Annual Report of Southwest Airlines Co\. for year 2018

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

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

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

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

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

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

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

***Airport capacity constraints and air traffic control inefficiencies have limited and could continue to limit the Company's growth; changes in or additional governmental regulation could increase the Company's operating costs or otherwise limit the Company's ability to conduct business\.***

Almost all commercial service airports are owned and/or operated by units of local or state governments\. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost\. Similarly, the federal government singularly controls all U\.S\. airspace, and airlines are dependent on the FAA operating that airspace in a safe and efficient manner\. The current air traffic control system is mainly radar\-based and supported in large part by antiquated equipment and technologies\. The FAA's protracted transition to a satellite\-based air traffic control system, as well as the implementation of policies and standards that account for the precision of global positioning system\-supported aircraft technologies, could continue to adversely impact airspace capacity and the overall efficiency of the system, resulting in limited opportunities for the Company to grow, longer scheduled flight times, increased delays and cancellations, and increased fuel consumption and aircraft emissions\. As discussed above under "Business \- Regulation," airlines are also subject to other extensive regulatory requirements\. These requirements often impose substantial costs on airlines\. The Company's strategic plans and results of operations could be negatively affected by changes in law and future actions taken by domestic and foreign governmental agencies having jurisdiction over its operations, including, but not limited to:

25


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

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

Risk Factors Relating to the Airline Industry

Terrorist attacks, geopolitical conflict or security events may adversely affect our business, financial condition and operating results\.

Terrorist attacks, geopolitical conflict or security events, or fear of such events, could have a significant adverse effect on our business\. Despite significant security measures at airports and airlines, the airline industry remains a high profile target for terrorist groups\. We constantly monitor threats from terrorist groups and individuals, including from violent extremists both internationally and domestically, with respect to direct threats against our operations and in ways not directly related to the airline industry\. In addition, the impact on our operations of avoiding areas of the world, including airspace, in which there are geopolitical conflicts and the targeting of commercial aircraft by parties to those conflicts can be significant\. Security events, primarily from external sources but also from potential insider threats, also pose a significant risk to our passenger and cargo operations\. These events could include random acts of violence and could occur in public areas that we cannot control\.

Terrorist attacks, geopolitical conflict or security events, or fear of such events, even if not made directly on or involving the airline industry, could have significant negative impact on us by discouraging passengers from flying, leading to decreased ticket sales and increased refunds\. In addition, potential costs from these types of events include increased security costs, impacts from avoiding flight paths over areas in which conflict is occurring, reputational harm and other costs\. If any or all of these types of events occur, they could have a material adverse effect on our business, financial condition and results of operations\.

The global airline industry is highly competitive and, if we cannot successfully compete in the marketplace, our business, financial condition and operating results will be materially adversely affected\.

The airline industry is highly competitive, marked by significant competition with respect to routes, fares, schedules (both timing and frequency), services, products, customer service and frequent flyer programs\. Consolidation in the airline industry, the rise of well\-funded government sponsored international carriers, changes in international alliances and the creation of immunized joint ventures have altered and will continue to alter the competitive landscape in the industry, resulting in the formation of airlines and alliances with increased financial resources, more extensive global networks and competitive cost structures\.

Our domestic operations are subject to competition from traditional network carriers, including American Airlines and United Airlines, national point\-to\-point carriers, including Alaska Airlines, JetBlue Airways and Southwest Airlines, and discount carriers, some of which may have lower costs than we do and provide service at low fares to destinations served by us\. Point\-to\-point, discount and ultra low\-cost carriers, including Spirit Airlines and Allegiant Air, place significant competitive pressure on network carriers in the domestic market\. As a result, we face significant competition at our domestic hub and gateway airports either directly at those airports or at the hubs of other airlines that are located in close proximity to our hubs and gateways\. We also face competition in smaller to medium\-sized markets from regional jet operations of other carriers\. Our ability to compete in the domestic market effectively depends, in part, on our ability to maintain a competitive cost structure\. If we cannot maintain our costs at a competitive level, then our business, financial condition and operating results could be materially adversely affected\.

Our international operations are subject to competition from both foreign and domestic carriers\. Competition is significant from government\-owned and \-funded carriers in the Gulf region, including Emirates, Etihad Airways and Qatar Airways\. These carriers have large numbers of international widebody aircraft on order and are increasing service to the U\.S\. from their hubs in the Middle East\. Several of these carriers, along with carriers from China, India and Southeast Asia, are government\-subsidized, which has allowed them to grow quickly, reinvest in their product and expand their global presence at the expense of U\.S\. airlines\.

