under these indemnities cannot be determined\. American has liability insurance protecting American for some of the obligations it has undertaken under these indemnities\.

American is required to make principal and interest payments for certain special facility revenue bonds issued by municipalities primarily to build or improve airport facilities and purchase equipment, which are leased to American\. The payment of principal and interest of certain special facility revenue bonds is guaranteed by American\. As of

164


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

ITEM 2\. PROPERTIES

Flight Equipment and Fleet Renewal

As of  December 31, 2019 , American operated a mainline fleet of  942  aircraft\. In  2019 , we continued our extensive fleet renewal program, which has provided us with the youngest fleet of the major U\.S\. network carriers\. During  2019 , American took delivery of  24  mainline aircraft and retired  38  mainline aircraft\. We are supported by our wholly\-owned and third\-party regional carriers that fly under capacity purchase agreements operating as American Eagle\. As of  December 31, 2019 , American Eagle operated  605  regional aircraft\. During  2019 , we increased our regional fleet by a net of  ten  aircraft, including the addition of  46  regional aircraft and retirement of  36  regional aircraft\.

Mainline

As of  December 31, 2019 , American’s mainline fleet consisted of the following aircraft:

|                          |                                         |                                               |           |            |           |
| ------------------------ | --------------------------------------- | --------------------------------------------- | --------- | ---------- | --------- |
|                          | **Average Seating**

**Capacity** | **Average**

**Age**

**(Years)** | **Owned** | **Leased** | **Total** |
| Airbus A319              | 128                                     | 15\.7                                         | 21        | 111        | 132       |
| Airbus A320              | 150                                     | 18\.7                                         | 10        | 38         | 48        |
| Airbus A321              | 179                                     | 7\.4                                          | 165       | 53         | 218       |
| Airbus A321neo           | 196                                     | 0\.4                                          | 2         | 10         | 12        |
| Airbus A330\-200         | 247                                     | 8\.0                                          | 15        | —          | 15        |
| Airbus A330\-300         | 291                                     | 19\.4                                         | 4         | 5          | 9         |
| Boeing 737\-800          | 163                                     | 10\.1                                         | 132       | 172        | 304       |
| Boeing 737\-8 MAX  ^(1)^ | 172                                     | 1\.4                                          | 9         | 15         | 24        |
| Boeing 757\-200          | 180                                     | 20\.1                                         | 31        | 3          | 34        |
| Boeing 767\-300ER        | 209                                     | 19\.9                                         | 17        | —          | 17        |
| Boeing 777\-200ER        | 273                                     | 19\.0                                         | 44        | 3          | 47        |
| Boeing 777\-300ER        | 304                                     | 5\.8                                          | 18        | 2          | 20        |
| Boeing 787\-8            | 234                                     | 4\.1                                          | 20        | —          | 20        |
| Boeing 787\-9            | 285                                     | 2\.2                                          | 17        | 5          | 22        |
| Embraer 190              | 99                                      | 12\.1                                         | 20        | —          | 20        |
| Total                    |                                         | 11\.0                                         | 525       | 417        | 942       |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | On March 13, 2019, a directive from the FAA grounded all U\.S\.\-registered Boeing 737 MAX aircraft\. We have removed all Boeing 737 MAX flying from our flight schedule through August 17, 2020 and will continue to assess this timeline\. |

37


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

***DOT Passenger Protection Rules***

The DOT regulates airline interactions with passengers through the ticketing process, at the airport and on board the aircraft\. Among other things, these regulations govern how our fares are displayed online, required customer disclosures, access by disabled passengers, handling of long onboard flight delays and reporting of mishandled bags\. In addition, the DOT is likely to issue a regulation in 2018 that would require air carriers to refund checked bag fees in the event of certain delays in delivery\.

***International***

International air transportation is subject to extensive government regulation, including aviation agreements between the U\.S\. and other countries or governmental authorities, such as the European Union (EU)\. Moreover, alliances with international carriers may be subject to the jurisdiction and regulations of various foreign agencies\. The U\.S\. government has negotiated “open skies” agreements with over 120 countries, which allow unrestricted route authority access between the U\.S\. and the foreign markets\. While the U\.S\. has worked to increase the number of countries with which open skies agreements are in effect, a number of markets important to us, including China, do not have open skies agreements\.

In addition, foreign countries impose passenger protection rules, which are analogous to, and often meet or exceed the requirements of, the DOT passenger protection rules discussed above\. In cases where these foreign requirements exceed the DOT rules, we may bear additional burdens and liabilities\. Further, various foreign airport authorities impose noise restrictions at their local airports\.

***Security***

Since shortly after the events of September 11, 2001, substantially all aspects of civil aviation security in the U\.S\. or affecting U\.S\. carriers have been controlled or regulated by the federal government through the Transportation Security Administration (TSA)\. Requirements include flight deck security; carriage of federal air marshals at no charge; enhanced security screening of passengers, baggage, cargo, mail, employees and vendors; fingerprint\-based background checks of all employees and vendor employees with access to secure areas of airports; and the provision of certain passenger data to the federal government and other international border security authorities, for security and immigration controls\. Funding for the TSA is provided by a combination of air carrier fees, passenger fees and taxpayer funds\. Customs and Border Protection, which, like the TSA, is part of the Department of Homeland Security, also promulgates requirements, performs services and collects fees that impact our provision of services\. Additionally, we have at times found it necessary or desirable to make significant expenditures to comply with security\-related requirements while seeking to reduce their impact on our customers, such as expenditures for automated security screening lines at airports\.

***Environmental Matters***

*Environmental Regulation*

The airline industry is subject to various laws and government regulations concerning environmental matters in the U\.S\. and other countries\. U\.S\. federal laws that have a particular impact on our operations include the Airport Noise and Capacity Act of 1990, the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act and the Comprehensive Environmental Response, Compensation and Liability Act (Superfund Act)\. The U\.S\. Environmental Protection Agency (EPA) and other federal agencies have been authorized to promulgate regulations that have an impact on our operations\. In addition to these federal activities, various states have been delegated certain authorities under the aforementioned federal statutes\. Many state and local governments have adopted environmental laws and regulations which are similar to or stricter than federal requirements\.

