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

|   |                                                     |
| - | --------------------------------------------------- |
| • | actual or potential disruptions to the ATC systems; |

|   |                                                                     |
| - | ------------------------------------------------------------------- |
| • | increases in costs of safety, security, and environmental measures; |

|   |                                                        |
| - | ------------------------------------------------------ |
| • | outbreaks of diseases that affect travel behavior; and |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | weather and natural disasters, including increases in frequency, severity or duration of such disasters, and related costs caused by more severe weather due to climate change\. |

In particular, an outbreak of a contagious disease such as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus, coronavirus or any other similar illness, if it were to become associated with air travel or persist for an extended period, could materially affect the airline industry and us by reducing revenues and adversely impacting our operations and passengers’ travel behavior\. For example, the coronavirus outbreak that originated in or around Wuhan, China in January 2020 has resulted in the widespread suspension of commercial air service to the region, including by American, as well as the imposition by the U\.S\. and other governments of significant restrictions on inbound travel from this region\. Our suspension of service, which remains in place as of the date of this report, and the potential for a period of significantly reduced demand for travel has and will likely continue to result in significant lost revenue\. As a result of these or other conditions beyond our control, our results of operations could be volatile and subject to rapid and unexpected change\. In addition, due to generally weaker demand for air travel during the winter, our revenues in the first and fourth quarters of the year could be weaker than revenues in the second and third quarters of the year\.

Our business is very dependent on the price and availability of aircraft fuel\. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity \.

Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business\. Market prices for aircraft fuel have fluctuated substantially over the past several years and prices continue to be highly volatile\.

Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of fuel can have a material effect on our operating results and liquidity\. Due to the competitive nature of the airline industry and unpredictability of the market for air travel, we can offer no assurance that we may be able to increase our fares, impose fuel surcharges or otherwise increase revenues or decrease other operating costs sufficiently to offset fuel price increases\. Similarly, we cannot predict actions that may be taken by our competitors in response to changes in fuel prices\.

Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability, price volatility or cost of aircraft fuel\. Natural disasters (including hurricanes or similar events in the U\.S\. Southeast and on the Gulf Coast where a significant portion of domestic refining capacity is located), political disruptions or wars involving oil\-producing countries, economic sanctions imposed against oil\-producing countries or specific industry participants, changes in fuel\-related governmental policy, the strength of the U\.S\. dollar against foreign currencies, changes in the cost to transport or store petroleum products, changes in access to petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, distribution challenges, additional fuel price volatility and cost increases in the future\. For instance, effective January 1, 2020, rules adopted by the International Maritime Organization restrict the sulfur content allowable in marine fuels from 3\.5% to 0\.5%, which is expected to cause increased demand by maritime shipping companies for low\-sulfur fuel and potentially lead to increased costs of aircraft fuel\. Any of these factors or events could cause a disruption in or increased demands on oil production, refinery operations, pipeline capacity or terminal access and possibly result in significant increases in the price of aircraft fuel and diminished availability of aircraft fuel supply\.

Our aviation fuel purchase contracts generally do not provide meaningful price protection against increases in fuel costs\. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review this policy from time to time based on market conditions and other factors\. Accordingly, as of  December 31, 2019 , we did not have any fuel hedging contracts outstanding to hedge our fuel consumption\. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices\. See also the discussion in Part II, Item 7A\. Quantitative and Qualitative Disclosures About Market Risk –  “Aircraft Fuel\.”

18


Annual Report of Southwest Airlines Co\. for year 2019

4 \. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, repayment of debt (see Note  6 ), and lease arrangements (see Note  7 )\. During the  year ended  December 31, 2019 , the Company leased   three  new 737 MAX 8 aircraft\. The Company has firm orders in place with Boeing for   219  737 MAX 8 aircraft and   30  737 MAX 7 aircraft, as well as options for   115  737 MAX 8 aircraft as of  December 31, 2019 \. All   34  of the Company's Boeing 737 MAX 8 aircraft have remained grounded since March 13, 2019, upon the FAA emergency order for all U\.S\. airlines to ground all MAX aircraft\. See Note  16  to the Consolidated Financial Statements for further information\. In addition, MAX deliveries were suspended as of March 13, 2019, and the timeline of future deliveries is uncertain\. The FAA will ultimately determine the timing of MAX return to service, and the Company therefore offers no assurances that current estimations and timelines are correct\. Based on the Company's current contractual obligations and shifting 40 MAX aircraft originally scheduled for delivery in 2019 into 2020 and one into 2021, the Company's capital commitments associated with these contractual firm orders and additional aircraft are as follows:   $2\.1 billion  in  2020 ,   $1\.7 billion  in  2021 ,   $1\.2 billion  in  2022 ,   $1\.6 billion  in  2023 ,   $1\.9 billion  in 2024, and   $1\.5 billion  thereafter\.

The Company adopted the provisions of the New Lease Standard effective January 1, 2019, using the modified retrospective adoption method\. The New Lease Standard eliminated the previous build\-to\-suit lease accounting guidance and resulted in the derecognition of build\-to\-suit assets and liabilities that remained on the balance sheet after the end of the construction period\. See Note 2 for further information\. Descriptions of the Company's recently completed and current build\-to\-suit projects follows\.

Fort Lauderdale\-Hollywood International Airport

In  December 2013 , the Company entered into an agreement with Broward County, Florida, which owns and operates Fort Lauderdale\-Hollywood International Airport ("FLL"), to oversee and manage the design and construction of the airport's Terminal 1 Modernization Project\. In addition to significant improvements to the existing Terminal 1, the project included the design and construction of a new five\-gate Concourse A with an international processing facility\. Funding for the project came directly from Broward County aviation sources, but flowed through the Company in its capacity as manager of the project\. Construction of Concourse A was completed during second quarter 2017, and construction on Terminal 1 was substantially complete and operational as of the end of third quarter 2018\. As construction was completed prior to adoption of the New Lease Standard, the Company derecognized the FLL related Assets constructed for others ("ACFO") and Construction obligation within the Consolidated Balance Sheet as of January 1, 2019\.

Los Angeles International Airport

In March 2013, the Company executed a lease agreement (the "T1 Lease") with Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles International Airport ("LAX")\. Under the T1 Lease, which was amended in June 2014 and September 2017, the Company oversaw and managed the design, development, financing, construction, and commissioning of the airport's Terminal 1 Modernization Project\. Construction on the Terminal 1 Modernization Project began during 2014 and was substantially complete and operational during fourth quarter 2018\. As construction was completed prior to adoption of the New Lease Standard, the Company derecognized the LAX T1 Lease related ACFO and Construction obligation within the Consolidated Balance Sheet as of January 1, 2019\.

In October 2017, the Company executed a separate lease agreement with LAWA (the "T1\.5 Lease")\. Under the T1\.5 Lease, the Company is overseeing and managing the design, development, financing, construction, and commissioning of a passenger processing facility between Terminal 1 and 2 (the "Terminal 1\.5 Project")\. The Terminal 1\.5 Project is expected to include ticketing, baggage claim, passenger screening, and a bus gate at a cost not to exceed   $479 million  for site improvements and non\-proprietary improvements\. Construction on the Terminal 1\.5 Project began during third quarter 2017 and is estimated to be completed during 2020\. The Company has determined that due to its role in the project, it is considered the owner of the Terminal 1\.5 Project for accounting purposes under the New Lease Standard\.

