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

*Income Taxes*

In 2017 and 2016, we recorded an income tax provision of $2\.1 billion and $1\.6 billion, respectively, which was substantially non\-cash\. Substantially all of our income before income taxes was attributable to the United States\.

In 2017, we recorded a special, non\-cash income tax charge of $823 million to reflect the impact of lower corporate income tax rates on our deferred tax asset and liabilities due to the 2017 Tax Act, which reduced the federal corporate income tax rate from 35% to 21%\.

See Note 7 to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information on income taxes\.

**American’s Results of Operations**

***Results of Operations –*** ***2018*** ***Compared to*** ***2017***

American realized pre\-tax income of $2\.2 billion and net income of $1\.7 billion in 2018\. This compares to 2017 pre\-tax income of $3\.6 billion and net income of $1\.3 billion\.

The year\-over\-year decline in American’s pre\-tax income was principally driven by an increase in fuel costs, which was offset in part by higher revenues driven by strong demand\.

*Operating Revenues*

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

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

**Increase**

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

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

**Increase**

**(Decrease)** |
|                          | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Passenger                | $40,676                                      | $39,131                                      | $1,545                                       | 3\.9                                                  |
| Cargo                    | 1,013                                        | 890                                          | 123                                          | 13\.8                                                 |
| Other                    | 2,841                                        | 2,589                                        | 252                                          | 9\.7                                                  |
| Total operating revenues | $44,530                                      | $42,610                                      | $1,920                                       | 4\.5                                                  |

Passenger revenue increased $1\.5 billion, or 3\.9%, in 2018 from 2017 due to a year\-over\-year increase in RPMs and yields driven by continued strong demand\. Domestic and international yields increased, led by an increase in yield in the Atlantic market\.

Cargo revenue increased $123 million, or 13\.8%, from 2017 driven primarily by increases in domestic and international freight yields and international freight volume\.

Other revenue increased $252 million, or 9\.7%, in 2018 from 2017 primarily driven by higher revenue associated with American’s loyalty program\. In 2018 and 2017, loyalty revenue included in other revenue was $2\.4 billion and $2\.1 billion, respectively\.

Total operating revenues in 2018increased $1\.9 billion, or 4\.5%, from 2017 driven principally by a 3\.9% increase in passenger revenue as described above\.

59


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

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

The table below presents selected passenger revenue and operating data of the Company, broken out by geographic region, expressed as year\-over\-year changes:

|                                 |                                        |                                        |                                        |                                        |                                        |                                        |                                        |
|:------------------------------- | --------------------------------------:| --------------------------------------:| --------------------------------------:| --------------------------------------:| --------------------------------------:| --------------------------------------:| --------------------------------------:|
|                                 | **Increase (decrease) from 2016 (a):** | **Increase (decrease) from 2016 (a):** | **Increase (decrease) from 2016 (a):** | **Increase (decrease) from 2016 (a):** | **Increase (decrease) from 2016 (a):** | **Increase (decrease) from 2016 (a):** | **Increase (decrease) from 2016 (a):** |
|                                 |                          **Domestic**  |                          **Atlantic**  |                           **Pacific**  |                             **Latin**  |           **Total
Consolidated**  |                          **Mainline**  |                          **Regional**  |
| Passenger revenue (in millions) |                                  $809  |                                  $103  |                                $(128)  |                                  $163  |                                  $947  |                                $1,138  |                                $(191)  |
| Passenger revenue               |                                 4\.2 % |                                  1\.9% |                                (3\.1)% |                                  5\.8% |                                 3\.0 % |                                 4\.5 % |                                (3\.2)% |
| Average fare per passenger      |                                 0\.1 % |                                  1\.4% |                                    — % |                                  4\.1% |                                (0\.4)% |                                (2\.3)% |                                 2\.0 % |
| Yield                           |                                (0\.4)% |                                  0\.9% |                                (2\.2)% |                                  4\.1% |                                 0\.1 % |                                 0\.6 % |                                 2\.4 % |
| PRASM                           |                                (0\.6)% |                                  1\.5% |                                (5\.8)% |                                  3\.3% |                                (0\.4)% |                                 0\.1 % |                                 0\.6 % |
| Passengers                      |                                 4\.2 % |                                  0\.5% |                                (3\.1)% |                                  1\.7% |                                 3\.4 % |                                 6\.9 % |                                (5\.0)% |
| RPMs (traffic)                  |                                 4\.7 % |                                  0\.9% |                                (0\.9)% |                                  1\.6% |                                 2\.8 % |                                 3\.9 % |                                (5\.4)% |
| ASMs (capacity)                 |                                 4\.9 % |                                  0\.4% |                                 2\.9 % |                                  2\.4% |                                 3\.5 % |                                 4\.4 % |                                (3\.8)% |
| Passenger load factor (points)  |                                (0\.2)  |                                  0\.4  |                                (3\.0)  |                                (0\.7)  |                                (0\.5)  |                                (0\.4)  |                                (1\.5)  |

(a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\.

Consolidated passenger revenue increased $0\.9 billion, or 3\.0%, in 2017 as compared to 2016 primarily due to a 2\.8% increase in traffic\. Consolidated PRASM decreased 0\.4% in 2017 as compared to 2016\. The decline in PRASM was driven by factors including more aggressive low\-cost carrier pricing in our hub markets, temporary share loss during roll\-out of our Basic Economy pricing, and softer demand in China and Guam\. Our revenue in 2017 was negatively impacted by severe storms during the third quarter\.

Cargo revenue increased $159 million, or 18\.2%, in 2017 as compared to 2016 due to higher year\-over\-year international freight volume and yield\.

***Operating Expense***

The table below includes data related to the Company’s operating expense for the years ended December 31 (in millions, except percentage changes):

|                                                    |           |           |                              |              |
|:-------------------------------------------------- | ---------:| ---------:| ----------------------------:| ------------:|
|                                                    |  **2017** |  **2016** | **Increase
(Decrease)** | **% Change** |
| Salaries and related costs                         |  $11,045  |  $10,275  |                        $770  |        7\.5  |
| Aircraft fuel                                      |    6,913  |    5,813  |                       1,100  |       18\.9  |
| Landing fees and other rent                        |    2,240  |    2,165  |                          75  |        3\.5  |
| Regional capacity purchase                         |    2,232  |    2,197  |                          35  |        1\.6  |
| Depreciation and amortization                      |    2,149  |    1,977  |                         172  |        8\.7  |
| Aircraft maintenance materials and outside repairs |    1,856  |    1,749  |                         107  |        6\.1  |
| Distribution expenses                              |    1,349  |    1,303  |                          46  |        3\.5  |
| Aircraft rent                                      |      621  |      680  |                         (59) |       (8\.7) |
| Special charges                                    |      176  |      638  |                        (462) |          NM  |
| Other operating expenses                           |    5,657  |    5,421  |                         236  |        4\.4  |
| Total operating expenses                           |  $34,238  |  $32,218  |                      $2,020  |        6\.3  |

Salaries and related costs increased $770 million, or 7\.5%, in 2017 as compared to 2016 primarily due to higher pay rates and benefit expenses driven by collective bargaining agreements finalized in 2016, and a 2\.5% increase

30


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

Company recognized an expense of $1 million, $1 million, and $2 million for interest and penalties, net of federal income tax benefit\. At December 31, 2019, the Company has unrecognized tax benefits recorded as a liability and some reducing deferred tax assets\. The Company's reserves for uncertain tax positions is unchanged in 2019 after statute lapses on reserves and current year activity\. These uncertain tax positions could change as a result of the Company's ongoing audits, settlement of issues, new audits and status of other taxpayer court cases\. The Company cannot predict the timing of these actions\. Due to the positions being taken in various jurisdictions, the amounts currently accrued are the Company's best estimate as of December 31, 2019\.