Revised underground storage tank regulations issued by the EPA in 2015 have affected certain airport fuel hydrant systems, with modifications of such systems needed in order to comply with applicable portions of the revised regulations\. In addition, related to the EPA and state regulations pertaining to stormwater management, several U\.S\. airport authorities are actively engaged in efforts to limit discharges of deicing fluid into the environment, often by requiring airlines to participate in the building or reconfiguring of airport deicing facilities\.

The environmental laws to which we are subject include those related to responsibility for potential soil and groundwater contamination\. We are conducting investigation and remediation activities to address soil and groundwater conditions at several sites, including airports and maintenance bases\. We anticipate that the ongoing costs of such activities will not have a material impact on our operations\. In addition, we have been named as a potentially responsible party (PRP) at certain Superfund sites\. Our alleged volumetric contributions at such sites are relatively small in comparison to total contributions of all PRPs; we anticipate that any future payments of costs at such sites will not have a material impact on our operations\.

12


Annual Report of Southwest Airlines Co\. for year 2019

"gather updated information on the costs and benefits of requiring airlines to make lavatories on new single\-aisle aircraft large enough, equivalent to that currently found on twin\-aisle aircraft, to permit a passenger with a disability (with the help of an assistant, if necessary) to approach, enter, and maneuver within the aircraft lavatory as necessary to use all lavatory facilities and leave by means of the aircraft's on\-board wheelchair\." Requirements to expand the size of lavatories could impose substantial costs on the Company, either in the short\-term or the long\-term\. Whether the DOT will actually adopt a new rule requiring larger lavatories, and the timing and application of any new rule, are unknown at this time\.

In January 2020, the DOT proposed new regulations that would allow airlines to recognize emotional support animals as pets rather than service animals\. Under the proposed rule, airlines would still be required to accept trained service dogs\. If adopted by the DOT, the rule would likely simplify the Company’s procedures for accepting animals in the cabin\.

The Reauthorization Act includes numerous provisions related to the DOT's rules and authority\. For example:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | the DOT has been given the authority to impose triple the maximum fines for damages to passengers' wheelchairs or other mobility aids, as well as for injury to passengers with disabilities; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | the DOT has been directed to implement a rulemaking to require air carriers to promptly provide a refund for any ancillary fee paid for services a passenger does not receive; and |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | the Reauthorization Act makes it an unfair and deceptive practice to involuntarily deplane a revenue passenger onboard an aircraft if that passenger is traveling on a confirmed reservation and is checked\-in for the relevant flight prior to the applicable check\-in deadline\. |

Aviation Taxes and Fees

The statutory authority for the federal government to collect most types of aviation taxes, which are used, in part, to finance programs administered by the FAA, must be periodically reauthorized by the U\.S\. Congress\. The Reauthorization Act extends most commercial aviation taxes through September 30, 2023\.

In addition to FAA\-related taxes, there are additional federal taxes related to the U\.S\. Department of Homeland Security\. These taxes do not need to be reauthorized periodically\. Congress has set the Transportation Security Fee paid by passengers at $5\.60 per one\-way passenger trip originating in the U\.S\. In addition, international passengers arriving in the U\.S\. are subject to U\.S\. immigration and customs fees that are indexed to inflation\. These fees are used to support the operations of U\.S\. Customs and Border Protection ("CBP")\. Finally, the U\.S\. Department of Agriculture's Animal and Plant Health Inspection Service imposes an agriculture inspection fee on international passengers arriving in the U\.S\.

In 2020, Congress is expected to consider legislation related to federal spending on public infrastructure, including at airports\. This legislation could result in an increase in the maximum Passenger Facility Charge, which is assessed by airports and collected by airlines, currently capped at $4\.50 per enplanement (with a maximum of two Passenger Facility Charges on a one\-way trip)\. Conversely, this legislation could also result in an infusion of federal investment in public infrastructure that may benefit all modes of transportation\.

Finally, the annual congressional budget process is another legislative vehicle by which new aviation taxes or regulations may be imposed\. The annual appropriations bill funds the federal government \- including the DOT, the FAA, the Transportation Security Administration (the "TSA"), and CBP\. Passage of the fiscal year 2021 appropriations bill will be considered throughout 2020 and could result in an increase in one or more of the taxes and fees discussed above, as well as new mandates on the DOT to begin or complete rulemakings related to airline consumer protection\.

Operational, Safety, and Health Regulation

The FAA has the authority to regulate safety aspects of civil aviation operations\. Specifically, the Company and certain of its third\-party service providers are subject to the jurisdiction of the FAA with respect to aircraft maintenance and operations, including equipment, ground facilities, dispatch, communications, training, and other matters affecting air safety\. The FAA, from time to time, issues orders or directives relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions\. The FAA, acting through its own powers or through

11


Annual Report of Southwest Airlines Co\. for year 2018

|                                 |          |               |
| ------------------------------- | -------- | ------------- |
|                                 | **2018** | **2017**      |
| **(in millions)**               |          | **As Recast** |
| **DEFERRED TAX LIABILITIES:**   |          |               |
| Accelerated depreciation        | $3,395   | $3,123        |
| Other                           | 92       | 83            |
| Total deferred tax liabilities  | 3,487    | 3,206         |
| **DEFERRED TAX ASSETS:**        |          |               |
| Construction obligation         | 355      | 318           |
| Accrued employee benefits       | 329      | 301           |
| Rapid rewards loyalty liability | 267      | 338           |
| Other                           | 109      | 130           |
| Total deferred tax assets       | 1,060    | 1,087         |
| Net deferred tax liability      | $2,427   | $2,119        |

The provision (benefit) for income taxes is composed of the following:

|                                      |          |               |               |
| ------------------------------------ | -------- | ------------- | ------------- |
|                                      | **2018** | **2017**      | **2016**      |
| **(in millions)**                    |          | **As Recast** | **As Recast** |
| **CURRENT:**                         |          |               |               |
| Federal                              | $338     | $904          | $778          |
| State                                | 60       | 72            | 69            |
| Total current                        | 398      | 976           | 847           |
| **DEFERRED:**                        |          |               |               |
| Federal                              | 299      | 200           | 393           |
| State                                | 2        | 2             | 27            |
| Change in federal statutory tax rate | —        | (1,270)       | —             |
| Total deferred                       | 301      | (1,068)       | 420           |
|                                      | $699     | $(92)         | $1,267        |

The effective tax rate on income before income taxes differed from the federal income tax statutory rate for the following reasons:

|                                            |          |               |               |
| ------------------------------------------ | -------- | ------------- | ------------- |
|                                            | **2018** | **2017**      | **2016**      |
| **(in millions)**                          |          | **As Recast** | **As Recast** |
| Tax at statutory U\.S\. tax rates          | $664     | $1,143        | $1,208        |
| State income taxes, net of federal benefit | 49       | 50            | 62            |
| Change in federal statutory tax rate       | —        | (1,270)       | —             |
| Other, net                                 | (14)     | (15)          | (3)           |
| Total income tax provision (benefit)       | $699     | $(92)         | $1,267        |

The only period subject to examination for the Company’s federal tax return is the 2018tax year\. The Company is also subject to various examinations from state and local income tax jurisdictions in the ordinary course of business\. These examinations are not expected to have a material effect on the financial results of the Company\.