79


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

**EXHIBIT INDEX**

Certain of the following exhibits have been filed with the Securities and Exchange Commission and are incorporated by reference from the documents below\. Certain others are filed with this Form 10\-K\. The exhibits are numbered in accordance with Item 601 of Regulation S\-K\.

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

**Number** | **Exhibit**

**Description**                                                                                | **Form** | **Date of**

**First Filing** | **Exhibit**

**Number** | **File**

**Number** |
| 3\.1                          | [Amended and Restated Certificate of Incorporation of Registrant](http://www.sec.gov/Archives/edgar/data/766421/000076642117000049/alk10-q22017ex31.htm)                                                                       | 10\-Q    | August 3, 2017                      | 3\.1                          |                            |
| 10\.1\#                       | [Aircraft General Terms Agreement, dated June 15, 2005, between the Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000095012405004737/v11316exv10w1.txt)                             | 10\-Q    | August 5, 2005                      | 10\.1                         |                            |
| 10\.2\#                       | [Purchase Agreement No\. 2497, dated June 15, 2005, between the Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000095012405004737/v11316exv10w2.txt)                                 | 10\-Q    | August 5, 2005                      | 10\.2                         |                            |
| 10\.3\#                       | [Supplemental Agreement No\. 23 to Purchase Agreement No\. 2497 between The Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642111000065/exhibit101.htm)                        | 10\-Q/A  | August 2, 2011                      | 10\.1                         |                            |
| 10\.4\#                       | [Supplemental Agreement No\. 29 to Purchase Agreement No\. 2497 between The Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642113000010/alk10-k123112ex107.htm)                | 10\-K    | February 14, 2013                   | 10\.1                         |                            |
| 10\.5\#                       | [Purchase Agreement No\. 3866 between The Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642113000010/alk10-k123112ex108.htm)                                                  | 10\-K    | February 14, 2013                   | 10\.2                         |                            |
| 10\.6\#                       | [Supplemental Agreement No\. 39 to Purchase Agreement No\. 2497 between The Boeing Company and Alaska Airlines, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642115000024/boeingsupplemental.htm)                | 10\-Q    | May 7, 2015                         | 10\.1                         |                            |
| 10\.7\#                       | [Purchase Agreement, dated April 11, 2016, between Embraer S\.A\. and Horizon Air Industries, Inc\.](http://www.sec.gov/Archives/edgar/data/766421/000076642116000077/exhibit101embraerpurchasea.htm)                          | 10\-Q    | May 9, 2016                         | 10\.1                         |                            |
| 10\.8^                        | [A320 Aircraft Purchase Agreement, dated as of December 29, 2010, between Airbus S\.A\.S\. and Virgin America Inc\.](http://www.sec.gov/Archives/edgar/data/1614436/000119312514365735/d761206dex1015.htm)                     | S\-1/A^  | October 7, 2014                     | 10\.15                        |                            |
| 10\.9\*                       | [Alaska Air Group, Inc\. 2008 Performance Incentive Plan, Form of Nonqualified Stock Option Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex103.htm)                                    | 10\-Q    | August 4, 2011                      | 10\.3                         |                            |
| 10\.10\*                      | [Alaska Air Group, Inc\. 2008 Performance Incentive Plan, Form of Performance Stock Unit Award Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex104.htm)                                 | 10\-Q    | August 4, 2011                      | 10\.4                         |                            |
| 10\.11\*                      | [Alaska Air Group, Inc\. 2008 Performance Incentive Plan, Form of Stock Unit Award Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex105.htm)                                             | 10\-Q    | August 4, 2011                      | 10\.5                         |                            |
| 10\.12\*                      | [Alaska Air Group, Inc\. 2008 Performance Incentive Plan, Amended for Stock\-Split](http://www.sec.gov/Archives/edgar/data/766421/000076642116000065/alk10-k123115ex1010.htm)                                                  | 10\-K    | February 11, 2016                   | 10\.10                        |                            |
| 10\.13\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan](http://www.sec.gov/Archives/edgar/data/766421/000076642116000081/ex101.htm)                                                                                | 8\-K     | May 18, 2016                        | 10\.1                         |                            |
| 10\.14\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan, Form of Nonqualified Stock Option Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642116000096/ex101formofnonqualifiedsto.htm)                        | 10\-Q    | August 2, 2016                      | 10\.1                         |                            |
| 10\.15\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan, Form of Incentive Stock Option Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642116000096/ex102formofincentivestocko.htm)                           | 10\-Q    | August 2, 2016                      | 10\.2                         |                            |
| 10\.16\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan, Form of Performance Stock Unit Award Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642116000096/ex103forofperformancestock.htm)                     | 10\-Q    | August 2, 2016                      | 10\.3                         |                            |
| 10\.17\*                      | [Alaska Air Group, Inc\. 2016 Performance Incentive Plan, Form of Stock Unit Award Agreement](http://www.sec.gov/Archives/edgar/data/766421/000076642116000096/ex104formofstockunitawarda.htm)                                 | 10\-Q    | August 2, 2016                      | 10\.4                         |                            |
| 10\.18\*                      | [Alaska Air Group, Inc\. 2010 Employee Stock Purchase Plan, as Amended for the Offering Period Commencing March 1, 2017](http://www.sec.gov/Archives/edgar/data/766421/000076642117000016/alk10-k123116ex1018.htm)             | 10\-K    | February 28, 2017                   | 10\.18                        |                            |
| 10\.19\*                      | [Alaska Air Group, Inc\. Stock Deferral Plan for Non\-Employee Directors](http://www.sec.gov/Archives/edgar/data/766421/000076642116000065/alk10-k123115ex1012.htm)                                                            | 10\-K    | February 11, 2016                   | 10\.12                        |                            |
| 10\.20\*                      | [Alaska Air Group, Inc\. Nonqualified Deferred Compensation Plan, as amended](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex101.htm)                                                             | 10\-Q    | August 4, 2011                      | 10\.1                         |                            |
| 10\.21\*                      | [1995 Elected Officers Supplementary Retirement Plan, as amended](http://www.sec.gov/Archives/edgar/data/766421/000076642111000069/alkq22011ex102.htm)                                                                         | 10\-Q    | August 4, 2011                      | 10\.2                         |                            |
| 10\.22\*                      | [Form of Alaska Air Group, Inc\. Change of Control Agreement for named executive officers, as amended and restated October 16, 2014](http://www.sec.gov/Archives/edgar/data/766421/000076642116000065/alk10-k123115ex1015.htm) | 10\-K    | February 11, 2016                   | 10\.15                        |                            |
| 10\.23\*                      | [Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended January 17, 2018](http://www.sec.gov/Archives/edgar/data/766421/000076642118000015/oprplanamended011718.htm)              | 10\-K    | February 15, 2017                   | 10\.25                        |                            |
| 10\.24\*                      | [Alaska Air Group Performance Based Pay Plan, Amended and Restated January 17, 2018](http://www.sec.gov/Archives/edgar/data/766421/000076642118000015/pbpamendedandrestated011.htm)                                            | 10\-K    | February 15, 2017                   | 10\.26                        |                            |
| 10\.25\*†                     | [Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended December 28, 2018](https://www.example.com/oprplanamended122818.htm)                                                      |          |                                     |                               |                            |
| 10\.26\*†                     | [Alaska Air Group Performance Based Pay Plan, Amended and Restated January 16, 2019](https://www.example.com/pbpplanamendedandrestate.htm)                                                                                |          |                                     |                               |                            |
| 21†                           | [Subsidiaries of Registrant](https://www.example.com/alk10-k123118ex21.htm)                                                                                |          |                                     |                               |                            |
| 23\.1†                        | [Consent of Independent Registered Public Accounting Firm (KPMG LLP)](https://www.example.com/alk10-k123118ex231.htm)                                                                                |          |                                     |                               |                            |