NOTE 8\. EMPLOYEE BENEFIT PLANS

Four qualified defined\-benefit plans, one non\-qualified defined\-benefit plan, and seven defined\-contribution retirement plans cover various employee groups of Alaska, Horizon and McGee Air Services\.

The defined\-benefit plans provide benefits based on an employee’s term of service and average compensation for a specified period of time before retirement\. The qualified defined\-benefit pension plans are closed to new entrants\.

Accounting standards require recognition of the overfunded or underfunded status of an entity’s defined\-benefit pension and other postretirement plan as an asset or liability in the consolidated financial statements and requires recognition of the funded status in AOCL\.

Qualified Defined\-Benefit Pension Plans

The Company’s four qualified defined\-benefit pension plans are funded as required by the Employee Retirement Income Security Act of 1974\. The defined\-benefit plan assets consist primarily of marketable equity and fixed\-income securities\. The work groups covered by qualified defined\-benefit pension plans include salaried employees, pilots, clerical, office, passenger service employees, mechanics and related craft employees\. The Company uses a December 31 measurement date for these plans\. All plans are closed to new entrants\.

Weighted average assumptions used to determine benefit obligations:

The rates below vary by plan and related work group\.

|                                |                                |                                |                   |                   |  |  |  |                   |                   |
|:------------------------------ |:------------------------------ |:------------------------------ |:-----------------:|:-----------------:|:- |:- |:- |:-----------------:|:-----------------:|
|                                |                                |                                |       2019        |       2019        |  |  |  |       2018        |       2018        |
| Discount rates                 | Discount rates                 | Discount rates                 | 3\.33% to 3\.47%  | 3\.33% to 3\.47%  |  |  |  | 4\.37% to 4\.46%  | 4\.37% to 4\.46%  |
| Rate of compensation increases | Rate of compensation increases | Rate of compensation increases | 2\.11% to 5\.44%  | 2\.11% to 5\.44%  |  |  |  | 2\.11% to 3\.50%  | 2\.11% to 3\.50%  |

Weighted average assumptions used to determine net periodic benefit cost:

The rates below vary by plan and related work group\.

|                                     |                                     |                                     |                   |                   |  |  |  |                    |                    |  |  |  |                   |                   |
|:----------------------------------- |:----------------------------------- |:----------------------------------- |:-----------------:|:-----------------:|:- |:- |:- |:------------------:|:------------------:|:- |:- |:- |:-----------------:|:-----------------:|
|                                     |                                     |                                     |       2019        |       2019        |  |  |  |        2018        |        2018        |  |  |  |       2017        |       2017        |
| Discount rates                      | Discount rates                      | Discount rates                      | 4\.37% to 4\.46%  | 4\.37% to 4\.46%  |  |  |  | 3\.69% to 3\.78%   | 3\.69% to 3\.78%   |  |  |  | 4\.29% to 4\.50%  | 4\.29% to 4\.50%  |
| Expected return on plan assets      | Expected return on plan assets      | Expected return on plan assets      | 4\.25% to 5\.50%  | 4\.25% to 5\.50%  |  |  |  | 4\.25% to 5\.50%   | 4\.25% to 5\.50%   |  |  |  | 5\.50% to 6\.00%  | 5\.50% to 6\.00%  |
| Rate of compensation increases^(a)^ | Rate of compensation increases^(a)^ | Rate of compensation increases^(a)^ | 2\.11% to 3\.50%  | 2\.11% to 3\.50%  |  |  |  | 2\.11% to 16\.51%  | 2\.11% to 16\.51%  |  |  |  | 2\.12% to 2\.59%  | 2\.12% to 2\.59%  |

(a) Significant rate of compensation increase in 2018 is due to the new contract with our Mainline pilots, which was executed at the end of 2017\.

The discount rates are determined using current interest rates earned on high\-quality, long\-term bonds with maturities that correspond with the estimated cash distributions from the pension plans\. At December 31, 2019, the Company selected discount rates for each of the plans using a pool of higher\-yielding bonds estimated to be more reflective of settlement rates, as management has taken steps to ultimately terminate or settle plans that are frozen and move toward freezing benefits in active plans in the future\. In determining the expected return on plan assets, the Company assesses the current level of expected returns on risk\-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class\. The expected return for each asset class is then weighted based on the target asset allocation to develop the expected long\-term rate of return on assets assumption for the portfolio\.

73


Annual Report of Southwest Airlines Co\. for year 2017

environmental regulatory developments in this area will have a material effect on the Company's capital expenditures or otherwise materially adversely affect its operations, operating costs, or competitive position\.

The federal government, as well as several state and local governments, the governments of other countries, and the United Nations’ International Civil Aviation Organization ("ICAO") are considering legislative and regulatory proposals and voluntary measures to address climate change by reducing green\-house gas emissions\. At the federal level, in July 2016, the Environmental Protection Agency (the "EPA") issued a final endangerment finding for greenhouse gas emissions from certain types of aircraft engines, which the agency determined contribute to the pollution that causes climate change and endangers public health and the environment\. Following this endangerment finding, per the federal Clean Air Act, the EPA is required to promulgate new regulations for controlling greenhouse gas emissions from aircraft, including potential new carbon\-efficiency standards on aircraft and engine manufacturers\.

The EPA's endangerment finding preceded adoption by the ICAO Assembly of a new "global market\-based measure" framework in an effort to control carbon dioxide emissions from international aviation\. The focal point of this framework is a future carbon offsetting system on aircraft operators designed to cap the growth of emissions related to international aviation emissions\. Details of this system are expected to be further developed in 2018 and, assuming the U\.S\. Government remains committed to the ICAO framework agreement and adopts terms for implementing it into U\.S\. law, this system is scheduled to be phased\-in beginning in 2021\. Regardless of the method of regulation, policy changes with regard to climate change are possible, which could significantly increase operating costs in the airline industry and, as a result, adversely affect operations\.

In addition to climate change, aircraft noise continues to be an environmental focus, especially as the FAA implements new flight procedures as part of its NextGen airspace modernization program discussed above\. The Airport Noise and Capacity Act of 1990 gives airport operators the right, under certain circumstances, to implement local noise abatement programs, provided they do not unreasonably interfere with interstate or foreign commerce or the national air transportation system\. Some airports have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of operations\. These types of restrictions can cause curtailments in service or increases in operating costs and can limit the ability of air carriers to expand operations at the affected airports\.

At the federal level, the FAA is considering changes to enhance community engagement when developing new flight procedures, and there is a possibility that Congress may enact legislation in 2018 to address local noise concerns at one or more commercial airports in the United States, via either the FAA reauthorization or annual appropriations process\. In 2017, the FAA published a final rule adopting the ICAO noise standard for future new type design aircraft submitted for certification after December 31, 2017, for large aircraft\. This standard does not affect the Company's in\-service fleet, nor does it require that manufacturers who produce existing types, such as the Boeing 737, meet the standard as they continue to produce those types in the future\.