113


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

ITEM 7\. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS

Year in Review

Our pre\-tax income for  2018  was  $5\.2 billion , representing a  $349 million  decrease  compared to the prior year, primarily resulting from higher fuel expense and salaries and related costs, offset by increased operating revenue\. Pre\-tax income, adjusted (a non\-GAAP financial measure) was  $5\.1 billion ,  a decrease  of  $137 million  compared to the prior year\. The adjustments to pre\-tax income were primarily related to  $53 million  of fuel hedge mark\-to\-market ("MTM") adjustments and settlements in the current year compared to  $259 million  in the prior year\.

Delta had a solid year in 2018 as the company maintained focus on its long\-term strategy while also addressing the short\-term challenges from higher fuel prices\. Our culture and solid foundation enabled the company to successfully offset the majority of the $2\.3 billion increase in fuel during 2018\. Our strategic priorities for the year were (1) leveraging our strong brand to drive revenue growth, (2) improving our cost performance, (3) continuing to build our global franchise and (4) investing for the future\.

Strong Brand Drives Revenue Growth

Compared to  2017 , our operating revenue  increased  $3\.3 billion , or  8\.0% , with strong demand for our premium products and growth in revenues from non\-ticket sources\. Total revenue per available seat mile ("TRASM") and TRASM, adjusted (a non\-GAAP financial measure)  increased  4\.3%  compared to the prior year, led by (1) unit revenue growth in each of our four geographic regions, (2) broad\-based strength in both leisure and corporate demand and (3) double\-digit growth in premium products and non\-ticket revenues\.

Improving Our Cost Performance

Operating Expense\.  Operating expense  increased  $4\.0 billion , or  11\.4% , primarily due to $2\.3 billion higher fuel expense and higher wages and profit sharing for employees\. The increase in fuel expense primarily resulted from a  31%  increase  in the market price per gallon of fuel and our  3\.6%  capacity growth compared to 2017, which was partially offset by improved fuel efficiency driven by our investment in new aircraft\. Salaries and profit sharing were higher due to pay rate increases for eligible employees implemented during 2017 and 2018, along with an adjustment to our profit sharing plan in 2018\.

Our operating cost per available seat mile ("CASM") increased  7\.5%  to  14\.87 cents  compared to 2017, primarily due to higher fuel expense and salaries and related costs\. Non\-fuel unit costs ("CASM\-Ex, a non\-GAAP financial measure) increased  1\.4%  to  10\.31 cents  due to the pay rate increases discussed above\.

Non\-Operating Expense\.  Total non\-operating expense was  $113 million  during 2018 compared to  $466 million  in 2017, primarily due to an increase in the pension benefit compared to the prior year, gains from investment\-related transactions and lower interest expense\.

Expanding Our Global Network

In 2018, international revenues grew  6\.7%  on a  0\.9%  increase in capacity\. We made significant progress in expanding our global reach, implementing a transpacific joint venture with Korean Air Lines, entering into a joint venture agreement with WestJet with respect to trans\-border routes between the U\.S\. and Canada and reaching an agreement with Air France\-KLM and Virgin Atlantic to combine our separate transatlantic joint ventures into a single three\-party transatlantic joint venture\. The WestJet and three\-party transatlantic joint venture agreements remain subject to receipt of required regulatory approvals\.

Investing for the Future

Our  $7\.0 billion  cash flows from operations funded  $5\.2 billion  in capital expenditures for the business\. As part of our multi\-year refleeting initiative, we took delivery of 68 new aircraft, including A321\-200s, B\-737\-900ERs, A350\-900s, A220\-100s and CRJ\-900s\. These deliveries allowed for the retirement of older, less efficient aircraft\.

The non\-GAAP financial measures pre\-tax income, adjusted, TRASM, adjusted, and CASM\-Ex, used above, are defined and reconciled in "Supplemental Information" below\.

 27


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

Stock Options\.  Stock options are granted with an exercise price equal to the closing price of Delta common stock on the grant date and generally have a 10\-year term\. We determine the fair value of stock options at the grant date using an option pricing model\. As of December 31, 2019, there were 3\.9 million outstanding stock option awards with a weighted average exercise price of $49\.57 of which  1\.4 million were exercisable\.

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

Other\.  During 2019 and 2018, we recognized $1 million and $7 million, respectively, of excess tax benefits in our income tax provision\.

NOTE 14\. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table shows the components of accumulated other comprehensive loss:

|                                                                     |                                                                     |                                                                     |                                             |                                |                                        |           |
|:------------------------------------------------------------------- |:------------------------------------------------------------------- |:------------------------------------------------------------------- | -------------------------------------------:| ------------------------------:| --------------------------------------:| ---------:|
| (in millions)                                                       | (in millions)                                                       | (in millions)                                                       | Pension and Other Benefits Liabilities^(2)^ | Derivative Contracts and Other | Available\-for\-Sale Investment s^(3)^ |     Total |
| Balance at January 1, 2017 (net of tax effect of $1,458)            | Balance at January 1, 2017 (net of tax effect of $1,458)            | Balance at January 1, 2017 (net of tax effect of $1,458)            |                                   $ (7,714) |                          $ 114 |                                 $ (36) | $ (7,636) |
| Changes in value (net of tax effect of $32)                         | Changes in value (net of tax effect of $32)                         | Changes in value (net of tax effect of $32)                         |                                       (264) |                           (23) |                                    150 |     (137) |
| Reclassifications into earnings (net of tax effect of $90)^(1)^     | Reclassifications into earnings (net of tax effect of $90)^(1)^     | Reclassifications into earnings (net of tax effect of $90)^(1)^     |                                         166 |                            (6) |                                    (8) |       152 |
| Balance at December 31, 2017 (net of tax effect of $1,400)          | Balance at December 31, 2017 (net of tax effect of $1,400)          | Balance at December 31, 2017 (net of tax effect of $1,400)          |                                     (7,812) |                             85 |                                    106 |   (7,621) |
| Changes in value (net of tax effect of $88)                         | Changes in value (net of tax effect of $88)                         | Changes in value (net of tax effect of $88)                         |                                       (294) |                              7 |                                      — |     (287) |
| Reclassifications into retained earnings (net of tax effect of $61) | Reclassifications into retained earnings (net of tax effect of $61) | Reclassifications into retained earnings (net of tax effect of $61) |                                           — |                              — |                                  (106) |     (106) |
| Reclassifications into earnings (net of tax effect of $57)^(1)^     | Reclassifications into earnings (net of tax effect of $57)^(1)^     | Reclassifications into earnings (net of tax effect of $57)^(1)^     |                                         181 |                              8 |                                      — |       189 |
| Balance at December 31, 2018 (net of tax effect $1,492)             | Balance at December 31, 2018 (net of tax effect $1,492)             | Balance at December 31, 2018 (net of tax effect $1,492)             |                                     (7,925) |                            100 |                                      — |   (7,825) |
| Changes in value (net of tax effect of $133)                        | Changes in value (net of tax effect of $133)                        | Changes in value (net of tax effect of $133)                        |                                       (422) |                              7 |                                      — |     (415) |
| Reclassifications into earnings (net of tax effect of $76)^(1)^     | Reclassifications into earnings (net of tax effect of $76)^(1)^     | Reclassifications into earnings (net of tax effect of $76)^(1)^     |                                         252 |                            (1) |                                      — |       251 |
| Balance at December 31, 2019 (net of tax effect of $1,549)          | Balance at December 31, 2019 (net of tax effect of $1,549)          | Balance at December 31, 2019 (net of tax effect of $1,549)          |                                   $ (8,095) |                          $ 106 |                                    $ — | $ (7,989) |

^(1)^ Amounts reclassified from AOCI for pension and other benefits liabilities and for derivative contracts designated as foreign currency cash flow hedges are recorded in miscellaneous, net in non\-operating expense and in passenger revenue, respectively, in the income statement\.

^(2)^ Includes $672 million of deferred income tax expense primarily related to pension and other benefit obligations that will not be recognized in net income until these obligations are fully extinguished\. We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations\.

^(3)^ The 2017 reclassification into earnings for available\-for\-sale investments relates to our investment in Grupo Aeroméxico and the related conversion to accounting under the equity method\. The reclassification of the unrealized gain was recorded to non\-operating expense in our income statement\. The 2018 reclassification into retained earnings relates to our investments in GOL, China Eastern and other previously designated available\-for\-sale investments, and the related conversion to accounting for changes in fair value of these investments from AOCI to the income statement\.

92


Annual Report of Southwest Airlines Co\. for year 2019

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\.

In addition, in response to these types of threats, there has been heightened legislative and regulatory focus on data privacy and security in the United States and elsewhere\. As a result, the Company must monitor a growing and fast\-evolving set of legal requirements in this area\. This regulatory environment is increasingly challenging and may present material obligations and risks to the Company's business, including significantly expanded compliance burdens, costs, and enforcement risks\.

The Company has a dedicated cyber\-security team and program that focuses on current and emerging data security matters\. The Company continues to assess and invest in the growing needs of the cyber\-security team through the allocation of skilled personnel, ongoing training, and support of the adoption and implementation of technologies coupled with cyber\-security risk management frameworks\.

The Company carries a cyber\-security insurance policy with regards to data protection and business interruption associated with both security breaches from malicious parties and from certain system failures\. However, available cyber\-security insurance with regards to data protection and business interruption could be more expensive in the future and/or have material differences in coverage than insurance that has historically been provided and may not be adequate to protect the Company's risk of loss\.

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

The Company is reliant on the success of its revenue strategies and other strategic plans and initiatives to grow and to help offset increasing costs\. The timely and effective execution of the Company's strategic plans could be negatively affected by (i) the Company's ability to timely and effectively implement, transition, and maintain related information technology systems and infrastructure; (ii) the Company's ability to effectively balance its investment of incremental operating expenses and capital expenditures related to its strategies against the need to effectively control costs; and (iii) as discussed further above, the Company's dependence on third parties with respect to the execution of its strategic plans\.

The airline industry has faced on\-going security concerns and related cost burdens; further threatened or actual terrorist attacks, or other hostilities, even if not made directly on the airline industry, could significantly harm the airline industry and the Company's operations\.

Terrorist attacks or other crimes and hostilities, actual and threatened, have from time to time materially adversely affected the demand for air travel and also have resulted in increased safety and security costs for the Company and the airline industry generally\. Safety and security measures create delays and inconveniences and can, in particular, reduce the Company's competitiveness against surface transportation for short\-haul routes\. Additional terrorist attacks or other hostilities, even if not made directly on the airline industry, or the fear of such attacks or other hostilities (including elevated national threat warnings, government travel warnings to certain destinations, travel restrictions, or selective cancellation or redirection of flights due to terror threats) would likely have a further significant negative impact on the Company and the airline industry\.

The Company is subject to extensive FAA regulation, which may materially and adversely affect the Company’s business plans, strategies, and results of  operations\.

The FAA promulgates and enforces regulations affecting the airline industry, and exercises extensive regulatory oversight of the Company’s operations\. The FAA from time to time also issues orders or directives relating to the

25


Annual Report of Southwest Airlines Co\. for year 2017

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the Consolidated Balance Sheet in Note 5\.