Through alliance and other marketing and codesharing agreements with foreign carriers, U\.S\. carriers have increased their ability to sell international transportation, such as services to and beyond traditional European and Asian gateway cities\. Similarly, foreign carriers have obtained increased access to interior U\.S\. passenger traffic beyond traditional U\.S\. gateway cities through these relationships\. In addition, several joint ventures among U\.S\. and foreign carriers have received grants of antitrust immunity allowing the participating carriers to coordinate schedules, pricing, sales and inventory\.

Increased competition in both the domestic and international markets may have a material adverse effect on our business, financial condition and operating results\.

 17


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

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

to be generated by the assets are less than the carrying amount of the assets and the net book value of the assets exceeds their estimated fair value\. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets\. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell\.

Total depreciation and amortization expense was $2\.2 billion, $1\.9 billion and $1\.7 billion for the years ended December 31, 2017, 2016 and 2015, respectively\.

***(f) Income Taxes***

Income taxes are accounted for under the asset and liability method\. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards\. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes\.

We provide a valuation allowance for our deferred tax assets when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized\. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income\. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets\. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the level and volatility of fuel prices and travel demand\.

***(g) Goodwill***

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and liabilities assumed\. Goodwill is not amortized but assessed for impairment annually on October 1^st^ or more frequently if events or circumstances indicate that goodwill may be impaired\. We have one consolidated reporting unit\.

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill\. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill\. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded\. Based upon our annual assessment, there was no goodwill impairment in 2017\. The carrying value of the goodwill on our consolidated balance sheets was $4\.1 billion as of December 31, 2017 and 2016\.

***(h) Other Intangibles, Net***

Intangible assets consist primarily of domestic airport slots, customer relationships, marketing agreements, international slots and route authorities, airport gate leasehold rights and tradenames\.

*Finite\-Lived Intangible Assets*

Finite\-lived intangible assets are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable\.

The following table provides information relating to our amortizable intangible assets as of December 31, 2017 and 2016 (in millions):

|                               |                  |                  |
| ----------------------------- | ---------------- | ---------------- |
|                               | **December 31,** | **December 31,** |
|                               | **2017**         | **2016**         |
| Domestic airport slots        | $365             | $365             |
| Customer relationships        | 300              | 300              |
| Marketing agreements          | 105              | 105              |
| Tradenames                    | 35               | 35               |
| Airport gate leasehold rights | 137              | 137              |
| Accumulated amortization      | (622)            | (578)            |
| Total                         | $320             | $364             |

87


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

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

***Current or future litigation and regulatory actions, or failure to comply with the terms of any settlement, order or arrangement relating to these actions, could have a material adverse impact on the Company\.***

From time to time, we are subject to litigation and other legal and regulatory proceedings relating to our business or investigations or other actions by governmental agencies, including as described in Part I, Item 3, Legal Proceedings, of this report\. No assurances can be given that the results of these or new matters will be favorable to us\. An adverse resolution of lawsuits, arbitrations, investigations or other proceedings or actions could have a material adverse effect on our financial condition and results of operations, including as a result of non\-monetary remedies, and could also result in adverse publicity\. Defending ourselves in these matters may be time\-consuming, expensive and disruptive to normal business operations and may result in significant expense and a diversion of management’s time and attention from the operation of our business, which could impede our ability to achieve our business objectives\. Additionally, any amount that we may be required to pay to satisfy a judgment, settlement, fine or penalty may not be covered by insurance\. If we fail to comply with the terms contained in any settlement, order or agreement with a governmental authority relating to these matters, we could be subject to criminal or civil penalties, which could have a material adverse impact on the Company\. Under our charter and certain indemnification agreements that we have entered into (and may in the future enter into) with our officers, directors and certain third parties, we could be required to indemnify and advance expenses to them in connection with their involvement in certain actions, suits, investigations and other proceedings\. There can be no assurance that any of these payments will not be material\.

***Disruptions to the Company’s regional network and United Express flights provided by third\-party regional carriers could adversely affect the Company’s operations and financial condition\.***

The Company has contractual relationships with various regional carriers to provide regional aircraft service branded as United Express\. These regional operations are an extension of the Company’s mainline network and complement the Company’s operations by carrying traffic that connects to mainline service and allows flights to smaller cities that cannot be provided economically with mainline aircraft\. The Company’s business and operations are dependent on its regional flight network, with regional capacity accounting for approximately 11% of the Company’s total capacity for the year ended December 31, 2017\.

Although the Company has agreements with its regional carriers that include contractually agreed performance metrics, the Company does not control the operations of these carriers\. A number of factors may impact the Company’s regional network, including weather\-related effects and seasonality\. In addition, the decrease in qualified pilots driven by federal regulations has adversely impacted and could continue to affect the Company’s regional flying\. For example, the FAA’s expansion of minimum pilot qualification standards, including a requirement that a pilot have at least 1,500 total flight hours, as well as the FAA’s revised pilot flight and duty time rules, effective January 2014, have contributed to a smaller supply of pilots available to regional carriers\. The decrease in qualified pilots resulting from the regulations as well as factors including a decreased student pilot population and a shrinking U\.S\. military from which to hire qualified pilots, could adversely impact the Company’s operations and financial condition, and also require the Company to reduce regional carrier flying\.