The Company remains steadfast in its desire to pursue, implement, and enhance initiatives that will reduce fuel consumption and improve fuel efficiency\. During 2017, the Company benefited from the introduction of the Boeing 737 MAX 8 aircraft to the Company's fleet and the retirement of the Company's Classic aircraft\. In addition, over the years, the Company has undertaken a number of other fuel conservation and carbon emission reduction initiatives such as the following:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------- |
| • | installation of blended winglets, which reduce drag and increase fuel efficiency, on all aircraft in the Company's fleet; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------- |
| • | upgrading of the Company's 737\-800 fleet with newly designed, split scimitar winglets;  |

|   |                         |
| - | ----------------------- |
| • | periodic engine washes; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------- |
| • | use of electric ground power for aircraft air and power at the gate and for ground support equipment at select locations; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------- |
| • | deployment of auto\-throttle and vertical navigation to maintain optimum cruising speeds; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------- |
| • | implementation of engine start procedures to support the Company's single engine taxi procedures; |

15


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

Certain of our international route authorities are subject to periodic renewal requirements\. We request extension of these authorities when and as appropriate\. While the DOT usually renews temporary authorities on routes where the authorized carrier is providing a reasonable level of service, there is no assurance this practice will continue in general or with respect to a specific renewal\. Dormant route authorities may not be renewed in some cases, especially where another U\.S\. carrier indicates a willingness to provide service\.

Airport Access

Operations at three major domestic airports and certain foreign airports served by us are regulated by governmental entities through allocations of "slots" or similar regulatory mechanisms\. Each slot represents the authorization to land at or take off from the particular airport during a specified time period\.

In the U\.S\., the FAA currently regulates the allocation of slots, slot exemptions, operating authorizations, or similar capacity allocation mechanisms at Reagan National in Washington, D\.C\. and LaGuardia and JFK in the New York City area\. Our operations at these airports generally require the allocation of slots or analogous regulatory authorizations\. Similarly, our operations at Tokyo's Narita and Haneda airports, London's Heathrow airport and other international airports are regulated by local slot coordinators pursuant to the International Air Transport Association's Worldwide Scheduling Guidelines and applicable local law\. We currently have sufficient slots or analogous authorizations to operate our existing flights, and we have generally been able to obtain the rights to expand our operations and to change our schedules\. There is no assurance, however, that we will be able to do so in the future because, among other reasons, such allocations are subject to changes in governmental policies\.

Environmental Matters

Our operations are subject to a number of international, federal, state and local laws and regulations governing protection of the environment, including regulation of greenhouse gases and other air emissions, noise reduction, water discharges, aircraft drinking water, storage and use of petroleum and other regulated substances, and the management and disposal of hazardous waste, substances and materials\.

Emissions \. Carbon emissions by the aviation industry and their impact on climate change have become a particular focus in the international community and within the U\.S\. For several years, the European Union has required its member states to implement regulations to include aviation in its Emissions Trading Scheme ("ETS")\. Under these regulations, any airline with flights originating or landing in the European Union is subject to the ETS and, beginning in 2012, was required to purchase emissions allowances if the airline exceeds the number of free allowances allocated to it under the ETS\. The ETS was amended to apply only to flights within the European Economic Area from 2013 through 2016\. In 2017, the EU extended the exemption for foreign flights through 2023 based on the International Civil Aviation Organization’s ("ICAO") adoption of a global market\-based program\.

In 2016, ICAO formally adopted a global, market\-based emissions offset program known as the Carbon Offsetting and Reduction Scheme for International Aviation ("CORSIA")\. This program is designed toward a medium\-term goal for the aviation industry of achieving carbon\-neutral growth in international aviation beginning in 2020\. A pilot phase of the offset program will begin in 2021, followed by a first phase of the program beginning in 2024 and a second phase beginning in 2027\. Countries can voluntarily participate in the pilot and first phase, but participation in the second phase is mandatory\. We plan to submit our CORSIA Emissions Monitoring Plan to the FAA in 2019 and begin emissions monitoring for the 2019 baseline year\. In 2017, ICAO also adopted new aircraft certification standards to reduce carbon dioxide (CO ~2~ ) emissions from aircraft\. The new aircraft certification standards will apply to new aircraft types in 2020 and to new in\-production aircraft starting in 2023 but no later than 2028\. These standards will not apply to existing in\-service aircraft\. However, exemption from the certification requirement could affect how these aircraft are treated under other programs governing CO ~2~  emissions\.

In 2016, the U\.S\. Environmental Protection Agency ("EPA") issued a final finding under the Clean Air Act that greenhouse gases threaten the public health and welfare, and further determined that aircraft cause or contribute to greenhouse gases\. The endangerment finding does not establish standards, but triggers an obligation for the EPA to regulate greenhouse gas emissions from aircraft\. The EPA has historically implemented air emissions control standards adopted by ICAO; therefore, the ICAO aircraft engine certification standards are expected to influence the development of any future EPA greenhouse gas emission standards for aircraft\.

 8


Annual Report of Southwest Airlines Co\. for year 2018

On July 9, 2012, the Company signed an agreement with Delta Air Lines, Inc\. and Boeing Capital Corp\. to lease or sublease all 88 of AirTran Airways' B717s to Delta at agreed\-upon lease rates\. Three operating leases expired during 2018, and, as of December 31, 2018, the following remained: 73 operating leases, ten owned, and two capital leases\. The sublease terms for the 73 B717s on operating lease and the two B717s on capital lease coincide with the Company's remaining lease terms for these aircraft from the original lessor, which range from approximately one to six years\. The leasing of the ten B717s that are owned by the Company is subject to certain conditions, and the remaining lease terms are up to four years, after which Delta will have the option to purchase the aircraft at the then\-prevailing market value\. The ten owned B717s are accounted for as sales type leases, the two B717s classified by the Company as capital leases are accounted for as direct financing leases, and the remaining 73 subleases are accounted for as operating leases with Delta\. There are no contingent payments and no significant residual value conditions associated with the transaction\.

During 2017, the Company retired its remaining 87 Classic aircraft, which included 61 Classic aircraft grounded in September 2017 as part of an accelerated retirement schedule\. The Company recorded a charge of $63 million, within Other operating expenses in the accompanying Consolidated Statement of Income, related to the leased portion of the Classic fleet, representing the remaining net lease payments due and certain lease return requirements that could have to be performed on these leased aircraft prior to their return to the lessors, as of the cease\-use date\. As of December 31, 2018, the remaining amounts associated with the cease\-use liability have been paid in full\.

**8****\. COMMON STOCK**

The Company has one class of capital stock, its common stock\. Holders of shares of common stock are entitled to receive dividends when and if declared by the Board of Directors and are entitled to one vote per share on all matters submitted to a vote of the Shareholders\. At December 31, 2018, the Company had 60 million shares of common stock reserved for issuance pursuant to Employee equity plans (of which 29 million shares had not been granted) through various share\-based compensation arrangements\. See Note 9 to the Consolidated Financial Statements for information regarding the Company's equity plans\.