The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Income for the year endedDecember 31, 2017 and 2016:

|                                                    |                                                                       |                                                                       |                                                                       |                                                    |                                                                           |                                                                           |                                                                           |                                                    |                                                                              |                                                                              |
| -------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------------------------------------------- | ---------------------------------------------------------------------------- |
| **Derivatives in cash flow hedging relationships** | **Derivatives in cash flow hedging relationships**                    | **Derivatives in cash flow hedging relationships**                    | **Derivatives in cash flow hedging relationships**                    | **Derivatives in cash flow hedging relationships** | **Derivatives in cash flow hedging relationships**                        | **Derivatives in cash flow hedging relationships**                        | **Derivatives in cash flow hedging relationships**                        | **Derivatives in cash flow hedging relationships** | **Derivatives in cash flow hedging relationships**                           | **Derivatives in cash flow hedging relationships**                           |
|                                                    | **(Gain) loss recognized in AOCI on derivatives (effective portion)** | **(Gain) loss recognized in AOCI on derivatives (effective portion)** | **(Gain) loss recognized in AOCI on derivatives (effective portion)** |                                                    | **(Gain) loss reclassified from AOCI into income (effective portion)(a)** | **(Gain) loss reclassified from AOCI into income (effective portion)(a)** | **(Gain) loss reclassified from AOCI into income (effective portion)(a)** |                                                    | **(Gain) loss recognized in income on derivatives (ineffective portion)(b)** | **(Gain) loss recognized in income on derivatives (ineffective portion)(b)** |
|                                                    | **Year ended**                                                        | **Year ended**                                                        | **Year ended**                                                        |                                                    | **Year ended**                                                            | **Year ended**                                                            | **Year ended**                                                            |                                                    | **Year ended**                                                               | **Year ended**                                                               |
|                                                    | **December 31,**                                                      | **December 31,**                                                      | **December 31,**                                                      |                                                    | **December 31,**                                                          | **December 31,**                                                          | **December 31,**                                                          |                                                    | **December 31,**                                                             | **December 31,**                                                             |
| **(in millions)**                                  | **2017**                                                              |                                                                       | **2016**                                                              |                                                    | **2017**                                                                  |                                                                           | **2016**                                                                  |                                                    | **2017**                                                                     | **2016**                                                                     |
| Fuel derivative contracts                          | $32                                                                   | \*                                                                    | $(122)                                                                | \*                                                 | $349                                                                      | \*                                                                        | $613                                                                      | \*                                                 | $31                                                                          | $(11)                                                                        |
| Interest rate derivatives                          | —                                                                     | \*                                                                    | 2                                                                     | \*                                                 | 7                                                                         | \*                                                                        | 9                                                                         | \*                                                 | 1                                                                            | (3)                                                                          |
| Total                                              | $32                                                                   |                                                                       | $(120)                                                                |                                                    | $356                                                                      |                                                                           | $622                                                                      |                                                    | $32                                                                          | $(14)                                                                        |

\*Net of tax

(a) Amounts related to fuel derivative contracts and interest rate derivatives are included in Fuel and oil and Interest expense, respectively\.

(b) Amounts are included in Other (gains) losses, net\.

|                                                        |                                                        |                                                        |                                                        |
| ------------------------------------------------------ | ------------------------------------------------------ | ------------------------------------------------------ | ------------------------------------------------------ |
| **Derivatives not in cash flow hedging relationships** | **Derivatives not in cash flow hedging relationships** | **Derivatives not in cash flow hedging relationships** | **Derivatives not in cash flow hedging relationships** |
|                                                        | **(Gain) loss**                                        | **(Gain) loss**                                        |                                                        |
|                                                        | **recognized in income on**                            | **recognized in income on**                            |                                                        |
|                                                        | **derivatives**                                        | **derivatives**                                        |                                                        |
|                                                        | **Year ended**                                         | **Year ended**                                         | **Location of (gain) loss**                            |
|                                                        | **December 31,**                                       | **December 31,**                                       | **recognized in income**                               |
| **(in millions)**                                      | **2017**                                               | **2016**                                               | **on derivatives**                                     |
| Fuel derivative contracts                              | $75                                                    | $14                                                    | Other (gains) losses, net                              |
| Interest rate derivatives                              | (4)                                                    | (2)                                                    | Interest Expense                                       |
| Total                                                  | $71                                                    | $12                                                    |                                                        |

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during 2017, 2016, and 2015 of $135 million, $153 million, and $124 million, respectively\. These amounts are excluded from the Company’s measurement of effectiveness for related hedges and are included as a component of Other (gains) losses, net, in the Consolidated Statement of Income\.

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties\. Included in the Company’s cumulative net unrealized gains from fuel hedges as of December 31, 2017, recorded in AOCI, were approximately $11 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to December 31, 2017\.

***Interest Rate Swaps***

The Company is party to certain interest rate swap agreements that are accounted for as either fair value hedges or cash flow hedges, as defined in the applicable accounting guidance for derivative instruments and hedging\. Several of the Company's interest rate swap agreements qualify for the "shortcut" method of accounting for hedges, which dictates

97


Annual Report of Southwest Airlines Co\. for year 2019

Item 9B\.  Other Information

None\.

116


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

(a) Long\-term debt presented in the Company's financial statements is net of $191 million of debt discount, premiums and debt issuance costs which are being amortized over the debt terms\. Contractual payments do not include the debt discount, premiums and debt issuance costs\.

(b) Includes interest portion of capital lease obligations of $124 million in 2019, $104 million in 2020, $80 million in 2021, $63 million in 2022, $57 million in 2023 and $410 million thereafter\. Interest payments on variable interest rate debt were calculated using London interbank offered rates ("LIBOR") applicable at December 31, 2018\.

(c) Represents our estimates of future minimum noncancelable commitments under our CPAs and does not include the portion of the underlying obligations for aircraft and facility rent that is disclosed as part of aircraft and nonaircraft operating leases\. Amounts also exclude a portion of United's capital lease obligation recorded for certain of its CPAs\. See Note 11 to the financial statements included in Part II, Item 8 of this report for the significant assumptions used to estimate the payments\.

(d) Amounts represent postretirement benefit payments, net of subsidy receipts, through 2028\. Benefit payments approximate plan contributions as plans are substantially unfunded\.

(e) Represents an estimate of the minimum funding requirements as determined by government regulations for United's U\.S\. pension plans\. Amounts are subject to change based on numerous assumptions, including the performance of assets in the plans and bond rates\. See *Critical Accounting Policies*, below, for a discussion of our current year assumptions regarding United's pension plans\.

(f) Represents contractual commitments for firm order aircraft, spare engines and other capital purchase commitments\. See Note 13 to the financial statements included in Part II, Item 8 of this report for a discussion of our purchase commitments\.