If a significant disruption occurs to the Company’s regional network or flights or if one or more of the regional carriers with which the Company has relationships is unable to perform their obligations over an extended period of time, there could be a material adverse effect on the Company’s business, financial condition and operations\.

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

The Company has engaged third\-party service providers to perform a large number of functions that are integral to its business, including regional operations, operation of customer service call centers, distribution and sale of airline seat inventory, provision of information technology infrastructure and services, transmitting or uploading of data, provision of aircraft maintenance and repairs, provision of various utilities and performance of aircraft

12


Annual Report of Southwest Airlines Co\. for year 2018

The following table is a summary of the Company’s intangible assets, which are included as a component of Other assets in the Company's Consolidated Balance Sheet, as of December 31, 2018 and 2017:

|                                             |                                              |                                      |                                         |                                  |                                  |
| ------------------------------------------- | -------------------------------------------- | ------------------------------------ | --------------------------------------- | -------------------------------- | -------------------------------- |
|                                             |                                              | **Year ended December 31, 2018**     | **Year ended December 31, 2018**        | **Year ended December 31, 2017** | **Year ended December 31, 2017** |
| **(in millions)**                           | **Weighted\-average useful life (in years)** | **Gross carrying**

**amount** | **Accumulated**

**amortization** | **Gross carrying amount**        | **Accumulated Amortization**     |
| Customer relationships/marketing agreements | 10                                           | $27                                  | $25                                     | $27                              | $23                              |
| Owned domestic slots (a)                    | Indefinite                                   | 295                                  | n/a                                     | 295                              | n/a                              |
| Gate leasehold rights (a)                   | 15                                           | 180                                  | 78                                      | 180                              | 66                               |
| Total                                       | 14                                           | $502                                 | $103                                    | $502                             | $89                              |

(a) Intangible assets primarily consist of acquired leasehold rights to certain airport owned gates, takeoff and landing slots (a "slot" is the right of an air carrier, pursuant to regulations of the FAA, to operate a takeoff or landing at a specific time at certain airports) at certain domestic slot\-controlled airports, and certain intangible assets acquired\.

The Company's definite lived assets are amortized on a straight\-line basis over the useful life of the asset\. The aggregate amortization expense for 2018, 2017, and 2016 was $16 million, $13 million, and $17 million, respectively\. Estimated aggregate amortization expense for the five succeeding years and thereafter is as follows: 2019 – $13 million, 2020 – $12 million, 2021 – $12 million, 2022 – $12 million, 2023 – $12 million, and thereafter – $45 million\.

***Revenue Recognition***

Tickets sold are initially deferred as Air traffic liability\. Passenger revenue is recognized and Air traffic liability is reduced when transportation is provided\. Air traffic liability primarily represents tickets sold for future travel dates and funds that are past flight date and remain unused as well as a portion of the Company's liability associated with its loyalty program\. The majority of the Company’s tickets sold are nonrefundable\. Refundable tickets that are sold but not flown on the travel date can be reused for another flight, up to a year from the date of sale, or refunded, subject to certain conditions\. Based on the Company's revenue recognition policy, revenue is recorded at the flight date for a Customer who does not change his/her itinerary and loses his/her funds as the Company has then fulfilled its performance obligation\. Amounts collected from passengers for ancillary service fees are also recognized when the service is provided, which is typically the flight date\.

Revenue from the estimated spoilage of tickets (including partial tickets) is recorded once the flight date has passed in proportion to the pattern of flights taken by the Customer, which approximates the average period over which the population of Rapid Reward Members redeem their points\. Initial spoilage estimates are routinely adjusted and ultimately finalized once the tickets expire, which is typically twelve months after the original purchase date\. See Note 5 for further information\.

Approximately $566 million, approximately $489 million, and approximately $383 million of the Company's Operating revenues in 2018, 2017, and 2016, respectively, were attributable to foreign operations\. The remainder of the Company's Operating revenues, approximately $21\.4 billion, approximately $20\.7 billion, and approximately $20\.0 billion in 2018, 2017, and 2016, respectively, were attributable to domestic operations\.