**9****\. STOCK PLANS**

***Share\-based Compensation***

The Company accounts for share\-based compensation utilizing fair value, which is determined on the date of grant for all instruments\. The Consolidated Statement of Income for the years ended December 31, 2018, 2017, and 2016, reflects share\-based compensation expense of $46 million, $37 million, and $33 million, respectively\. The total tax benefit recognized in earnings from share\-based compensation arrangements for the years ended December 31, 2018, 2017, and 2016, was not material\. As of December 31, 2018, there was $51 million of total unrecognized compensation cost related to share\-based compensation arrangements, which is expected to be recognized over a weighted\-average period of 1\.9 years\. The Company expects substantially all unvested awards to vest\.

***Restricted Stock Units and Stock Grants***

Under the Company’s Amended and Restated 2007 Equity Incentive Plan ("2007 Equity Plan"), which has been approved by Shareholders, the Company granted restricted stock units ("RSUs") and performance\-based restricted stock units ("PBRSUs") to certain Employees during 2018, 2017, and 2016\. Outstanding RSUs vest over three years, subject generally to the individual’s continued employment or service\. The PBRSUs granted in January 2016 and February 2017 are subject to the Company’s performance with respect to a three\-year simple average of Return on Invested Capital, before taxes and excluding special items, for the defined performance period and the individual’s continued employment or service\. The PBRSUs granted in January 2018 are subject to the Company’s performance with respect to a three\-year simple average of Return on Invested Capital, after taxes and excluding special items, for the defined performance period and the individual’s continued employment or service\. The number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Return on Invested Capital performance and ranges from zero PBRSUs to 200 percent of granted PBRSUs\. Forfeiture rates are estimated at the time of grant based on

95


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

Results of Operations \-  2017  Compared to  2016

Operating Revenue

|                                               |                             |                             |                         |                           |
| --------------------------------------------- | --------------------------- | --------------------------- | ----------------------- | ------------------------- |
|                                               | **Year Ended December 31,** | **Year Ended December 31,** | **Increase (Decrease)** | **% Increase (Decrease)** |
| **(in millions)**                             | **2017**                    | **2016**                    | **Increase (Decrease)** | **% Increase (Decrease)** |
| Ticket \- Main cabin                          | $20,380                     | $20,489                     | $(109)                  | (0\.5)%                   |
| Ticket \- Business cabin and premium products | 12,087                      | 11,045                      | 1,042                   | 9\.4 %                    |
| Loyalty travel awards                         | 2,403                       | 2,234                       | 169                     | 7\.6 %                    |
| Travel\-related services                      | 2,077                       | 2,046                       | 31                      | 1\.5 %                    |
| Total passenger revenue                       | $36,947                     | $35,814                     | $1,133                  | 3\.2 %                    |
| Cargo                                         | 744                         | 684                         | 60                      | 8\.8 %                    |
| Other                                         | 3,447                       | 2,952                       | 495                     | 16\.8 %                   |
| Total operating revenue                       | $41,138                     | $39,450                     | $1,688                  | 4\.3 %                    |
| TRASM (cents)                                 | 16\.18¢                     | 15\.66¢                     | 0\.52¢                  | 3\.3 %                    |
| Third\-party refinery sales ^(1)^             | (0\.20)                     | (0\.09)                     | (0\.11)                 | NM                        |
| TRASM, adjusted (cents)                       | 15\.98¢                     | 15\.57¢                     | 0\.41¢                  | 2\.6 %                    |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | For additional information on adjusting for third\-party refinery sales, see "Supplemental Information" below\. |

Passenger Revenue

Ticket and Loyalty Travel Awards Revenue

Ticket, including both main cabin and business cabin and premium products, and loyalty travel awards revenue increased  $933 million  and  $169 million , respectively, compared to the year ended  December 31, 2016 , consistent with the discussion of passenger revenue by geographic region, below\. Business cabin and premium products ticket revenue includes revenues from fare products other than main cabin, including Delta One, Delta Premium Select, First Class and Comfort\+\. The growth in this ticket revenue primarily results from the continued expansion of our branded fare products and strength in business demand\.

Passenger Revenue by Geographic Region

|                         |                                  |                                                                      |                                                                      |                                                                      |                                                                      |                                                                      |                                                                      |                                                                      |
| ----------------------- | -------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- |
|                         |                                  | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** | **Increase (Decrease)**

**vs\. Year Ended December 31, 2016** |
| **(in millions)**       | **Year Ended December 31, 2017** | **Passenger Revenue**                                                | **RPMs**  **(Traffic)**                                              | **ASMs (Capacity)**                                                  | **Passenger Mile Yield**                                             | **PRASM**                                                            | **Load Factor**                                                      | **Load Factor**                                                      |
| Domestic                | $26,079                          | 4\.3 %                                                               | 3\.2 %                                                               | 2\.7 %                                                               | 1\.1 %                                                               | 1\.6 %                                                               | 0\.4                                                                 | pts                                                                  |
| Atlantic                | 5,537                            | 2\.2 %                                                               | 4\.8 %                                                               | 0\.3 %                                                               | (2\.5)%                                                              | 1\.8 %                                                               | 3\.6                                                                 | pts                                                                  |
| Latin America           | 2,862                            | 6\.6 %                                                               | 3\.1 %                                                               | 1\.0 %                                                               | 3\.3 %                                                               | 5\.5 %                                                               | 1\.8                                                                 | pts                                                                  |
| Pacific                 | 2,469                            | (8\.8)%                                                              | (9\.0)%                                                              | (7\.7)%                                                              | 0\.2 %                                                               | (1\.2)%                                                              | (1\.2)                                                               | pts                                                                  |
| Total passenger revenue | $36,947                          | 3\.2 %                                                               | 2\.2 %                                                               | 1\.0 %                                                               | 1\.0 %                                                               | 2\.2 %                                                               | 1\.0                                                                 | pt                                                                   |

Passenger revenue  increased  $1\.1 billion  over the prior year\. PRASM  increased  2\.2%  and passenger mile yield  increased  1\.0%  on  1\.0%  higher  capacity\. Load factor was  1 point  higher  than the prior year at  85\.6% \.

Unit revenues of the domestic region  increased  1\.6% , resulting from our commercial initiatives, including branded fares, and an improving revenue environment\. We continued to differentiate our product offerings and enable customer choice through segmentation, including offering Basic Economy throughout our domestic network\. Our domestic operations closed 2017 with three consecutive quarters of year\-over\-year unit revenue growth, with robust demand for both business and leisure\. We saw improvements in business markets with 81 of the top 100 business markets producing positive yields during the December 2017 quarter, up from 50% earlier in the year\.

 32


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

**GROUND FACILITIES AND SERVICES**

We own terminal buildings in various cities in the state of Alaska and several buildings located at or near Seattle\-Tacoma International Airport (Sea\-Tac) near Seattle, WA\. These include a multi\-bay hangar and shops complex (used primarily for line maintenance), a flight operations and training center, an air cargo facility, an information technology office and data center, and various other commercial office buildings\. Additionally, in 2017 we entered into a contract to acquire property near our existing headquarters facility for the development of additional office space\.