 99


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

**AIRCRAFT**

The following table describes the aircraft we operate and their average age at December 31, 2018:

|                      |           |           |            |           |                                                |
| -------------------- | --------- | --------- | ---------- | --------- | ---------------------------------------------- |
| **Aircraft Type**    | **Seats** | **Owned** | **Leased** | **Total** | **Average**

**Age in**

**Years** |
| B737 Freighters      | —         | 3         | —          | 3         | 17\.9                                          |
| B737 NextGen         | 124\-178  | 149       | 10         | 159       | 8\.1                                           |
| A319/A320            | 119\-149  | 10        | 53         | 63        | 8\.8                                           |
| A321neo              | 185       | —         | 8          | 8         | 1\.1                                           |
| Total Mainline Fleet |           | 162       | 71         | 233       | 8\.2                                           |
| Q400                 | 76        | 30        | 9          | 39        | 11\.2                                          |
| E175                 | 76        | 26        | 32         | 58        | 1\.4                                           |
| Total Regional Fleet |           | 56        | 41         | 97        | 5\.3                                           |
| Total                |           | 218       | 112        | 330       | 7\.3                                           |

“Management’s Discussion and Analysis of Financial Condition and Results of Operations" discusses future orders and options for additional aircraft\. “Liquidity and Capital Resources" provides more information about aircraft that are used to secure long\-term debt arrangements or collateralize credit facilities\.

Alaska’s leased B737 aircraft have lease expiration dates between 2020 and 2026\. Alaska’s leased A319, A320, and A321neo aircraft have expiration dates between 2019 and 2030\. Horizon’s leased Q400 aircraft have expiration dates between 2019 and 2021\. The leased E175 aircraft are through our capacity purchase agreement with SkyWest\. Alaska and Horizon have the option to extend some of the leases for additional periods, or the right to purchase the aircraft at the end of the lease term, usually at the fair\-market value of the aircraft\.

**GROUND FACILITIES AND SERVICES**

In various cities in the state of Alaska, we own terminal buildings and two multi\-bay hangars\. We also own several buildings located at or near Seattle\-Tacoma International Airport (Sea\-Tac)\. 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 2018 we began developing a property near our existing headquarters facility for additional office space\.

At the majority of the airports we serve, we lease ticket counters, gates, cargo and baggage space, ground equipment, office space and other support areas\. 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; San Jose, CA; Redmond, OR; Seattle, WA; Kent, WA; and Spokane, WA\. Further, we lease call center facilities in Phoenix, AZ, Boise, ID, and Kent, WA\.

Beginning in 2019, under the new lease accounting standard (Topic 842) leased aircraft, certain leased space on airport property, and the majority of our operations, training, administrative, and data center facility leases will be recognized on the balance sheet as a liability representing the lease payments owed, and a right\-of\-use asset representing our right to use the underlying asset\.

|                                |
| ------------------------------ |
| **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 California\-based Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws\. The court

 26


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

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

|     |                   |                                                                                |
| --- | ----------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|     |                   | **Interactive Data File**                                                                                |
| 101 | UAL

United | The following financial statements from the combined Annual Report of UAL and United on Form 10\-K for the year ended December, 2019, formatted in Inline XBRL: (i) the Statements of Consolidated Operations, (ii) the Statements of Consolidated Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Statements of Consolidated Cash Flows, (v) the Statements of Consolidated Stockholders' Equity (Deficit) and (vi) the Combined Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags\. |
| 104 | UAL

United | Cover Page Interactive Data File \- the cover page XBRL tags are embedded within the Inline XBRL document                                                                                |

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

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------- |
| ^ | Portions of the referenced exhibit have been omitted pursuant to Item 601(b) of Regulation S\-K\. |

102


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

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

**UNITED CONTINENTAL HOLDINGS, INC\.**

**STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)**

**(In millions)**

|                                                           |                             |                             |                             |
| --------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                           | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                           | **2018**                    | **2017 (a)**                | **2016 (a)**                |
| Net income                                                | $2,129                      | $2,144                      | $2,234                      |
| Other comprehensive income (loss), net change related to: |                             |                             |                             |
| Employee benefit plans, net of taxes                      | 342                         | (195)                       | (313)                       |
| Fuel derivative financial instruments, net of taxes       | —                           | 1                           | 316                         |
| Investments and other, net of taxes                       | (4)                         | (6)                         | (1)                         |
| Total other comprehensive income (loss), net              | 338                         | (200)                       | 2                           |
| Total comprehensive income, net                           | $2,467                      | $1,944                      | $2,236                      |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2014\-09, *Revenue from Contracts with Customers (Topic 606)\.* See Note 1 to the financial statements contained in Part II, Item 8 of this report for additional information\.

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements\.

43


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

approximately 1,800 flight attendants in November 2016\. The Company believes the claims in this case are without factual and legal merit\.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor\-in\-interest to Virgin America, responsible for various damages and penalties sought by the class members\. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million\. It did not award injunctive relief against Alaska Airlines\.

The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U\.S\. Constitution and federal law and for other employment law and improper class certification reasons\. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter\-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal\. For these reasons, no loss has been accrued\.

The Company is involved in other litigation around the application of state and local employment laws, like many air carriers\. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce\. None of these additional disputes are material\.

NOTE 10\. SHAREHOLDERS' EQUITY

Dividends

During 2019, the Board of Directors declared dividends of $1\.40 per share\. The Company paid dividends of $173 million, $158 million and $148 million to shareholders of record during 2019, 2018 and 2017\.

Subsequent to year\-end, the Board of Directors declared a quarterly cash dividend of $0\.375 per share to be paid in March 2020 to shareholders of record as of February 18, 2020\. This is a 7% increase from the most recent quarterly dividend of $0\.35 per share\.

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program\. As of December 31, 2019, the Company has repurchased 7\.1 million shares for $513 million under this program\.

At December 31, 2019, the Company held 8,811,866 shares in treasury\. Management does not anticipate retiring common shares held in treasury for the foreseeable future\.