***Loyalty Program***

The Company records a liability for the relative fair value of providing free travel under its loyalty program for all points earned from flight activity or sold to companies participating in the Company’s Rapid Rewards loyalty program as business partners that are expected to be redeemed for future travel\. The loyalty liability represents performance obligations that will be satisfied when a Rapid Rewards loyalty member redeems points for travel or other goods and services, or upon spoilage of the points\. Points earned from flight activity are valued at their relative standalone selling

75


Annual Report of Southwest Airlines Co\. for year 2017

|                                                                    |                                                                    |                                                                    |                                                                    |                                                                    |
| ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------------------ |
| **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** | **Quantitative information about Level 3 fair value measurements** |
|                                                                    | **Valuation technique**                                            | **Unobservable input**                                             | **Period (by year)**                                               | **Range**                                                          |
| Fuel derivatives                                                   | Option model                                                       | Implied volatility                                                 | 2018                                                               | 11\-26%                                                            |
|                                                                    |                                                                    |                                                                    | 2019                                                               | 17\-22%                                                            |
|                                                                    |                                                                    |                                                                    | 2020                                                               | 17\-21%                                                            |
|                                                                    |                                                                    |                                                                    | Beyond 2020                                                        | 18\-20%                                                            |

The carrying amounts and estimated fair values of the Company’s long\-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at December 31, 2017, are presented in the table below\. The fair values of the Company’s publicly held long\-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these agreements as Level 2\. Debt under seven of the Company’s debt agreements is not publicly held\. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable\. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items\.

|                                                               |                     |                          |                                |
| ------------------------------------------------------------- | ------------------- | ------------------------ | ------------------------------ |
| **(in millions)**                                             |  **Carrying value** | **Estimated fair value** | **Fair value level hierarchy** |
| French Credit Agreements due 2018 \- 2\.54%                   | $1                  | $1                       | Level 3                        |
| Fixed\-rate 737 Aircraft Notes payable through 2018 \- 7\.03% | 3                   | 3                        | Level 3                        |
| 2\.75% Notes due 2019                                         | 300                 | 302                      | Level 2                        |
| Term Loan Agreement payable through 2019 \- 6\.315%           | 66                  | 66                       | Level 3                        |
| Term Loan Agreement payable through 2019 \- 4\.84%            | 19                  | 20                       | Level 3                        |
| 2\.65% Notes due 2020                                         | 491                 | 494                      | Level 2                        |
| Term Loan Agreement payable through 2020 \- 5\.223%           | 237                 | 240                      | Level 3                        |
| 737 Aircraft Notes payable through 2020                       | 155                 | 154                      | Level 3                        |
| 2\.75% Notes due 2022                                         | 300                 | 300                      | Level 2                        |
| Pass Through Certificates due 2022 \- 6\.24%                  | 294                 | 318                      | Level 2                        |
| Term Loan Agreement payable through 2026 \- 2\.67%            | 215                 | 215                      | Level 3                        |
| 3\.00% Notes due 2026                                         | 300                 | 293                      | Level 2                        |
| 3\.45% Notes due 2027                                         | 300                 | 299                      | Level 2                        |
| 7\.375% Debentures due 2027                                   | 127                 | 154                      | Level 2                        |

104


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

conditions in certain markets, resulting in delays and disruptions of air traffic\. The outdated technologies also cause the ATC system to be less resilient in the event of a failure\. For example, an automation failure and an evacuation, in 2015 and 2017 respectively, at the Washington Air Route Control Center resulted in cancellations and delays of hundreds of flights traversing the greater Washington, D\.C\. airspace\.

In the early 2000s, the FAA embarked on a path to modernize the national airspace system, including migration from the current radar\-based ATC system to a GPS\-based system\. This modernization of the ATC system, generally referred to as “NextGen,” has been plagued by delays and cost overruns, and it remains uncertain when the full array of benefits expected from this modernization will be available to the public and the airlines\. Failure to update the ATC system in a timely manner and the substantial costs that may be imposed on airlines in order to fund a modernized ATC system may have a material adverse effect on our business\.

Further, our business has been adversely impacted when government agencies have ceased to operate as expected including due to partial shut\-downs, sequestrations or similar events\. These events have resulted in, among other things, reduced demand for air travel, an actual or perceived reduction in ATC and security screening resources and related travel delays, as well as disruption in the ability of the FAA to grant required regulatory approvals, such as those that are involved when a new aircraft is first placed into service\.