We lease ticket counters, gates, cargo and baggage space, ground equipment, office space and other support areas at the majority of the airports we serve\. Airport leases contain provisions for periodic adjustments of lease rates\. We are typically responsible for maintenance, insurance and other facility\-related expenses and services under these agreements\. We also lease operations, training, administrative, and data center facilities in Burlingame, CA; Portland, OR; Quincy, WA; and Spokane, WA as well as line maintenance stations in Boise, ID; Bellingham, WA; Eugene, OR; San Jose, CA; Medford, OR; Redmond, OR; Seattle, WA; Kent, WA; and Spokane, WA\. Further, we lease call center facilities in Phoenix, AZ, and Boise, ID\.

|                                |
| ------------------------------ |
| **ITEM 3\. LEGAL PROCEEDINGS** |

We are a party to routine litigation matters incidental to our business\. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations\. This forward\-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries\.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws\. Plaintiffs received class certification in November 2016\. Virgin America filed a motion for summary judgment seeking to dismiss all claims on various federal preemption grounds\. In January 2017, the Court denied in part and granted in part Virgin America’s motion\. The Company believes the claims in this case are without factual and legal merit and intends to defend this lawsuit\.

|                                      |
| ------------------------------------ |
| **ITEM 4\. MINE SAFETY DISCLOSURES** |

Not applicable\.

**PART II**

|                                                                                |
| ------------------------------------------------------------------------------------------------------------------------------ |
| **ITEM 5\. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES** |

As of December 31, 2017, there were 129,903,498 shares of common stock of Alaska Air Group, Inc\. issued, 123,060,638 shares outstanding, and 2,044 shareholders of record\. In 2017, we paid quarterly dividends of $0\.300 per share in March, June, September and December\. Our common stock is listed on the New York Stock Exchange (symbol: ALK)\. The following table shows the trading range of Alaska Air Group, Inc\. common stock on the New York Stock Exchange:

|                |              |             |          |          |
| -------------- | ------------ | ----------- | -------- | -------- |
|                | **2017**     | **2017**    | **2016** | **2016** |
|                | **High**     | **Low**     | **High** | **Low**  |
| First Quarter  | **$101\.43** | **$86\.22** | $83\.05  | $61\.58  |
| Second Quarter | **93\.16**   | **82\.03**  | 83\.09   | 54\.53   |
| Third Quarter  | **95\.75**   | **71\.17**  | 71\.57   | 56\.47   |
| Fourth Quarter | **82\.68**   | **61\.10**  | 91\.88   | 65\.60   |

**SALES OF NON\-REGISTERED SECURITIES**

None\.

 28


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

Non\-Operating Results

|                                   |                                   |                                   |                         |                         |  |  |  |                 |                         |                         |                         |
|:--------------------------------- |:--------------------------------- |:--------------------------------- | -----------------------:| -----------------------:|:- |:- |:- | ---------------:|:-----------------------:|:-----------------------:|:-----------------------:|
|                                   |                                   |                                   | Year Ended December 31, | Year Ended December 31, |  |  |  |                 | Favorable (Unfavorable) | Favorable (Unfavorable) | Favorable (Unfavorable) |
| (in millions)                     | (in millions)                     | (in millions)                     |                    2019 |                    2018 |  |  |  |  2019 vs\. 2018 |
| Interest expense, net             | Interest expense, net             | Interest expense, net             |                  $(301) |                  $(311) |  |  |  |            $10  |
| Gain/(loss) on investments, net   | Gain/(loss) on investments, net   | Gain/(loss) on investments, net   |                    119  |                     38  |  |  |  |             81  |
| Miscellaneous, net                | Miscellaneous, net                | Miscellaneous, net                |                   (238) |                    160  |  |  |  |           (398) |
| Total non\-operating expense, net | Total non\-operating expense, net | Total non\-operating expense, net |                  $(420) |                  $(113) |  |  |  |          $(307) |

Interest Expense\.  At December 31, 2018, the principal amount of debt and finance leases was $9\.7 billion\. During 2019, we issued $1\.5 billion of unsecured notes and $500 million of aircraft secured EETC debt\. As a result of the debt issuances, partially offset by principal payments, the amount of debt and finance leases was $11\.0 billion at December 31, 2019\. Despite the increase in debt during the current year, interest expense decreased $10 million compared to the prior year due to recent refinancing transactions at lower interest rates resulting from our improvement to investment grade credit rating in recent years and the favorable interest rate environment\.

Gain/(Loss) on Investments\.  Gain/(loss) on investments reflects the gains and losses on our equity investments\. The increase compared to 2018 primarily results from unrealized gains in Hanjin\-KAL and Air France\-KLM\.

Miscellaneous\.  Miscellaneous, net is primarily composed of pension and related expense, our proportionate share of earnings from our equity investments in Virgin Atlantic and Grupo Aeroméxico, charitable contributions and foreign exchange gains/(losses)\.

The change from 2019 compared to 2018 primarily results from the unfavorable movement in pension and related expense and the sale of our DGS entity in 2018\. The pension and related expense was $65 million in 2019 compared to a benefit of $245 million in 2018\. In 2018, the sale of our DGS entity to a subsidiary of Argenbright Holdings, LLC resulted in a gain of $91 million\.

Our equity investment earnings and foreign exchange gains/(losses) fluctuate and thus impact the comparability of miscellaneous from period to period\.

Income Taxes

Our effective tax rate for 2019 was 23\.1%\. We expect our annual effective tax rate to be between 23% and 24% for 2020\. At December 31, 2019, we had approximately $1\.9 billion of U\.S\. federal pre\-tax net operating loss carryforwards, which do not begin to expire until 2027\. We believe we will utilize the majority of our remaining federal net operating losses and tax credits during 2020\.

For more information about our income taxes, see Note 12 of the Notes to the Consolidated Financial Statements\.

35


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

ITEM 9B\. OTHER INFORMATION

None\.

PART III

ITEM 10\. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE  REGISTRANT

Information required by this item is set forth under the headings "Governance Matters," "Proposal 1 \- Election of Directors" and "Section 16 Beneficial Ownership Reporting Compliance" in our Proxy Statement to be filed with the Commission related to our 2019 Annual Meeting of Stockholders ("Proxy Statement"), and is incorporated by reference\. Pursuant to instruction 3 to paragraph (b) of Item 401 of Regulation S\-K, certain information regarding executive officers is contained in Part I of this Form 10\-K\.

ITEM 11\. EXECUTIVE COMPENSATION

Information required by this item is set forth under the headings "Compensation Committee Interlocks and Insider Participation," "Executive Compensation" and "Director Compensation" in our Proxy Statement and is incorporated by reference\.

ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about the number of shares of common stock that may be issued under Delta's equity compensation plans as of  December 31, 2018 \.

|                                                              |                                                                                |                                                                                |                                                                                |
| ------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Plan Category**                                            | **(a) No\. of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights** **^(1)^** | **(b) Weighted\-Average Exercise Price of Outstanding Options, Warrants and Rights** **^(2)^** | **(c) No\. of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))** **^(3)^** |
| Equity compensation plans approved by securities holders     | 4,085,690                                                                                | $29\.45                                                                                | 27,412,528                                                                                |
| Equity compensation plans not approved by securities holders | —                                                                                | —                                                                                | —                                                                                |
| Total                                                        | 4,085,690                                                                                | $29\.45                                                                                | 27,412,528                                                                                |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Includes a maximum of 1,630,020 shares of common stock that may be issued upon the achievement of certain performance conditions under outstanding performance share awards as of  December 31, 2018 \.  |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Includes performance share awards, which do not have exercise prices\. The weighted average exercise price of options is $48\.99\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | Reflects shares remaining available for issuance under Delta's Performance Compensation Plan\. If any shares of our common stock are covered by an award under the Plan that expires, is canceled, forfeited or otherwise terminates without delivery of shares (including shares surrendered or withheld for payment of taxes related to an award), then such shares will again be available for issuance under the Plan except for (i) any shares tendered in payment of an option, (ii) shares withheld to satisfy any tax withholding obligation with respect to the exercise of an option or stock appreciation right ("SAR") or (iii) shares covered by a stock\-settled SAR or other awards that were not issued upon the settlement of the award\. Because 2,399,369 shares of restricted stock remain unvested and subject to forfeiture, these shares could again be available for issuance\. |

Other information required by this item is set forth under the heading "Beneficial Ownership of Securities" in our Proxy Statement and is incorporated by reference\.

ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR  INDEPENDENCE

Information required by this item is set forth under the headings "Governance Matters" and "Proposal 1 \- Election of Directors" in our Proxy Statement and is incorporated by reference\.

 100


Annual Report of Southwest Airlines Co\. for year 2019

The table below presents additional information related to the Company's leases as of  December 31, 2019 :

|                                           |         |
| ----------------------------------------- | ------- |
| **Weighted average remaining lease term** |         |
| Operating leases                          | 9 years |
| Finance leases                            | 8 years |
| **Weighted average discount rate**        |         |
| Operating leases (a)                      | 3\.7%   |
| Finance leases                            | 3\.8%   |

(a) Upon adoption of the New Lease Standard, the incremental borrowing rate used for existing leases was established as of January 1, 2019\.

As of  December 31, 2019 , the Company had additional operating lease commitments that had not yet commenced of approximately   $543 million  for   16  Boeing 737 MAX 8 aircraft contractually to be delivered in 2020, each with lease terms that range from  eight  to   nine years \.

Disclosures related to periods prior to the adoption of the New Lease Standard

As of December 31, 2018, the Company's fleet included   51  aircraft on operating lease and   72  aircraft on capital lease\. Amounts applicable to these aircraft on capital lease that were included in property and equipment were   $1\.3 billion  for flight equipment and   $304 million  in accumulated amortization\.

Total rental expense for operating leases, both aircraft and other, charged to operations in  2018  and  2017  was   $935 million  and   $939 million , respectively\. The majority of the Company’s terminal operations space, as well as   124  aircraft, including   73  B717s subleased to Delta, were under operating leases at December 31, 2018\. For aircraft operating leases and for terminal operating leases and other real estate leases, expense is recorded on a straight–line basis and included in Other operating expenses and in Landing fees and airport rentals, respectively, in the Consolidated Statement of Income\. The majority of the Company’s terminal operations space payments are considered variable, and thus excluded from the Company’s disclosures of future minimum lease payments\. Future minimum lease payments under capital leases and noncancelable operating leases and rentals to be received under subleases with initial or remaining terms in excess of one year at December 31, 2018, were:

|                                             |                               |                                 |                        |                                      |
| ------------------------------------------- | ----------------------------- | ------------------------------- | ---------------------- | ------------------------------------ |
| **(in millions)**                           | **Capital**

**leases** | **Operating**

**leases** | **Subleases**          | **Operating**

**leases, net** |
| 2019                                        | $111                          | $348                            | $

(92

)  | $256                                 |
| 2020                                        | 109                           | 357                             | (78

)           | 279                                  |
| 2021                                        | 105                           | 244                             | (41

)           | 203                                  |
| 2022                                        | 100                           | 172                             | (17

)           | 155                                  |
| 2023                                        | 97                            | 146                             | (7

)            | 139                                  |
| Thereafter                                  | 335                           | 474                             | (1

)            | 473                                  |
| Total minimum lease payments                | $857                          | $1,741                          | $

(236

) | $1,505                               |
| Less amount representing interest           | 126                           |                                 |                        |                                      |
| Present value of minimum lease payments (a) | 731                           |                                 |                        |                                      |
| Less current portion                        | 85                            |                                 |                        |                                      |
| Long\-term portion                          | $646                          |                                 |                        |                                      |

(a) Excludes lease incentive obligation of   $114 million \.

In 2017, the Company recorded a charge of   $63 million , within Other operating expenses in the accompanying Consolidated Statement of Income, related to the leased portion of the Classic fleet, representing the remaining net

89


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

The comprehensive summary of Alaska's alliances with other airlines is as follows:

|                                            |                                                    |                                                                                |                                                                                |
| ------------------------------------------ | -------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- |
|                                            |                                                    | **Codeshare**                                                                     | **Codeshare**                                                                       |
|                                            | **Frequent**

**Flyer**

**Agreement** | **Alaska Flight \# on**

**Flights Operated by**

**Other Airline** | **Other Airline Flight \#**

**on Flights Operated by**

**Air Group** |
| **Major U\.S\. or International Airlines** |                                                    |                                                                                |                                                                                |
| Aer Lingus                                 | Yes                                                | No                                                                                | No                                                                                |
| American Airlines                          | Yes                                                | Yes                                                                               | Yes                                                                                |
| British Airways                            | Yes                                                | No                                                                                | Yes                                                                                |
| Cathay Pacific Airways                     | Yes                                                | No                                                                                | Yes                                                                                |
| Condor Airlines ^(a)^                      | Yes                                                | No                                                                                | No                                                                                |
| Emirates                                   | Yes                                                | No                                                                                | Yes                                                                                |
| Fiji Airways ^(a)^                         | Yes                                                | No                                                                                | Yes                                                                                |
| Finnair                                    | Yes                                                | No                                                                                | Yes                                                                                |
| Hainan Airlines                            | Yes                                                | No                                                                                | No                                                                                |
| Icelandair                                 | Yes                                                | No                                                                                | Yes                                                                                |
| Japan Airlines                             | Yes                                                | No                                                                                | Yes                                                                                |
| Korean Air                                 | Yes                                                | No                                                                                | Yes                                                                                |
| LATAM                                      | Yes                                                | No                                                                                | Yes                                                                                |
| Qantas                                     | Yes                                                | No                                                                                | Yes                                                                                |
| Singapore Airlines                         | Yes                                                | No                                                                                | No                                                                                |
| **Regional Airlines**                      |                                                    |                                                                                |                                                                                |
| Ravn Alaska                                | Yes                                                | Yes                                                                               | No                                                                                |
| PenAir ^(a)^                               | Yes                                                | Yes                                                                               | No                                                                                |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | These airlines do not have their own frequent flyer program\. However, Alaska's Mileage Plan ^TM^  members can earn and redeem miles on these airlines' route systems\. |

**CARGO AND OTHER REVENUE**

The Company provides freight and mail services (cargo)\. The majority of cargo services are provided to commercial businesses and the United States Postal Service\. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination, or is transferred to a third\-party carrier for delivery\.

The Company also earns other revenue for lounge memberships, hotel and car commissions, and certain other immaterial items not intrinsically tied to providing air travel to passengers\. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue\.