Share repurchase activity (in millions, except shares):

|                                       |                                       |           |           |      |      |      |        |  |  |  |         |         |  |  |  |        |      |      |      |         |         |  |  |  |        |  |  |  |      |      |      |      |      |      |      |      |      |  |  |  |  |  |  |
|:------------------------------------- |:------------------------------------- | ---------:| ---------:|:----:|:----:|:----:| ------:|:- |:- |:- | -------:| -------:|:- |:- |:- | ------:|:----:|:----:|:----:| -------:| -------:|:- |:- |:- | ------:|:- |:- |:- |:----:|:----:|:----:|:----:|:----:|:----:|:----:|:----:|:----:|:- |:- |:- |:- |:- |:- |
|                                       |                                       |      2019 |      2019 | 2019 | 2019 | 2019 |   2019 |  |  |  |         |         |  |  |  |   2018 | 2018 | 2018 | 2018 |    2018 |    2018 |  |  |  |        |  |  |  | 2017 | 2017 | 2017 | 2017 | 2017 | 2017 | 2017 | 2017 | 2017 |  |  |  |  |  |  |
|                                       |                                       |    Shares |    Shares |      |      |      | Amount |  |  |  |  Shares |  Shares |  |  |  | Amount |      |      |      |  Shares |  Shares |  |  |  | Amount |
| 2015 Repurchase Program – $1 billion  | 2015 Repurchase Program – $1 billion  | 1,192,820 | 1,192,820 |      |      |      |   $ 75 |  |  |  | 776,186 | 776,186 |  |  |  |   $ 50 |      |      |      | 981,277 | 981,277 |  |  |  |   $ 75 |

Accumulated Other Comprehensive Loss (AOCL)

AOCL consisted of the following (in millions, net of tax):

|                                      |                                      |                                      |         |  |  |  |         |
|:------------------------------------ |:------------------------------------ |:------------------------------------ | -------:|:- |:- |:- | -------:|
|                                      |                                      |                                      |    2019 |  |  |  |    2018 |
| Related to marketable securities     | Related to marketable securities     | Related to marketable securities     |     $ 9 |  |  |  |  $ (11) |
| Related to employee benefit plans    | Related to employee benefit plans    | Related to employee benefit plans    |   (469) |  |  |  |   (440) |
| Related to interest rate derivatives | Related to interest rate derivatives | Related to interest rate derivatives |     (5) |  |  |  |       3 |
|                                      |                                      |                                      | $ (465) |  |  |  | $ (448) |

78


Annual Report of Southwest Airlines Co\. for year 2018

|   |                                         |
| - | --------------------------------------- |
| • | increases in airport rates and charges; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | limitations on airport gate capacity or use of other airport facilities such as the 2016 and 2017 reallocation of slots at John Wayne Airport in Orange County, California, which caused the Company to reduce service at that airport;  |

|   |                                    |
| - | ---------------------------------- |
| • | limitations on route authorities;  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------- |
| • | actions and decisions that create difficulties in obtaining access at slot\-controlled airports;  |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------- |
| • | actions and decisions that create difficulties in obtaining operating permits and approvals;  |

|   |                                       |
| - | ------------------------------------- |
| • | changes to environmental regulations; |

|   |                                 |
| - | ------------------------------- |
| • | new or increased taxes or fees; |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------- |
| • | changes to laws that affect the services that can be offered by airlines in particular markets and at particular airports; |

|   |                                        |
| - | -------------------------------------- |
| • | restrictions on competitive practices; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------- |
| • | changes in laws that increase costs for safety, security, compliance, or other Customer Service standards; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------- |
| • | changes in laws that may limit the Company's ability to enter into fuel derivative contracts to hedge against increases in fuel prices; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------- |
| • | changes in laws that may limit or regulate the Company's ability to promote the Company’s business or fares; and |

|   |                                                                       |
| - | --------------------------------------------------------------------- |
| • | the adoption of more restrictive locally\-imposed noise regulations\. |

***The airline industry is affected by many conditions that are beyond its control, which can impact the Company's business strategies and results of operations\.***

In addition to the unpredictable economic conditions and fuel costs discussed above, the Company, like the airline industry in general, is affected by conditions that are largely unforeseeable and outside of its control, including, among others:

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | adverse weather and natural disasters such as the weather\-related disruptions in third quarter 2018, which resulted in approximately 2,200 canceled flights;  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | changes in consumer preferences, perceptions, spending patterns, or demographic trends (including, without limitation, changes in travel patterns due to government shutdowns or sequestration); |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | actual or potential disruptions in the air traffic control system (including, for example, as a result of inadequate FAA staffing levels due to government shutdowns or sequestration); |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | actual or perceived delays at various airports resulting from government shutdowns (including, for example, longer wait\-times at TSA checkpoints due to inadequate TSA staffing levels); |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------- |
| • | changes in the competitive environment due to industry consolidation, industry bankruptcies, and other factors; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | delays in deliveries of new aircraft (including, without limitation, due to the closure of the FAA's aircraft registry during government shutdowns); |

|   |                           |
| - | ------------------------- |
| • | outbreaks of disease; and |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | actual or threatened war, terrorist attacks, government travel warnings to certain destinations, travel restrictions, and political instability\. |

***The airline industry is intensely competitive\.***

As discussed in more detail above under "Business \- Competition," the airline industry is intensely competitive\. The Company's primary competitors include other major domestic airlines, as well as regional and new entrant airlines, surface transportation, and alternatives to transportation such as videoconferencing and the Internet\. The Company's

26


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

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

|            |                 |                                                                                |
| ----------:|:--------------- |:---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| \*^10\.158 | UAL
United | [Aircraft General Terms Agreement, dated October 10, 1997, by and among Continental and Boeing (filed as Exhibit 10\.15 to Continental’s Form  10\-K for the year ended December 31, 1997, Commission File Number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/0000319687-98-000003.txt)                                             |
| \*^10\.159 | UAL
United | [Letter Agreement    6\-1162\-CHL\-048, dated February 8, 2002, by and among Continental and Boeing (filed as Exhibit 10\.44 to Continental’s Form  10\-K for the year ended December 31, 2001, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968702000006/exhibit1044.htm)                              |
| \*^10\.160 | UAL
United | [Purchase Agreement No\. 2484, including exhibits and side letters, dated December 29, 2004, by and among Continental and Boeing (filed as Exhibit 10\.27 to Continental’s Form  10\-K for the year ended December 31, 2004, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968705000036/exhibit1027.htm) |
| \*^10\.161 | UAL
United | [Supplemental Agreement No\. 1 to Purchase Agreement No\. 2484, dated June 30, 2005 (filed as Exhibit 10\.5 to Continental’s Form  10\-Q for the quarter ended June 30, 2005, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968705000095/fexhibit105.htm)                                                |
| \*^10\.162 | UAL
United | [Supplemental Agreement No\. 2, including exhibits and side letters, to Purchase Agreement No\. 2484, dated January 20, 2006 (filed as Exhibit 10\.27(b) to Continental’s Form  10\-K for the year ended December 31, 2005, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968706000013/fexh1027b.htm)    |
| \*^10\.163 | UAL
United | [Supplemental Agreement No\. 3 to Purchase Agreement No\. 2484, dated May 3, 2006 (filed as Exhibit 10\.4 to Continental’s Form  10\-Q for the quarter ended June 30, 2006, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968706000062/fexhibit104.htm)                                                  |
| \*^10\.164 | UAL
United | [Supplemental Agreement No\. 4 to Purchase Agreement No\. 2484, dated July 14, 2006 (filed as Exhibit 10\.5 to Continental’s Form  10\-Q for the quarter ended September 30, 2006, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968706000073/fexhibit105.htm)                                           |
| \*^10\.165 | UAL
United | [Supplemental Agreement No\. 5 to Purchase Agreement No\. 2484, dated March 12, 2007 (filed as Exhibit 10\.1 to Continental’s Form  10\-Q for the quarter ended March 31, 2007, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968707000018/fexhibit101.htm)                                              |
| \*^10\.166 | UAL
United | [Supplemental Agreement No\. 6 to Purchase Agreement No\. 2484, dated October 22, 2008 (filed as Exhibit 10\.25(f) to Continental’s Form  10\-K for the year ended December 31, 2008, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/000031968709000008/f123108form10kexh1025f.htm)                             |
| \*^10\.167 | UAL
United | [Supplemental Agreement No\. 7 to Purchase Agreement No\. 2484, dated November 7, 2012 (filed as Exhibit 10\.179 to UAL’s Form  10\-K for the year ended December 31, 2012, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513074391/d436512dex10179.htm)                                               |
| \*^10\.168 | UAL
United | [Supplemental Agreement No\. 8 to Purchase Agreement No\. 2484, dated June 17, 2013 (filed as Exhibit 10\.4 to UAL’s Form  10\-Q for the quarter ended June 30, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex104.htm)                                                       |
| \*^10\.169 | UAL
United | [Supplemental Agreement No\. 9 to Purchase Agreement No\. 2484, dated June 6, 2014 (filed as Exhibit 10\.4 to UAL’s Form  10\-Q for the quarter ended June 30, 2014, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312514278970/d732259dex104.htm)                                                        |