Our operating authority in international markets is subject to aviation agreements between the U\.S\. and the respective countries or governmental authorities, such as the EU, and in some cases, fares and schedules require the approval of the DOT and/or the relevant foreign governments\. Moreover, alliances with international carriers may be subject to the jurisdiction and regulations of various foreign agencies\. The U\.S\. government has negotiated “open skies” agreements with many countries, which agreements allow unrestricted route authority access between the U\.S\. and the foreign markets\. While the U\.S\. has worked to increase the number of countries with which open skies agreements are in effect, a number of markets important to us, including China, do not have open skies agreements\. For example, the open skies air services agreement between the U\.S\. and the EU, which took effect in March 2008, provides airlines from the U\.S\. and EU member states open access to each other’s markets, with freedom of pricing and unlimited rights to fly from the U\.S\. to any airport in the EU\. As a result of the agreement and a subsequent open skies agreement involving the U\.S\. and the United Kingdom, which was agreed in anticipation of Brexit, we face increased competition in these markets, including LHR\. Bilateral and multilateral agreements among the U\.S\. and various foreign governments of countries we serve but which are not covered by an open skies treaty are subject to periodic renegotiation\. We currently operate a number of international routes under government arrangements that limit the number of airlines permitted to operate on the route, the capacity of the airlines providing services on the route, or the number of airlines allowed access to particular airports\. If an open skies policy were to be adopted for any of these markets, it could have a material adverse impact on us and could result in the impairment of material amounts of our related tangible and intangible assets\. In addition, competition from foreign airlines, revenue\-sharing joint ventures, JBAs, and other alliance arrangements by and among other airlines could impair the value of our business and assets on the open skies routes\.

Brexit occurred on January 31, 2020 under the terms of the agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (the Withdrawal Agreement)\. There will now be a transition period during which the United Kingdom and the EU will seek to negotiate an agreement governing their future relationship, including in relation to air services\. Under the Withdrawal Agreement, this transition period is scheduled to end on December 31, 2020, with a potential extension of up to two years, although the United Kingdom government has passed legislation preventing any such extension of the transition period\. We face risks associated with Brexit, notably given the extent of our passenger and cargo traffic and that of our joint business partners that flows through LHR in the United Kingdom\. During the transition period, our current air services may continue as we currently conduct them\. However, Brexit will mandate further modification in the current regulatory regime, including in relation to commercial air service\. The precise scope of traffic rights between the EU and the United Kingdom remains uncertain and therefore the continuation of our current services is not assured and could be subject to disruption\. During the transition period, the United Kingdom and the EU will seek to implement a new air services agreement\. We cannot predict the terms of any such successor air services agreement or whether changes in the relationship between the United Kingdom and the EU, including whether or not an agreement governing their future relationship is reached before the end of the transition period, could materially adversely affect our business, results of operations and financial condition\. More generally, changes in U\.S\. or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of route authorities, slots or other assets located abroad, or otherwise adversely affect our international operations\.

23


Annual Report of Southwest Airlines Co\. for year 2017

by December 31, 2014\. During second quarter 2017, the City of Dallas approved using the remaining bond funds for additional terminal construction projects which began during second quarter and are expected to be completed in 2018\.

During 2015, the City of Dallas issued additional bonds for the construction of a new parking garage at Dallas Love Field\. The Company has not guaranteed the principal or interest payments on these bonds, but remains the accounting owner of this project\.

Construction costs recorded in ACFO for the Company's various projects as of December 31, 2017, and December 31, 2016, were as follows:

|                            |     |                       |                              |                                 |                       |                              |                                 |
| -------------------------- | --- | --------------------- | ---------------------------- | ------------------------------- | --------------------- | ---------------------------- | ------------------------------- |
|                            |     | **December 31, 2017** | **December 31, 2017**        | **December 31, 2017**           | **December 31, 2016** | **December 31, 2016**        | **December 31, 2016**           |
| (in millions)              |     | **ACFO**              | **ACFO,**

**Net (a)** | **Construction Obligation (b)** | **ACFO**              | **ACFO,**

**Net (a)** | **Construction Obligation (b)** |
| FLL Terminal               | (c) | $258                  | $256                         | $258                            | $132                  | $132                         | $132                            |
| LAX Terminal 1             | (c) | 433                   | 417                          | 433                             | 344                   | 336                          | 344                             |
| LAX Terminal 1\.5          | (c) | 31                    | 31                           | 31                              | —                     | —                            | —                               |
| LFMP \- Terminal           | (c) | 543                   | 474                          | 516                             | 538                   | 486                          | 522                             |
| LFMP \- Parking Garage     | (c) | 152                   | 152                          | 152                             | 80                    | 80                           | 80                              |
| HOU International Terminal | (d) | 126                   | 118                          | —                               | 126                   | 122                          | —                               |
|                            |     | $1,543                | $1,448                       | $1,390                          | $1,220                | $1,156                       | $1,078                          |

(a) Net of accumulated depreciation\.

(b) Construction obligation will be reduced through future facility rent payments\. These future payments are not fixed per the lease agreement, but are variable and fluctuate based on various market and other factors outside the control of the Company\.

(c) Projects still in progress\.

(d) Project completed in 2015 at Houston William P\. Hobby Airport ("HOU")\.

***Contingencies***

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service ("IRS")\. The Company's management does not expect that the outcome of any of its currently ongoing legal proceedings or the outcome of any adjustments presented by the IRS, individually or collectively, will have a material adverse effect on the Company's financial condition, results of operations, or cash flow\.