**GENERAL**

The airline industry is highly competitive and subject to various uncertainties, including economic conditions, volatile fuel prices, a largely unionized work force, the need to finance large capital expenditures and the related availability of capital, government regulation—including taxes and fees, and potential aircraft incidents\. Airlines have high fixed costs, primarily for wages, aircraft fuel, aircraft ownership and facilities rents\. Because expenses of a flight do not vary significantly based on the number of passengers carried, a relatively small change in the number of passengers or in pricing has a disproportionate effect on an airline’s operating and financial results\. In other words, a minor shortfall in expected revenue levels could cause a disproportionately negative impact to our operating and financial results\. Passenger demand and ticket prices are, in large measure, influenced by the general state of the economy, current global economic and political events, and total available airline seat capacity\.

In 2018, the airline industry's profits declined when compared to 2017, primarily due to rising fuel prices, higher labor costs, and increased competitive fare actions reducing ticket prices\. Despite some of these headwinds, the industry reported profits in 2018\. In the current industry environment, airlines are making significant investments in airports, more fuel\-efficient planes and new services to differentiate their customer service offering\. Thus, the level of competition is expected to continue to increase\.

 10


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

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

Regional Carriers Revenue

Our regional carriers include both our contract carrier agreements with third\-party regional carriers ("contract carriers") and Endeavor Air, Inc\. ("Endeavor"), our wholly owned subsidiary\. Our contract carrier agreements are structured as either (1) capacity purchase agreements where we purchase all or a portion of the contract carrier's capacity and are responsible for selling the seat inventory we purchase or (2) revenue proration agreements, which are based on a fixed dollar or percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries\. We record revenue related to our contract carriers and Endeavor in regional carriers passenger revenue and the related expenses in regional carriers expense\.

Cargo Revenue

Cargo revenue is recognized when we provide the transportation\.

Other Revenue

Other revenue is primarily comprised of (1) loyalty programs, (2) administrative fees, club and on\-board sales, (3) ancillary businesses and refinery and (4) baggage fees\.

Manufacturers' Credits

We periodically receive credits in connection with the acquisition of aircraft and engines\. These credits are deferred until the aircraft and engines are delivered, and then applied as a reduction to the cost of the related equipment\.

Maintenance Costs

We record maintenance costs to aircraft maintenance materials and outside repairs\. Maintenance costs are expensed as incurred, except for costs incurred under power\-by\-the\-hour contracts, which are expensed based on actual hours flown\. Power\-by\-the\-hour contracts transfer certain risk to third\-party service providers and fix the amount we pay per flight hour to the service provider in exchange for maintenance and repairs under a predefined maintenance program\. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining estimated useful life of the asset or the remaining lease term, whichever is shorter\.

Advertising Costs

We expense advertising costs in passenger commissions and other selling expenses in the year incurred\. Advertising expense was   $284 million ,   $277 million  and   $230 million  for the years ended  December 31, 2017 , 2016 and  2015 , respectively\.

Commissions

Passenger sales commissions are recognized in operating expense when the related revenue is recognized\.

 62


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

**CRITICAL ACCOUNTING ESTIMATES**

The discussion and analysis of our financial position and results of operations in this MD&A are based upon our consolidated financial statements\. The preparation of these financial statements requires us to make estimates and judgments that affect our financial position and results of operations\. See **Note 1** to the consolidated financial statements for a description of our significant accounting policies\.

Critical accounting estimates are defined as those that reflect significant management judgment and uncertainties and that potentially may lead to materially different results under varying assumptions and conditions\. Management has identified the following critical accounting estimates and has discussed the development, selection and disclosure of these policies with our audit committee\.

**FREQUENT FLYER PROGRAMS**

Alaska's Mileage Plan™ loyalty program awards mileage credits to members who fly on our airlines and our airline partners, referred to as flown miles\. We also sell services, including miles for transportation, Companion Fare™ certificates, bag fee waivers, and access to our brand and customer lists to a major bank that offers Alaska affinity credit cards\. To a lesser extent, miles for transportation are also sold to other non\-airline partners, such as hotels, and car rental agencies\. The outstanding miles may be redeemed for travel on our airlines or any of our airline partners, and for non\-airline products such as hotels\. As long as the Mileage Plan™ is in existence, we have an obligation to provide this future travel\.

Mileage credits and the various other services we sell under our loyalty program represent performance obligations that are part of a multiple deliverable revenue arrangement\. Accounting guidance requires that we use a relative standalone selling price allocation to allocate consideration received to the material performance obligations in these contracts\. Our relative standalone selling price allocation models are refreshed when contracts originate or are materially modified\.

At December 31, 2018, we had approximately 243 billion miles outstanding, resulting in an aggregate deferred revenue balance of $1\.9 billion\. The deferred revenue resulting from our relative selling price allocations requires significant management judgment\. There are uncertainties inherent in these estimates\. Therefore, different assumptions could affect the amount and/or timing of revenue recognition or expenses\. The most significant assumptions are described below\.

|       |                                                                       |
| ----- | --------------------------------------------------------------------- |
| *1\.* | *The rate at which we defer sales proceeds related to services sold:* |

We estimate the standalone selling price for each performance obligation, including mileage credits, by considering multiple inputs and methods, including but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value published selling prices, number of miles awarded, and the number of miles redeemed\. We estimate the selling prices and volumes over the terms of the agreements in order to determine the allocation of proceeds to each of the multiple deliverables\.

|       |                                                                        |
| ----- | ---------------------------------------------------------------------- |
| *2\.* | *The number of miles that will not be redeemed for travel (breakage):* |

We estimate how many miles will be used per award\. For example, our members may redeem mileage credits for award travel to various locations or choose between a highly restricted award and an unrestricted award\. Our estimates are based on the current requirements in our Mileage Plan program™ and historical award redemption patterns\.

We regularly review significant Mileage Plan™ assumptions and change our assumptions if facts and circumstances indicate that a change is necessary\. Any such change in assumptions could have a significant effect on our financial position and results of operations\.

|                                                                         |
| ----------------------------------------------------------------------- |
| **ITEM 7A\. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK** |

We have interest\-rate risk on our variable\-rate debt obligations and our available\-for\-sale marketable investment portfolio, and commodity\-price risk in jet fuel required to operate our aircraft fleet\. We purchase the majority of our jet fuel at prevailing market prices and seek to manage market risk through execution of our hedging strategy and other means\. We have market\-sensitive instruments in the form of fixed\-rate debt instruments and financial derivative instruments used to hedge our exposure to jet fuel price increases and interest\-rate increases\. We do not purchase or hold any derivative financial instruments for trading purposes\.

 52


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

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

The Company determined the grant date fair value of stock options using a Black\-Scholes option pricing model, which requires the use of several assumptions\. The risk\-free interest rate is based on the U\.S\. treasury yield curve in effect for the expected term of the option at the time of grant\. The dividend yield on UAL's common stock was assumed to be zero since UAL did not pay dividends at the time of the option grants\. The volatility assumptions were based upon historical volatilities of UAL using daily stock price returns equivalent to the expected term of the option\. The expected term of the options was determined based upon a simplified assumption that the option will be exercised evenly from vesting to expiration due to the Company's lack of relevant historical data related to stock options\.

As of  December 31, 2019 , there were approximately   0\.7 million  outstanding stock option awards,   0\.2 million  of which were exercisable, with weighted\-average exercise prices of   $82\.12  and   $56\.89 , respectively, intrinsic values of   $11 million  and   $6 million , respectively, and weighted\-average remaining contractual lives (in years) of   7\.3  and   3\.7 , respectively\.