***Off\-Balance Sheet Arrangements\.***An off\-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support, or that engages in leasing, hedging or research and development arrangements\. The Company's primary off\-balance sheet arrangements include operating leases, which are summarized in the contractual obligations table under *Contractual Obligations,* above,and certain municipal bond obligations, as discussed below\.

As of December 31, 2018, United had cash collateralized $73 million of letters of credit, which generally have evergreen clauses and are expected to be renewed on an annual basis\. As of December 31, 2018, United also had $418 million of surety bonds securing various obligations with expiration dates through2022\.

As of December 31, 2018, United is the guarantor of approximately $1\.9 billion in aggregate principal amount of tax\-exempt special facilities revenue bonds and interest thereon\. These bonds, issued by various airport municipalities, are payable solely from rentals paid under long\-term agreements with the respective governing bodies\. The leasing arrangements associated with a majority of these obligations are accounted for as operating leases\. The leasing arrangements associated with a portion of these obligations are accounted for as capital leases\. The annual lease payments for those obligations are included in the contractual obligations table under *Contractual Obligations,* above\.

In connection with funding the Synergy Loan Agreement, the Company entered into an agreement with AVH's significant minority shareholder, Kingsland Holdings Limited ("Kingsland"), pursuant to which, in return for Kingsland's pledge of its 144\.8 million shares of AVH common stock (equivalent to 18\.1 million American Depositary Receipts ("ADRs")) and its consent to Synergy's pledge of its AVH common stock to United under the Synergy Loan Agreement, United (1) granted to Kingsland the right to put its shares of AVH common stock to United at market price on the fifth anniversary of the Synergy Loan Agreement, and (2) guaranteed Synergy's obligation to pay Kingsland (which amount, if paid by United, will increase United's secured loan to Synergy by such amount) if the market price of AVH common stock on the fifth anniversary is less than $12 per ADR on the NYSE, for an aggregate maximum possible combined put payment and guarantee amount on the fifth anniversary of $217\.2 million\. Accordingly, the Company recorded a liability of $31 million for the fair value of its guarantee to loan additional funds to Synergy if required\. Any additional loans to Synergy would be collateralized by Synergy's shares of AVH stock and other collateral\.

As of December 31, 2018, United is the guarantor of $145 million of aircraft mortgage debt issued by one of United's regional carriers\. The aircraft mortgage debt is subject to increased cost provisions and the Company would potentially be responsible for those costs under the guarantees\. The increased cost provisions in the $145 million of aircraft mortgage debt are similar to those in certain of the Company's debt agreements\. See discussion under *Increased Cost Provisions,*below, for additional information on increased cost provisions related to the Company's debt\.

***EETCs\.*** As of December 31, 2018, United had $8\.8 billion principal amount of equipment notes outstanding issued under EETC financings\. Generally, the structure of these EETC financings consists of pass\-through trusts created by United to issue pass\-through certificates, which represent fractional undivided interests in the respective pass\-through trusts and are not obligations of United\. The proceeds of the issuance of the pass\-through certificates are used to purchase equipment notes which

33


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

|                               |                                                                                |
| ----------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Exhibit**

**Number** | **Description**                                                                                |
| 4\.53                         | [Assumption Agreement, dated as of December 30, 2015, by American Airlines, Inc\. for the benefit of Wilmington Trust Company, as pass through trustee, subordination agent, and paying agent, and Wilmington Trust, National Association, as escrow agent, in each case, under the Note Purchase Agreement, dated as of April 24, 2013, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), Wilmington Trust Company, Wilmington Trust, National Association and Wilmington Trust Company (incorporated by reference to Exhibit 10\.2 to AAG’s Current Report on Form 8\-K filed on December 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515418305/d110614dex102.htm) |
| 4\.54                         | [Form of Participation Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee, Subordination Agent and Pass Through Trustee (incorporated by reference to Exhibit 4\.13 to US Airways Group’s Current Report on Form 8\-K filed on April 25, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513171448/d526546dex413.htm)                                                                                |
| 4\.55                         | [Form of Trust Indenture and Security Agreement among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, Wilmington Trust, National Association, as Securities Intermediary, and Wilmington Trust Company, as Indenture Trustee (incorporated by reference to Exhibit 4\.14 to US Airways Group’s Current Report on Form 8\-K filed on April 25, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513171448/d526546dex414.htm)                                                                                |
| 4\.56                         | [Form of Amendment No\. 1 to Participation Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee, Subordination Agent and Pass Through Trustee (Exhibit A to Note Purchase Agreement) (incorporated by reference to Exhibit 4\.8 to US Airways Group’s Current Report on Form 8\-K filed on June 6, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513250235/d548366dex48.htm)                                                                                |
| 4\.57                         | [Form of Amendment No\. 1 to Trust Indenture and Security Agreement among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, Wilmington Trust, National Association, as Securities Intermediary, and Wilmington Trust Company, as Indenture Trustee (Exhibit B to Note Purchase Agreement) (incorporated by reference to Exhibit 4\.9 to US Airways Group’s Current Report on Form 8\-K filed on June 6, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513250235/d548366dex49.htm)                                                                                |
| 4\.58                         | [Amended and Restated Guarantee, dated as of March 31, 2014, from American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.) relating to obligations of US Airways under the equipment notes relating to its Series 2013\-1 Pass Through Certificates (incorporated by reference to Exhibit 10\.5 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000011/d715288dex105.htm)                                                                                |
| 4\.59                         | [Form of Participation Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee, Subordination Agent and Pass Through Trustee (Schedule I to Amendment No\. 1 to Note Purchase Agreement (2012\-2)) (incorporated by reference to Exhibit 4\.10 to US Airways Group’s Current Report on Form 8\-K filed on June 6, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513250235/d548366dex410.htm)                                                                                |
| 4\.60                         | [Form of Trust Indenture and Security Agreement among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, Wilmington Trust, National Association, as Securities Intermediary, and Wilmington Trust Company, as Indenture Trustee (Schedule II to Amendment No\. 1 to Note Purchase Agreement (2012\-2)) (incorporated by reference to Exhibit 4\.11 to US Airways Group’s Current Report on Form 8\-K filed on June 6, 2013 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000119312513250235/d548366dex411.htm)                                                                                |
| 4\.61                         | [Form of Participation Agreement (Participation Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee and Subordination Agent) (incorporated by reference to Exhibit 4\.14 to US Airways Group’s Current Report on Form 8\-K filed on December 23, 2010 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012310116213/p18414exv4w14.htm)                                                                                |
| 4\.62                         | [Form of Indenture (Trust Indenture and Security Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee) (incorporated by reference to Exhibit 4\.15 to US Airways Group’s Current Report on Form 8\-K filed on December 23, 2010 (Commission File No\. 1\-8444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012310116213/p18414exv4w15.htm)                                                                                |
| 4\.63                         | [Amended and Restated Guarantee, dated as of March 31, 2014, from American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.) relating to obligations of US Airways under the equipment notes relating to its Series 2010\-1 Pass Through Certificates (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000011/d715288dex101.htm)                                                                                |
| 4\.64                         | [Form of Participation Agreement (Participation Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee and Subordination Agent) (incorporated by reference to Exhibit 4\.18 to US Airways Group’s Current Report on Form 8\-K filed on July 1, 2011 (Commission File No\. 1\-08444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012311063424/p18939exv4w18.htm)                                                                                |
| 4\.65                         | [Form of Indenture (Trust Indenture and Security Agreement between American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), as Owner, and Wilmington Trust Company, as Indenture Trustee) (incorporated by reference to Exhibit 4\.19 to US Airways Group’s Current Report on Form 8\-K filed on July 1, 2011 (Commission File No\. 1\-08444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012311063424/p18939exv4w19.htm)                                                                                |
| 4\.66                         | [Guarantee, dated as of June 28, 2011, from American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.) (incorporated by reference to Exhibit 4\.23 to US Airways Group’s Current Report on Form 8\-K filed on July 1, 2011 (Commission File No\. 1\-08444))\.](http://www.sec.gov/Archives/edgar/data/701345/000095012311063424/p18939exv4w23.htm)                                                                                |