**5****\. SUPPLEMENTAL FINANCIAL INFORMATION**

|                          |                       |                       |
| ------------------------ | --------------------- | --------------------- |
| **(in millions)**        | **December 31, 2017** | **December 31, 2016** |
| Derivative contracts     | $136                  | $120                  |
| Intangible assets, net   | 413                   | 426                   |
| Capital lease receivable | 76                    | 90                    |
| Other                    | 161                   | 138                   |
| Other assets             | $786                  | $774                  |

85


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

The percentage of Mainline passenger capacity by region and average stage length is presented below:

|                              |          |          |                    |          |          |
| ---------------------------- | -------- | -------- | ------------------ | -------- | -------- |
|                              | **2018** | **2017** | **2016** **^(a)^** | **2015** | **2014** |
| West Coast ^(b)^             | 23%      | 24%      | 30%                | 31%      | 31%      |
| Transcon/midcon              | 46%      | 45%      | 30%                | 27%      | 25%      |
| Hawaii and Costa Rica        | 15%      | 15%      | 19%                | 20%      | 20%      |
| Alaska                       | 11%      | 11%      | 15%                | 16%      | 16%      |
| Mexico                       | 5%       | 5%       | 6%                 | 6%       | 7%       |
| Canada                       | —%       | —%       | —%                 | —%       | 1%       |
| Total                        | 100%     | 100%     | 100%               | 100%     | 100%     |
| Average Stage Length (miles) | 1,298    | 1,301    | 1,225              | 1,195    | 1,182    |

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

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

**REGIONAL**

Our Regional operations consist of flights operated by Horizon, SkyWest and PenAir\. In 2018, our Regional operations carried approximately 10 million revenue passengers, primarily in the states of Washington, Oregon, Idaho and California\. Horizon is the largest regional airline in the Pacific Northwest and carries approximately 71% of Air Group's regional revenue passengers\.

Based on 2018 Horizon passenger enplanements on regional aircraft, our most significant concentration of regional activity was in Seattle and Portland\. At December 31, 2018, Horizon’s operating fleet consisted of 26 E175 jet aircraft and 39 Bombardier Q400 turboprop aircraft\. The regional fleet operated by SkyWest consisted of 32 E175 aircraft\.

The percentage of regional passenger capacity by region and average stage length is presented below:

|                              |          |          |          |          |          |
| ---------------------------- | -------- | -------- | -------- | -------- | -------- |
|                              | **2018** | **2017** | **2016** | **2015** | **2014** |
| West Coast                   | 53%      | 59%      | 60%      | 62%      | 66%      |
| Pacific Northwest            | 11%      | 13%      | 16%      | 19%      | 19%      |
| Canada                       | 3%       | 4%       | 5%       | 7%       | 8%       |
| Alaska                       | 2%       | 3%       | 4%       | 5%       | 4%       |
| Midcon                       | 30%      | 21%      | 15%      | 6%       | 2%       |
| Mexico                       | 1%       | —%       | —%       | 1%       | 1%       |
| Total                        | 100%     | 100%     | 100%     | 100%     | 100%     |
| Average Stage Length (miles) | 468      | 422      | 381      | 348      | 339      |

**FREQUENT FLYER PROGRAM**

Alaska Airlines Mileage Plan™ provides a comprehensive suite of frequent flyer benefits\. Miles can be earned by flying on our airlines or on one of our 17 airline partners, by using an Alaska Airlines credit card, or through other non\-airline partners\. Alaska's extensive list of airline partners includes carriers associated with each of the three major global alliances, making it easier for our members to earn miles and reach elite status in our frequent flyer program\. Through Alaska and our global partners, Mileage Plan™ members have access to a large network of over 900 worldwide travel destinations\. Further, members can receive up to 40,000 bonus miles upon signing up for the Alaska Airlines Visa Signature card and meeting a minimum spend threshold, and earn triple miles on Alaska Airlines purchases\. Alaska Airlines Visa Signature cardholders and small business cardholders in the U\.S\., and Platinum and World Elite Mastercard cardholders in Canada, also receive an annual companion ticket that allows members to purchase an additional ticket for $99 plus taxes, with no restrictions or black\-out dates, and a free first checked bag for up to six people traveling on the same itinerary\. Earned miles can be redeemed for flights on our airlines, or our partner airlines, for hotel stays via mileageplanhotels\.com, or for upgrades to First Class on Alaska Airlines\. We believe all of these benefits give our Mileage Plan™ members more value for their travel\.

Mileage Plan™ revenues, including those in the Passenger revenue income statement line item, represented approximately 13% of Air Group's total revenues in 2018\. Mileage Plan™ helps drive revenue growth by attracting new customers and building customer loyalty through the benefits that we provide\.

 8


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

The inability to attract, retain and train qualified personnel, or maintain our culture, could result in guest impacts and adversely affect our business and results of operations\.