NOTE 5 \- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ("AOCI")

The tables below present the components of the Company's AOCI, net of tax (in millions):

|                                                  |                                                                                |     |                           |     |                        |        |                        |
| ------------------------------------------------ | ------------------------------------------------------------------------------------ | --- | ------------------------- | --- | ---------------------- | ------ | ---------------------- |
|                                                  | **Pension and**

**Other**

**Postretirement**

**Liabilities** |     | **Investments and Other** |     | **Deferred Taxes**     |        |

**Total**      |
| Balance at December 31, 2016                     | $

(854

)                                                               |     | $

(1

)      |     | $26                    |        | $

(829

) |
| Change in value                                  | (306

)                                                                        | (a) | (7

)               |     | 74                     |        | (239

)          |
| Amounts reclassified to earnings                 | 58                                                                                |     | 2                         |     | (21

)           |        | 39                     |
| Reclassification of stranded tax effects         | —                                                                                |     | —                         |     | (118

)          | (b)    | (118

)          |
| Balance at December 31, 2017                     | (1,102

)                                                                      |     | (6

)               |     | (39

)           |        | (1,147

)        |
| Change in value                                  | 377                                                                                | (a) | (5

)               |     | (83

)           |        | 289                    |
| Amounts reclassified to earnings                 | 62                                                                                |     | —                         |     | (13

)           |        | 49                     |
| Amounts reclassified to retained earnings ("RE") | —                                                                                |     | 7                         | (c) | (1

)            | (c)    | 6                      |
| Balance at December 31, 2018                     | (663

)                                                                        |     | (4

)               |     | (136

)          |
 | (803

)          |
| Change in value                                  | 105                                                                                | (a) | 7                         |     | (24

)           |        | 88                     |
| Amounts reclassified to earnings                 | (2

)                                                                          |     | (1

)               |     | —                      |        | (3

)            |
| Balance at December 31, 2019                     | $

(560

)                                                               |     | $2                        |     | $

(160

) |        | $

(718

) |

(a) This AOCI component is included in the computation of net periodic pension and other postretirement costs\. See Note 7 of this report for additional information on pensions and other postretirement liabilities\.

(b) This amount represents the reclassification from AOCI to RE of the stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the "Tax Act")\.

(c) These amounts represent the reclassification from AOCI to RE of the unrealized loss, and related tax, on the Company's investment in Azul Linhas Aéreas Brasileiras S\.A\. ("Azul") which was classified as an available\-for\-sale security prior to the Company adopting Accounting Standards Update No\. 2016\-01, Financial Instruments—Overall (Subtopic 825\-10) effective January 1, 2018\.

65


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

Undrawn Lines of Credit

We have  $3\.0 billion  available in revolving lines of credit\.  During February 2019, we drew  $750 million  from our unsecured Revolving Credit Facility for general corporate purposes\.

These credit facilities include covenants customary for financing of this type\. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them\.

Covenants

 We were in compliance with the covenants in our financing agreements at  December 31, 2018 \.

Contractual Obligations

The following table summarizes our contractual obligations at  December 31, 2018  that we expect will be paid in cash\. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax positions and amounts payable under collective bargaining arrangements, among others\. In addition, the table does not include expected significant cash payments representing obligations that arise in the ordinary course of business that do not include contractual commitments\.

The amounts presented are based on various estimates, including estimates regarding the timing of payments, prevailing interest rates, volumes purchased, the occurrence of certain events and other factors\. Accordingly, the actual results may vary materially from the amounts presented in the table\.

|                                             |                                               |                                               |                                               |                                               |                                               |                                               |                                               |
| ------------------------------------------- | --------------------------------------------- | --------------------------------------------- | --------------------------------------------- | --------------------------------------------- | --------------------------------------------- | --------------------------------------------- | --------------------------------------------- |
|                                             | **Contractual Obligations by Year** **^(1)^** | **Contractual Obligations by Year** **^(1)^** | **Contractual Obligations by Year** **^(1)^** | **Contractual Obligations by Year** **^(1)^** | **Contractual Obligations by Year** **^(1)^** | **Contractual Obligations by Year** **^(1)^** | **Contractual Obligations by Year** **^(1)^** |
| **(in millions)**                           | **2019**                                      | **2020**                                      | **2021**                                      | **2022**                                      | **2023**                                      | **Thereafter**                                | **Total**                                     |
| Long\-term debt (see Note 7)                |                                               |                                               |                                               |                                               |                                               |                                               |                                               |
| Principal amount                            | $1,441                                        | $2,048                                        | $1,019                                        | $1,676                                        | $929                                          | $2,195                                        | $9,308                                        |
| Interest payments                           | 387                                           | 300                                           | 248                                           | 195                                           | 128                                           | 643                                           | 1,901                                         |
| Finance lease obligations (see Note 8)      |                                               |                                               |                                               |                                               |                                               |                                               |                                               |
| Principal amount                            | 109                                           | 77                                            | 68                                            | 28                                            | 23                                            | 98                                            | 403                                           |
| Interest payments                           | 17                                            | 12                                            | 8                                             | 5                                             | 4                                             | 13                                            | 59                                            |
| Operating lease obligations (see Note 8)    | 1,185                                         | 1,022                                         | 845                                           | 712                                           | 673                                           | 4,289                                         | 8,726                                         |
| Aircraft purchase commitments (see Note 11) | 3,290                                         | 3,130                                         | 3,190                                         | 2,760                                         | 1,850                                         | 1,940                                         | 16,160                                        |
| Contract carrier obligations (see Note 11)  | 1,505                                         | 1,344                                         | 951                                           | 872                                           | 769                                           | 2,862                                         | 8,303                                         |
| Employee benefit obligations (see Note 10)  | 146                                           | 144                                           | 125                                           | 119                                           | 111                                           | 6,027                                         | 6,672                                         |
| Other obligations                           | 874                                           | 709                                           | 470                                           | 732                                           | 566                                           | 765                                           | 4,116                                         |
| Total                                       | $8,954                                        | $8,786                                        | $6,924                                        | $7,099                                        | $5,053                                        | $18,832                                       | $55,648                                       |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------ |
| ^(1)^ | For additional information, see the Notes to the Consolidated Financial Statements referenced in the table above\. |

Long\-Term Debt, Principal Amount\.  Represents scheduled principal payments on long\-term debt\.

Long\-Term Debt, Interest Payments\.  Represents estimated interest payments under our long\-term debt based on the interest rates specified in the applicable debt agreements\. Interest payments on variable interest rate debt were calculated using LIBOR at  December 31, 2018 \.

Finance and Operating Lease Obligations\.  Refer to  Note 8  of the Notes to the Consolidated Financial Statements for additional information regarding finance and operating leases\.

Aircraft Purchase Commitments\.  Refer to the aircraft purchase commitments table in Item 2 for additional information about our future aircraft purchases\.

Contract Carrier Obligations\.  Represents our estimated minimum fixed obligations under capacity purchase agreements with third\-party regional carriers\. The reported amounts are based on (1) the required minimum levels of flying by our contract carriers under the applicable agreements and (2) assumptions regarding the costs associated with such minimum levels of flying\.

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