168


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

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

The components of American’s deferred tax assets and liabilities were (in millions):

|                                                    |                  |                  |
| -------------------------------------------------- | ---------------- | ---------------- |
|                                                    | **December 31,** | **December 31,** |
|                                                    | **2017**         | **2016**         |
| Deferred tax assets:                               |                  |                  |
| Operating loss carryforwards                       | $2,409           | $4,087           |
| Pensions                                           | 1,549            | 2,595            |
| Loyalty program liability                          | 420              | 485              |
| Alternative minimum tax (AMT) credit carryforwards | 457              | 456              |
| Postretirement benefits other than pensions        | 170              | 291              |
| Rent expense                                       | 160              | 256              |
| Gains from lease transactions                      | 107              | 213              |
| Reorganization items                               | 35               | 53               |
| Other                                              | 638              | 911              |
| Total deferred tax assets                          | 5,945            | 9,347            |
| Valuation allowance                                | (25)             | (13)             |
| Net deferred tax assets                            | 5,920            | 9,334            |
| Deferred tax liabilities:                          |                  |                  |
| Accelerated depreciation and amortization          | (4,999)          | (7,101)          |
| Other                                              | (274)            | (335)            |
| Total deferred tax liabilities                     | (5,273)          | (7,436)          |
| Net deferred tax asset                             | $647             | $1,898           |

At December 31, 2017, American had approximately $10\.6 billion of federal NOLs carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which American expects to be available for use in 2018\. American is a member of AAG’s consolidated federal and certain state income tax returns\. The amount of federal NOL Carryforwards available in those returns is $10\.0 billion, substantially all of which is expected to be available for use in 2018\. The federal NOL Carryforwards will expire beginning in 2022 if unused\. American also had approximately $3\.2 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2017, which will expire in years 2018 through 2037 if unused\. American’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred\. Substantially all of American’s remaining federal NOL Carryforwards attributable to US Airways Group are subject to limitation under Section 382; however, American’s ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation\. American elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9\.5 billion (with $8\.6 billion of unlimited NOL still remaining at December 31, 2017) of its federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382\. Similar limitations may apply for state income tax purposes\. American’s ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another future ownership change occurs\. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three\-year period can potentially limit a company’s future use of NOLs and tax credits\. See Part I, Item 1A\. Risk Factors – *“Our ability to utilize our NOL Carryforwards may be limited”* for unaudited additional discussion of this risk\.

At December 31, 2017, American had an AMT credit carryforward of approximately $452 million available for federal income tax purposes, which is now expected to be refunded in 2019 and 2020 as a result of the repeal of corporate AMT\.

In 2017, American recorded an income tax provision of $1\.3 billion, with an effective rate of approximately 41%, which was substantially non\-cash as American utilized the NOLs described above\. Substantially all of American’s income before income taxes is attributable to the United States\.

147


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

The major components of our total CASM and our total CASM excluding special items and fuel for the years ended December 31, 2017 and 2016 are as follows (amounts may not recalculate due to rounding):

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

**Increase**

**(Decrease)** |
|                                              | **2017**                                  | **2016**                                  | **Percent**

**Increase**

**(Decrease)** |
|                                              | **(In cents, except percentage changes)** | **(In cents, except percentage changes)** | **(In cents, except percentage changes)**             |
| Total CASM:                                  |                                           |                                           |                                                       |
| Aircraft fuel and related taxes              | 2\.22                                     | 1\.85                                     | 19\.5                                                 |
| Salaries, wages and benefits                 | 4\.32                                     | 4\.01                                     | 7\.8                                                  |
| Maintenance, materials and repairs           | 0\.71                                     | 0\.67                                     | 5\.6                                                  |
| Other rent and landing fees                  | 0\.65                                     | 0\.65                                     | 0\.8                                                  |
| Aircraft rent                                | 0\.43                                     | 0\.44                                     | (1\.6)                                                |
| Selling expenses                             | 0\.53                                     | 0\.48                                     | 10\.3                                                 |
| Depreciation and amortization                | 0\.62                                     | 0\.56                                     | 10\.4                                                 |
| Special items, net                           | 0\.26                                     | 0\.26                                     | 0\.6                                                  |
| Other                                        | 1\.78                                     | 1\.69                                     | 4\.8                                                  |
| Regional expenses:                           |                                           |                                           |                                                       |
| Aircraft fuel and related taxes              | 0\.50                                     | 0\.41                                     | 23\.2                                                 |
| Other                                        | 1\.87                                     | 1\.80                                     | 3\.5                                                  |
| Total CASM                                   | 13\.88                                    | 12\.83                                    | 8\.2                                                  |
| Special items, net:                          |                                           |                                           |                                                       |
| Special items, net                           | (0\.26)                                   | (0\.26)                                   | (0\.6)                                                |
| Regional operating special items, net        | (0\.01)                                   | (0\.01)                                   | 48\.4                                                 |
| Aircraft fuel and related taxes              |                                           |                                           |                                                       |
| Aircraft fuel and related taxes \- mainline  | (2\.22)                                   | (1\.85)                                   | 19\.5                                                 |
| Aircraft fuel and related taxes \- regional  | (0\.50)                                   | (0\.41)                                   | 23\.2                                                 |
| Total CASM, excluding special items and fuel | 10\.90                                    | 10\.31                                    | 5\.8                                                  |