We compete against other major U\.S\. airlines for pilots, aircraft technicians and other skilled labor\. As more pilots in the industry approach mandatory retirement age, the U\.S\. airline industry may be affected by a pilot shortage\. Attrition beyond normal levels, the inability to attract new pilots, or our key vendors' inability to attract and retain mechanics or other skilled labor positions could negatively impact our operating results\. As a result, our business prospects could be harmed\. Additionally, we may be required to increase our wage and benefit packages, or pay increased rates to our vendors, to retain these positions\. This would result in increased overall costs and may adversely impact our financial position\.

Our success is also dependent on cultivating and maintaining a united culture with cohesive values and goals\. Much of our continued success is tied to our guest loyalty\. Failure to maintain and grow the Alaska culture could strain our ability to maintain relationships with guests, suppliers, employees and other constituencies\. As part of this process, we may continue to incur substantial costs for employee programs\.

|                                     |                                     |                                     |
| ----------------------------------- | ----------------------------------- | ----------------------------------- |
| ITEM 1B\. UNRESOLVED STAFF COMMENTS | ITEM 1B\. UNRESOLVED STAFF COMMENTS | ITEM 1B\. UNRESOLVED STAFF COMMENTS |

 None\.

|                     |                     |                     |
| ------------------- | ------------------- | ------------------- |
| ITEM 2\. PROPERTIES | ITEM 2\. PROPERTIES | ITEM 2\. PROPERTIES |

AIRCRAFT

The following table describes the aircraft we operate and their average age at December 31, 2019:

|                      |                      |                      |           |           |  |  |  |       |       |  |  |  |        |        |  |  |  |       |       |  |  |  |                                |                                |
|:-------------------- |:-------------------- |:-------------------- |:---------:|:---------:|:- |:- |:- | -----:| -----:|:- |:- |:- | ------:| ------:|:- |:- |:- | -----:| -----:|:- |:- |:- | ------------------------------:| ------------------------------:|
| Aircraft Type        | Aircraft Type        | Aircraft Type        |   Seats   |   Seats   |  |  |  | Owned | Owned |  |  |  | Leased | Leased |  |  |  | Total | Total |  |  |  | Average
Age in
Years | Average
Age in
Years |
| B737 Freighters      | B737 Freighters      | B737 Freighters      |    —      |    —      |  |  |  |    3  |    3  |  |  |  |     —  |     —  |  |  |  |    3  |    3  |  |  |  |                         18\.9  |                         18\.9  |
| B737 NextGen         | B737 NextGen         | B737 NextGen         | 124\-178  | 124\-178  |  |  |  |  153  |  153  |  |  |  |    10  |    10  |  |  |  |  163  |  163  |  |  |  |                          8\.9  |                          8\.9  |
| A319/A320            | A319/A320            | A319/A320            | 119\-150  | 119\-150  |  |  |  |   10  |   10  |  |  |  |    51  |    51  |  |  |  |   61  |   61  |  |  |  |                          9\.7  |                          9\.7  |
| A321neo              | A321neo              | A321neo              | 185\-190  | 185\-190  |  |  |  |    —  |    —  |  |  |  |    10  |    10  |  |  |  |   10  |   10  |  |  |  |                          1\.7  |                          1\.7  |
| Total Mainline Fleet | Total Mainline Fleet | Total Mainline Fleet |           |           |  |  |  |  166  |  166  |  |  |  |    71  |    71  |  |  |  |  237  |  237  |  |  |  |                          8\.9  |                          8\.9  |
| Q400                 | Q400                 | Q400                 |    76     |    76     |  |  |  |   26  |   26  |  |  |  |     7  |     7  |  |  |  |   33  |   33  |  |  |  |                         11\.7  |                         11\.7  |
| E175                 | E175                 | E175                 |    76     |    76     |  |  |  |   30  |   30  |  |  |  |    32  |    32  |  |  |  |   62  |   62  |  |  |  |                          2\.3  |                          2\.3  |
| Total Regional Fleet | Total Regional Fleet | Total Regional Fleet |           |           |  |  |  |   56  |   56  |  |  |  |    39  |    39  |  |  |  |   95  |   95  |  |  |  |                          5\.6  |                          5\.6  |
| Total                | Total                | Total                |           |           |  |  |  |  222  |  222  |  |  |  |   110  |   110  |  |  |  |  332  |  332  |  |  |  |                          8\.0  |                          8\.0  |

“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\. Note 6 to the Consolidated Financial Statements provides more information regarding leased aircraft as capitalized on our Consolidated Balance Sheets\.

Alaska’s leased B737 aircraft have lease expiration dates between 2020 and 2028\. Alaska’s leased A319, A320, and A321neo aircraft have expiration dates between 2020 and 2031\. Horizon’s leased Q400 aircraft have expiration dates between 2022 and 2023\. The leased E175 aircraft are through our capacity purchase agreement with SkyWest, which extends through 2030\. Alaska has the option to extend some of the leases for additional periods\.