125


Annual Report of Southwest Airlines Co\. for year 2018

would be LIBOR plus a spread of 100\.0 basis points\. The facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre\-tax income to fixed obligations, as defined\. As of December 31, 2018, the Company was in compliance with this covenant and there were no amounts outstanding under the revolving credit facility\.

The Company entered into the following accelerated share repurchases during 2018, which were each recorded as a treasury share purchase for purposes of calculating earnings per share\. See Part II, Item 5 for further information on the Company's share repurchase authorizations\.

|                                                                        |                     |               |
| ---------------------------------------------------------------------- | ------------------- | ------------- |
| **Share repurchases (in millions)**                                    | **Shares received** | **Cash paid** |
| First Quarter 2018 Accelerated Share Repurchase Program

  | 8\.73               | $500          |
| Second Quarter 2018 Accelerated Share Repurchase Program

 | 9\.69               | 500           |
| Third Quarter 2018 Accelerated Share Repurchase Program

  | 8\.20               | 500           |
| Fourth Quarter 2018 Accelerated Share Repurchase Program               | 9\.84               | 500           |
| Total                                                                  | 36\.46              | $2,000        |

The Company maintained its investment grade credit ratings of "A3" with Moody's, "BBB\+" with Standard & Poor's, and "BBB\+" with Fitch\.

The Company routinely carries a working capital deficit, in which its current liabilities exceed its current assets\. This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused funds available to Customers, and loyalty deferred revenue, which are performance obligations for future Customer flights, do not require future settlement in cash, and are mostly nonrefundable\. See Note 5 to the Consolidated Financial Statements for further information\. The Company believes that its current liquidity position, including unrestricted cash and short\-term investments of $3\.7 billion as of December 31, 2018, anticipated future internally generated funds from operations, and its fully available, unsecured revolving credit facility of $1\.0 billion that expires in August 2022, will enable it to meet its future known obligations in the ordinary course of business\. However, if a liquidity need were to arise, the Company believes it has access to financing arrangements because of its investment grade credit ratings, large value of unencumbered assets, and modest leverage, which should enable it to meet its ongoing capital, operating, and other liquidity requirements\. The Company will continue to consider various borrowing or leasing options to maximize liquidity and supplement cash requirements, as necessary\.

The Company has a large net deferred tax liability on its Consolidated Balance Sheet\. The deferral of income taxes has resulted in a significant benefit to the Company and its liquidity position\. Since the Company purchases the majority of the aircraft it acquires, it has been able to utilize accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, in 2018 and in previous years, which has enabled the Company to defer the cash tax payments associated with these depreciable assets to future years\. Based on the Company’s scheduled future aircraft deliveries from Boeing and existing tax laws in effect, the Company will continue to defer a portion of cash income taxes to future years\. The Company has paid in the past, and will continue to pay in the future, significant cash taxes to the various taxing jurisdictions where it operates\. The Company expects to be able to continue to meet such obligations utilizing cash and investments on hand, as well as cash generated from its ongoing operations\.

**Off\-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments**

The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, payment of debt, and lease arrangements\. In 2018, the Company exercised 40 737 MAX 8 options, which added 10 additional firm orders in each year 2019 through 2022\. Additionally, four 737 MAX 8 firm orders were shifted from 2019 into fourth quarter 2018, and commitments for three pre\-owned 737\-700 aircraft previously scheduled for delivery in 2018 were replaced with commitments for three 737 MAX 8 aircraft to be delivered in 2019\. For aircraft commitments with Boeing, the Company is required to make cash deposits toward the purchase of aircraft in advance\. These deposits are classified as Deposits on flight equipment purchase contracts in the Consolidated Balance Sheet until the aircraft

55


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

Mileage credits sold to co\-branded credit cards and other partners

We sell mileage credits to participating airline partners and non\-airline business partners, including our co\-branded credit card partners, under contracts with terms extending generally for  one to seven  years\. Consideration received from the sale of mileage credits is variable and payment terms typically are within  30 days  subsequent to the month of mileage sale\. Sales of mileage credits to non\-airline business partners are comprised of  two  components, transportation and marketing\. We allocate the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered\.

Our most significant partner agreements are our co\-branded credit card agreements with Citi and Barclaycard US that we entered into in 2016\. We identified the following revenue elements in these co\-branded credit card agreements: the transportation component; and the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component)\. Accordingly, we recognize the marketing component in other revenue in the period of the mileage sale following the sales\-based royalty method\.

The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above\. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided\.

For the portion of our outstanding mileage credits that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining mileage credits are redeemed\. Our estimates are based on analysis of historical redemptions\. For the year ended  December 31, 2019 , a hypothetical  10%  increase in our estimate of miles not expected to be redeemed would have increased revenues by approximately  $95 million \.

Cargo Revenue

Cargo revenue is recognized when we provide the transportation\.

Other Revenue

Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage sales to co\-branded credit card and other partners and other marketing related payments\. The accounting and recognition for the loyalty program marketing services are discussed above in “ Loyalty Revenue \.” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation\-related services\.

Long\-lived Assets

Long\-lived assets consist of flight equipment, as well as other fixed assets and definite\-lived intangible assets such as certain domestic airport slots, customer relationships, marketing agreements, tradenames and airport gate leasehold rights\. In addition to the original cost, the recorded value of our fixed assets is impacted by a number of estimates made, including estimated useful lives, salvage values and our determination as to whether aircraft are temporarily or permanently grounded\. Definite\-lived intangible assets are originally recorded at their acquired fair values and are subsequently amortized over their estimated useful lives\. See Note 1 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 1 to American’s Consolidated Financial Statements in Part II, Item 8B for further information\.