Significant changes in the components of total CASM are as follows:

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Aircraft fuel and related taxes per ASM  increase d  19\.5 % primarily due to a  21\.4%  increase  in the average price per gallon of fuel to  $1\.71  in  2017  from  $1\.41  in  2016 , offset in part by a  0\.5%  decrease  in gallons of fuel consumed\. The  decrease  in fuel consumption was primarily driven by the operation of more fuel efficient aircraft during  2017  in connection with our fleet renewal program\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Salaries, wages and benefits per ASM  increase d  7\.8 % primarily due to mid\-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective in the third quarter of 2016\. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Maintenance, materials and repairs per ASM  increase d  5\.6 % as compared to  2016  primarily due to a contract change that accelerated the timing of certain maintenance expenses incurred\. Certain flight equipment was transitioned to a new flight hour based contract (referred to as power by the hour) where expense is incurred and recognized based on actual hours flown\. Previously, this flight equipment was covered by a time and materials based contract where expense is incurred and recognized as maintenance is performed\. |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Selling expenses per ASM  increase d  10\.3 % primarily due to higher commissions driven by the overall increase in revenues as well as an increase in flown premium tickets, which are subject to higher commissions\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Depreciation and amortization per ASM  increase d  10\.4 % primarily due to our fleet renewal program, as we took delivery of 57 owned mainline aircraft in 2017\. |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Regional aircraft fuel and related taxes per ASM  increase d  23\.2 % primarily due to a  21\.2%  increase  in the average price per gallon of fuel to  $1\.79  in  2017  from  $1\.48  in  2016  as well as a  2\.8%  increase  in gallons of fuel consumed\. |

57


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

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

The following information relates to all pension plans with an accumulated benefit obligation and a projected benefit obligation in excess of plan assets at December 31 (in millions):

|                                |          |          |
| ------------------------------ | -------- | -------- |
|                                | **2019** | **2018** |
| Projected benefit obligation   | $6,161   | $5,196   |
| Accumulated benefit obligation | 5,137    | 4,286    |
| Fair value of plan assets      | 4,714    | 3,614    |

Net periodic benefit cost for the years ended December 31 included the following components (in millions):

|                                                    |                      |                                   |                      |                                   |                      |                                   |
| -------------------------------------------------- | -------------------- | --------------------------------- | -------------------- | --------------------------------- | -------------------- | --------------------------------- |
|                                                    | **2019**             | **2019**                          | **2018**             | **2018**                          | **2017**             | **2017**                          |
|                                                    | **Pension Benefits** | **Other Postretirement Benefits** | **Pension Benefits** | **Other Postretirement Benefits** | **Pension Benefits** | **Other Postretirement Benefits** |
| Service cost                                       | $184                 | $10                               | $228                 | $12                               | $195                 | $13                               |
| Interest cost                                      | 226                  | 47                                | 217                  | 61                                | 220                  | 66                                |
| Expected return on plan assets                     | (291

)        | (1

)                       | (292

)        | (2

)                       | (243

)        | (2

)                       |
| Amortization of unrecognized actuarial (gain) loss | 118                  | (52

)                      | 130                  | (32

)                      | 128                  | (33

)                      |
| Amortization of prior service credits              | —                    | (73

)                      | —                    | (37

)                      | —                    | (37

)                      |
| Other                                              | 5                    | —                                 | 1                    | —                                 | 5                    | —                                 |
| Net periodic benefit cost (credit)                 | $242                 | $

(69

)             | $284                 | $2                                | $305                 | $7                                |

Service cost is recorded in Salaries and related costs on the statement of consolidated operations\. All other components of net periodic benefit costs are recorded in Miscellaneous, net on the statement of consolidated operations\.

The assumptions used for the benefit plans were as follows:

|                                                       |                      |                      |
| ----------------------------------------------------- | -------------------- | -------------------- |
|                                                       | **Pension Benefits** | **Pension Benefits** |
| **Assumptions used to determine benefit obligations** | **2019**             | **2018**             |
| Discount rate                                         | 3\.52%               | 4\.20%               |
| Rate of compensation increase                         | 3\.89%               | 3\.89%               |
| **Assumptions used to determine net expense**         |                      |                      |
| Discount rate                                         | 4\.21%               | 3\.65%               |
| Expected return on plan assets                        | 7\.40%               | 7\.31%               |
| Rate of compensation increase                         | 3\.89%               | 3\.89%               |

A 50 basis points decrease in the weighted average discount rate would have increased the Company's  December 31, 2019  pension benefit liability by approximately   $0\.7 billion  and increased the estimated  2019  pension benefit expense by approximately   $69 million \.

|                                                                                |                                   |                                   |
| ------------------------------------------------------------------------------------- | --------------------------------- | --------------------------------- |
|                                                                                | **Other Postretirement Benefits** | **Other Postretirement Benefits** |
| **Assumptions used to determine benefit obligations**                                 | **2019**                          | **2018**                          |
| Discount rate                                                                         | 3\.35%                            | 4\.30%                            |
| **Assumptions used to determine net expense**                                         |                                   |                                   |
| Discount rate                                                                         | 4\.30%                            | 3\.63%                            |
| Expected return on plan assets                                                        | 3\.00%                            | 3\.00%                            |
| Health care cost trend rate assumed for next year                                     | 6\.00%                            | 6\.00%                            |
| Rate to which the cost trend rate is assumed to decline (ultimate trend rate in 2033) | 5\.00%                            | 5\.00%                            |

A 50 basis points decrease in the weighted average discount rate would have increased the Company's  December 31, 2019  postretirement benefit liability by approximately   $42 million  and increased the estimated  2019  benefits expense by approximately   $4 million \.

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