We assess impairment of long\-lived assets used in operations when events and circumstances indicate that the assets may be impaired\. An asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the carrying amount of the assets and the net book value of the assets exceeds their estimated fair value\. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets\. Estimates of fair value represent management’s best estimate based on appraisals, industry trends and reference to market rates and transactions\.

The majority of American’s aircraft fleet types are depreciated over 25\-30 years\. It is possible that the ultimate lives of our aircraft will be significantly different than the current estimate due to unforeseen events in the future that impact our fleet plan\.

66


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

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

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

|                                                    |                           |                                             |                           |                                             |                           |                                             |
|:-------------------------------------------------- | -------------------------:| -------------------------------------------:| -------------------------:| -------------------------------------------:| -------------------------:| -------------------------------------------:|
|                                                    |                  **2017** |                                    **2017** |                  **2016** |                                    **2016** |                  **2015** |                                    **2015** |
|                                                    | **Pension
Benefits** | **Other
Postretirement
Benefits** | **Pension
Benefits** | **Other
Postretirement
Benefits** | **Pension
Benefits** | **Other
Postretirement
Benefits** |
| Service cost                                       |                     $195  |                                        $13  |                     $112  |                                        $19  |                     $124  |                                        $21  |
| Interest cost                                      |                      220  |                                         66  |                      200  |                                         86  |                      200  |                                         82  |
| Expected return on plan assets                     |                     (243) |                                         (2) |                     (216) |                                         (2) |                     (194) |                                         (2) |
| Curtailment gain                                   |                        —  |                                          —  |                        —  |                                       (107) |                        —  |                                          —  |
| Amortization of unrecognized actuarial (gain) loss |                      128  |                                        (33) |                       76  |                                        (19) |                       85  |                                        (22) |
| Amortization of prior service credits              |                        —  |                                        (37) |                        —  |                                        (31) |                        —  |                                        (32) |
| Other                                              |                        5  |                                          —  |                        5  |                                          —  |                        4  |                                          —  |
| Net periodic benefit cost (credit)                 |                     $305  |                                         $7  |                     $177  |                                       $(54) |                     $219  |                                        $47  |

See Note 14 of this report for additional information related to the curtailment gain recorded in 2016\.

The estimated amounts that will be amortized in 2018 out of accumulated other comprehensive income (loss) into net periodic benefit cost are as follows (in millions):

|                             |                               |                                             |
|:--------------------------- | -----------------------------:| -------------------------------------------:|
|                             | **Pension**
**Benefits** | **Other
Postretirement
Benefits** |
| Actuarial (gain) loss       |                          $132 |                                       $(32) |
| Prior service (credit) cost |                            —  |                                        (37) |

The assumptions used for the benefit plans were as follows:

|                                                       |                        |                        |
|:----------------------------------------------------- | ----------------------:| ----------------------:|
|                                                       |  **Pension Benefits**  |  **Pension Benefits**  |
| **Assumptions used to determine benefit obligations** |              **2017**  |              **2016**  |
| Discount rate                                         |                 3\.65% |                 4\.18% |
| Rate of compensation increase                         |                 3\.89% |                 3\.54% |
| **Assumptions used to determine net expense**         |                        |                        |
| Discount rate                                         |                 4\.19% |                 4\.58% |
| Expected return on plan assets                        |                 7\.02% |                 7\.04% |
| Rate of compensation increase                         |                 3\.54% |                 3\.53% |

80


Annual Report of Southwest Airlines Co\. for year 2019

During recent years, the airline industry has continued to be impacted by the significant growth of "Ultra\-Low Cost Carriers" ("ULCCs")\. ULCCs provide "unbundled" service offerings, which enable them to appeal to price\-sensitive travelers through promotion to consumers of an extremely low relative base fare for a seat, while separately charging for related services and products\. In response, most major U\.S\. airlines offer expanded cabin segmentation fare products, such as a "basic economy" product\. The basic economy product provides for a lower  base fare to compete with a ULCC base fare, but may include significant additional restrictions on amenities such as seat assignments (including restrictions on group and family seating), order of boarding, checked baggage and use of overhead bin space, flight changes and refunds, and eligibility for upgrades\. Also in response to competitive ULCC pricing, some carriers no longer have fare floors for certain routes, leading to a lower fare offering across the industry\. Further, to better derive revenue from customers, some carriers offer a "premium economy" fare that targets consumers willing to pay a premium for certain amenities that were previously included in the carriers' base fare (e\.g\., more favorable seating locations in the main cabin)\.

Company Operations

Route Structure

Southwest principally provides point\-to\-point service, rather than the "hub\-and\-spoke" service provided by most major U\.S\. airlines\. The hub\-and\-spoke system concentrates most of an airline's operations at a limited number of central hub cities and serves most other destinations in the system by providing one\-stop or connecting service through a hub\. By not concentrating operations through one or more central transfer points, Southwest's point\-to\-point route structure has allowed for more direct nonstop routing than hub\-and\-spoke service\. The Company continues to focus on adding depth to schedule offerings in certain key cities, which is expected to benefit operational efficiency and give Customers additional options to reach their final destination\. Approximately 77 percent of the Company's Customers flew nonstop during 2019, and, as of December 31, 2019, Southwest served 720 nonstop city pairs\. For 2019, the Company’s average aircraft trip stage length was 748 miles, with an average duration of approximately 2\.0 hours, as compared with an average aircraft trip stage length of 757 miles and an average duration of approximately 2\.0 hours in 2018\.

Southwest’s point\-to\-point service has also enabled it to provide its markets with frequent, conveniently timed flights and low fares\. For example, Southwest currently offers 21 weekday roundtrips between Dallas Love Field and Houston Hobby, 13 weekday roundtrips between Burbank and Oakland, 16 weekday roundtrips between San Diego and San Jose, eight weekday roundtrips between Denver and Chicago Midway, and 10 weekday roundtrips between Los Angeles International and Las Vegas\. Southwest complements its high\-frequency short\-haul routes with long\-haul nonstop service including flights between California and Hawaii and between markets such as Los Angeles and Nashville, Las Vegas and Orlando, San Diego and Baltimore, Houston and New York LaGuardia, and Oakland and Baltimore\.

The Company continually works to optimize its route network and schedule through the addition of frequencies in its core markets and the addition of new markets and itineraries, while also pruning less profitable flights from its schedule\. The Company's network and schedule optimization efforts have been particularly beneficial in addressing the impact of the MAX groundings\.

The Company continued its focus on California in 2019, and continues to invest significant resources to solidify its leadership position in California, including the planned addition of new destination options and flights for California Customers\. For example, as Hawaii is an attractive leisure destination for the Company's California Customers, the Company began service to Hawaii in first quarter 2019 with inaugural service from Oakland to Honolulu on the Island of Oahu\. In second quarter 2019, the Company began service from Oakland to Kahului on the Island of Maui, and service from San Jose to Honolulu and Kahului\. Interisland service also began during second quarter 2019, with service between Honolulu and Kahului, and between Honolulu and Kona on the Island of Hawaii\. During fourth quarter 2019, the Company began service at Lihue Airport on the Island of Kauai; and added Sacramento as an additional California gateway city\. Additionally, in January 2020, the Company began service at Hilo International Airport on the Island of Hawaii\. The Company is also scheduled to begin service from San Diego to Kahului on April 14, 2020, and from San Diego to Honolulu on April 20, 2020\. By April 20, 2020, the Company is scheduled to offer 28 daily departures between California and Hawaii, and 38 daily departures among the Hawaiian Islands\. The Company is currently scheduled to offer over 800 departures from California on peak flying days in the summer of 2020 and, based on the most recent data available from the DOT, for the year ended September 30, 2019, Southwest already carried more California travelers to, from, and within California than any other airline\. In addition to California and Hawaii, the Company

4


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

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

The amount of, and changes to, our uncertain tax positions were not material in any of the years presented\. We accrue interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively\.

The 2017 Tax Act was enacted on December 22, 2017\. The 2017 Tax Act is the most comprehensive tax change in more than 30 years\. We have completed our evaluation of the 2017 Tax Act and we have reflected the impact of its effects, including the impact of lower corporate income tax rates (21% vs\. 35%) on our deferred tax assets and liabilities and the one\-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred\. For the year ended December 31, 2017, we recognized a special income tax provision of $823 million to reflect these impacts of the 2017 Tax Act\.

**8\. Risk Management**

Our economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel\.

Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, our revenues are heavily influenced by the condition of the U\.S\. economy and economies in other regions of the world\. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by our competitors, all of which in turn have had, and may have in the future, a negative effect on our business\. In addition, during challenging economic times, actions by our competitors to increase their revenues can have an adverse impact on our revenues\.

Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business\. Market prices for jet fuel have fluctuated substantially over the past several years and prices continue to be highly volatile\. Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of fuel can have a material effect on our operating results and liquidity\.

These additional factors could impact our results of operations, financial performance and liquidity:

***(a) Credit Risk***

Most of our receivables relate to tickets sold to individual passengers through the use of major credit cards or to tickets sold by other airlines and used by passengers on American\. These receivables are short\-term, mostly settled within seven days after sale\. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts\. We do not believe we are subject to any significant concentration of credit risk\.

***(b) Interest Rate Risk***

We have exposure to market risk associated with changes in interest rates related primarily to our variable rate debt obligations\. Interest rates on $9\.9 billion principal amount of long\-term debt as of December 31, 2018 are subject to adjustment to reflect changes in floating interest rates\. The weighted average effective interest rate on our variable rate debt was 4\.3% at December 31, 2018\. We do not currently have an interest rate hedge program\.

***(c) Foreign Currency Risk***

We are exposed to the effect of foreign exchange rate fluctuations on the U\.S\. dollar value of foreign currency\-denominated operating revenues and expenses\. Our largest exposure comes from the British pound, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real\. We do not currently have a foreign currency hedge program\. See Part I, Item 1A\. Risk Factors – *“We operate a global business with international operations that are subject to economic and political**instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control”* for unaudited additional discussion of this risk\.

**9\. Fair Value Measurements and Other Investments**

***Assets Measured at Fair Value on a Recurring Basis***

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i\.e\. an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability\. Accounting standards include disclosure requirements around fair values used for certain financial instruments and establish a fair value hierarchy\. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market\. Each fair value measurement is reported in one of three levels:

109


Annual Report of Southwest Airlines Co\. for year 2018

|                                          |                                           |                                             |                                               |                                                               |                                          |                                             |                                               |                                                               |     |
| ---------------------------------------- | ----------------------------------------- | ------------------------------------------- | --------------------------------------------- | ------------------------------------------------------------- | ---------------------------------------- | ------------------------------------------- | --------------------------------------------- | ------------------------------------------------------------- | --- |
| **Offsetting of derivative liabilities** | **Offsetting of derivative liabilities**  | **Offsetting of derivative liabilities**    | **Offsetting of derivative liabilities**      | **Offsetting of derivative liabilities**                      | **Offsetting of derivative liabilities** | **Offsetting of derivative liabilities**    | **Offsetting of derivative liabilities**      | **Offsetting of derivative liabilities**                      |     |
| (in millions)                            | (in millions)                             | (in millions)                               | (in millions)                                 | (in millions)                                                 | (in millions)                            | (in millions)                               | (in millions)                                 | (in millions)                                                 |     |
|                                          |                                           | (i)                                         | (ii)                                          | (iii) = (i) \+ (ii)                                           |                                          | (i)                                         | (ii)                                          | (iii) = (i) \+ (ii)                                           |     |
|                                          |                                           | **December 31, 2018**                       | **December 31, 2018**                         | **December 31, 2018**                                         |                                          | **December 31, 2017**                       | **December 31, 2017**                         | **December 31, 2017**                                         |     |
| **Description**                          | **Balance Sheet location**                | **Gross amounts of recognized liabilities** | **Gross amounts offset in the Balance Sheet** | **Net amounts of liabilities presented in the Balance Sheet** |                                          | **Gross amounts of recognized liabilities** | **Gross amounts offset in the Balance Sheet** | **Net amounts of liabilities presented in the Balance Sheet** |     |
| Fuel derivative contracts                | Prepaid expenses and other current assets | $—                                          | $—                                            | $—                                                            |                                          | $50                                         | $(50)                                         | $—                                                            |     |
| Interest rate derivative contracts       | Accrued liabilities                       | $2                                          | $—                                            | $2                                                            |                                          | $1                                          | $—                                            | $1                                                            |     |
| Interest rate derivative contracts       | Other noncurrent liabilities              | $12                                         | $—                                            | $12                                                           | (a)                                      | $21                                         | $—                                            | $21                                                           | (a) |

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the Consolidated Balance Sheet in Note 15\.

101


Annual Report of Southwest Airlines Co\. for year 2017

Accounts and other receivables are carried at cost\. They primarily consist of amounts due from credit card companies associated with sales of tickets for future travel, and amounts due from business partners in the Company’s frequent flyer program\. The allowance for doubtful accounts was immaterial at December 31, 2017 and 2016\. In addition, the provision for doubtful accounts and write\-offs for 2017, 2016, and 2015 were each immaterial\.

***Inventories***

Inventories primarily consist of aircraft fuel, flight equipment expendable parts, materials, and supplies\. All of these items are carried at average cost, less an allowance for obsolescence\. These items are generally charged to expense when issued for use\. The reserve for obsolescence was $45 million and $57 million at December 31, 2017, and 2016, respectively\. In addition, the Company’s provision for obsolescence and write\-offs for 2017, 2016, and 2015 were each immaterial\.

***Property and Equipment***

Property and equipment is stated at cost\. Capital expenditures includes payments made for aircraft, other flight equipment, purchase deposits related to future aircraft deliveries, airport and other facility construction projects, and ground and other property and equipment\. Depreciation is provided by the straight\-line method to estimated residual values over periods of approximately 25 years for flight equipment, 5 to 30 years for ground property and equipment, and 10 to 30 years, or the expected term of the Company's lease if shorter, for Assets constructed for others, once the asset is placed in service\. Residual values estimated for aircraft are approximately 15 percent, for ground property and equipment generally range from 0 to 10 percent, and for Assets constructed for others range from 17 to 75 percent\. Property under capital leases and related obligations are initially recorded at an amount equal to the present value of future minimum lease payments computed on the basis of the Company’s incremental borrowing rate or, when known, the interest rate implicit in the lease\. Amortization of property under capital leases is on a straight\-line basis over the lease term and is included in Depreciation and amortization expense\. Leasehold improvements generally are amortized on a straight\-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease\. Assets constructed for others primarily consists of airport improvement projects in which the Company is considered the accounting owner of the facilities\. See Note 4 for further information\.

During first quarter 2016, the Company made the decision to further simplify its operations and accelerate the retirement of its less\-efficient Boeing 737\-300 ("Classic") fleet\. In September 2017, the Company retired the remaining 61 Classic aircraft as part of this accelerated retirement schedule\. This change in retirement dates was considered a change in estimate and was accounted for on a prospective basis as of the dates the decisions were finalized\. Therefore, the Company recorded accelerated depreciation expense over the remainder of the useful lives for each Classic aircraft and related parts\. See Note 7 for further information regarding the Company's aircraft fleet\.

The impacts on expense and earnings from the accelerated depreciation were as follows:

|                                             |                                  |                                  |
| ------------------------------------------- | -------------------------------- | -------------------------------- |
| **(in millions, except per share amounts)** | **Year ended December 31, 2017** | **Year ended December 31, 2016** |
| Depreciation and amortization expense       | $21                              | $123                             |
| Net income \*                               | $(19)                            | $(66)                            |
| Net income per basic share                  | $(0\.03)                         | $(0\.11)                         |
| Net income per diluted share                | $(0\.03)                         | $(0\.10)                         |

\* net of profitsharing benefit

The Company evaluates its long\-lived assets used in operations for impairment when events and circumstances indicate that the undiscounted cash flows to be generated by that asset are less than the carrying amounts of the asset and may not be recoverable\. Factors that would indicate potential impairment include, but are not limited to, significant decreases in the market value of the long\-lived asset(s), a significant change in the long\-lived asset’s physical condition, and

76


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

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

with other airlines regarding strategic activities\. If other airlines participate in such activities, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of the Company and potentially impairing the Company's ability to realize expected benefits from its own strategic relationships\.

***Orders for new aircraft typically must be placed years in advance of scheduled deliveries, and changes in the Company's network strategy over time may make aircraft on order less economic for the Company, result in costs related to modification or termination of aircraft orders or cause the Company to enter into orders for new aircraft on less favorable terms\.***

The Company's orders for new aircraft are typically made years in advance of actual delivery of such aircraft, and the financial commitment required for purchases of new aircraft is substantial\. At December 31, 2018, the Company had firm commitments to purchase 273 new aircraft from The Boeing Company ("Boeing"), Airbus S\.A\.S ("Airbus") and Embraer S\.A\. ("Embraer"), as well as related agreements with engine manufacturers, maintenance providers and others\. As of December 31, 2018, the Company's commitments relating to the acquisition of aircraft and related spare engines, aircraft improvements and other related obligations aggregated to a total of $24\.7 billion\.

Subsequent to the Company placing an order for new aircraft, the Company's network strategy may change\. As a result, the Company's preference for a particular aircraft that it has ordered, often years in advance, may be decreased or eliminated\. If the Company were to modify or terminate any of its existing aircraft order commitments, it may be responsible for material liabilities to its counterparties arising from any such change\. Additionally, the Company may have a need for additional aircraft that are not available under its existing orders\. In such cases, the Company may seek to acquire aircraft from other sources, such as through lease arrangements, which may result in higher costs or less favorable terms, or through the purchase or lease of used aircraft\. The Company may not be able to acquire such aircraft when needed on favorable terms or at all\.

***A majority of the Company's aircraft and certain parts are sourced from single suppliers; therefore, the Company would be materially and adversely affected if it were unable to obtain additional equipment or support from any of these suppliers\.***

The Company currently sources the majority of its aircraft and many related aircraft parts from Boeing\. In addition, our aircraft suppliers are dependent on other suppliers for certain other aircraft parts\. Therefore, if the Company was unable to acquire additional aircraft from Boeing, or if Boeing was unable or unwilling to make timely deliveries of aircraft or to provide adequate support for its products, the Company's operations could be materially and adversely affected\. The Company is also dependent on a limited number of suppliers for aircraft engines and certain other aircraft parts and could therefore also be materially and adversely affected in the event of the unavailability of these engines and other parts\.

***Union disputes, employee strikes or slowdowns, and other labor\-related disruptions could adversely affect the Company's operations and could result in increased costs that impair its financial performance\.***

United is a highly unionized company\. As of December 31, 2018, the Company and its subsidiaries had approximately 92,000 active employees, of whom approximately 83% were represented by various U\.S\. labor organizations\.

There is a risk that unions or individual employees might pursue judicial or arbitral claims arising out of changes implemented as a result of the Company entering into collective bargaining agreements with its represented employee groups\. There is also a possibility that employees or unions could engage in job actions such as slowdowns, work\-to\-rule campaigns, sick\-outs or other actions designed to disrupt the Company's normal operations, in an attempt to pressure the Company in collective bargaining negotiations\. Although the RLA makes such actions unlawful until the parties have been lawfully released to self\-help, and the Company can seek injunctive relief against premature self\-help, such actions can cause significant harm even if ultimately enjoined\. In addition, collective bargaining agreements with the Company's represented employee groups increase the Company's labor costs, which increase could be material for any applicable reporting period\.

***An outbreak of a disease or similar public health threat could have a material adverse impact on the Company's business, operating results and financial condition\.***

An outbreak of a disease or similar public health threat that affects travel demand, travel behavior, or travel restrictions could have a material adverse impact on the Company's business, financial condition and operating results\.

***If we experience changes in, or are unable to retain, our senior management team or other key employees, our operating results could be adversely affected\.***

Much of our future success depends on the continued availability of skilled personnel with industry experience and knowledge, including our senior management team and other key employees\. If we are unable to attract and retain talented, highly qualified senior management and other key employees, or if we are unable to effectively provide for the succession of senior management, our business may be adversely affected\.

14


Annual Report of Southwest Airlines Co\. for year 2018

The Company currently has agreements with organizations that process credit card transactions arising from purchases of air travel tickets by its Customers utilizing American Express, Discover, and MasterCard/VISA\. Credit card processors have financial risk associated with tickets purchased for travel because the processor generally forwards the cash related to the purchase to the Company soon after the purchase is completed, but the air travel generally occurs after that time; therefore, the processor will have liability if the Company does not ultimately provide the air travel\. Under these processing agreements, and based on specified conditions, increasing amounts of cash reserves could be required to be posted with the counterparty\.

A majority of the Company’s sales transactions are processed by Chase Paymentech\. Should chargebacks processed by Chase Paymentech reach a certain level, proceeds from advance ticket sales could be held back and used to establish a reserve account to cover such chargebacks and any other disputed charges that might occur\. Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels below investment grade\. Cash reserve requirements are based on the Company’s public debt rating and a corresponding percentage of the Company’s Air traffic liability\.

As of December 31, 2018, the Company was in compliance with all credit card processing agreements\. The inability to enter into credit card processing agreements would have a material adverse effect on the business of the Company\. The Company believes that it will be able to continue to renew its existing credit card processing agreements or will be able to enter into new credit card processing agreements with other processors in the future\.

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