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\.

26


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

Credit Card Processing Agreements

Our VISA/MasterCard and American Express credit card processing agreements provide that no cash reserve ("Reserve") is required, and no withholding of payment related to receivables collected will occur, except in certain circumstances, including when we do not maintain a required level of liquidity as outlined in the merchant processing agreements\. In circumstances in which the credit card processor can establish a Reserve or withhold payments, the amount of the Reserve or payments that may be withheld would be equal to the potential liability of the credit card processor for tickets purchased with VISA/MasterCard or American Express credit cards, as applicable, that had not yet been used for travel\. We did not have a Reserve or an amount withheld as of  December 31, 2018  or  2017 \.

Other Contingencies

General Indemnifications

We are the lessee under many commercial real estate leases\. It is common in these transactions for us, as the lessee, to agree to indemnify the lessor and the lessor's related parties for tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises\. This type of indemnity would typically make us responsible to indemnified parties for liabilities arising out of the conduct of, among others, contractors, licensees and invitees at, or in connection with, the use or occupancy of the leased premises\. This indemnity often extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by either their sole or gross negligence or their willful misconduct\.

Our aircraft and other equipment lease and financing agreements typically contain provisions requiring us, as the lessee or obligor, to indemnify the other parties to those agreements, including certain of those parties' related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or other equipment\.

We believe that our insurance would cover most of our exposure to liabilities and related indemnities associated with the commercial real estate leases and aircraft and other equipment lease and financing agreements described above\. While our insurance does not typically cover environmental liabilities, we have insurance policies in place as required by applicable environmental laws\.

Some of our aircraft and other financing transactions include provisions that require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to specified changes in law or regulations\. In some of these financing transactions, we also bear the risk of changes in tax laws that would subject payments to non\-U\.S\. lenders to withholding taxes\.

We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict (1) when and under what circumstances these provisions may be triggered and (2) the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time\.

 89


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

|                         |                              |
| ----------------------- | ---------------------------- |
| Date: February 25, 2019 | /s/ Susan D\. Kronick        |
|                         | Susan D\. Kronick, Director  |
| Date: February 25, 2019 | /s/ Martin H\. Nesbitt       |
|                         | Martin H\. Nesbitt, Director |
| Date: February 25, 2019 | /s/ Denise M\. O’Leary       |
|                         | Denise M\. O’Leary, Director |
| Date: February 25, 2019 | /s/ Ray M\. Robinson         |
|                         | Ray M\. Robinson, Director   |

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of American Airlines, Inc\. and in the capacities and on the dates noted:

|                         |                                                      |
| ----------------------- | ---------------------------------------------------- |
| Date: February 25, 2019 | /s/ W\. Douglas Parker                               |
|                         | W\. Douglas Parker                                   |
|                         | Chairman and Chief Executive Officer                 |
|                         | (Principal Executive Officer)                        |
| Date: February 25, 2019 | /s/ Derek J\. Kerr                                   |
|                         | Derek J\. Kerr                                       |
|                         | Executive Vice President and Chief Financial Officer |
|                         | (Principal Financial and Accounting Officer)         |
| Date: February 25, 2019 | /s/ Stephen L\. Johnson                              |
|                         | Stephen L\. Johnson, Director                        |
| Date: February 25, 2019 | /s/ Robert D\. Isom                                  |
|                         | Robert D\. Isom, Director                            |

202


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

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

|                                           |           |             |             |             |                               |           |             |             |             |                               |
| ----------------------------------------- | --------- | ----------- | ----------- | ----------- | ----------------------------- | --------- | ----------- | ----------- | ----------- | ----------------------------- |
|                                           | **2019**  | **2019**    | **2019**    | **2019**    | **2019**                      | **2018**  | **2018**    | **2018**    | **2018**    | **2018**                      |
| Pension Plan Assets:                      | **Total** | **Level 1** | **Level 2** | **Level 3** | **Assets Measured at NAV(a)** | **Total** | **Level 1** | **Level 2** | **Level 3** | **Assets Measured at NAV(a)** |
| Equity securities funds                   | $1,957    | $47         | $117        | $71         | $1,722                        | $1,457    | $254        | $106        | $63         | $1,034                        |
| Fixed\-income securities                  | 1,732     | —           | 687         | 69          | 976                           | 1,520     | —           | 628         | 87          | 805                           |
| Alternatives                              | 776       | —           | —           | 205         | 571                           | 596       | —           | —           | 134         | 462                           |
| Other investments                         | 499       | 466         | 21          | 12          | —                             | 254       | 224         | 17          | 13          | —                             |
| Total                                     | $4,964    | $513        | $825        | $357        | $3,269                        | $3,827    | $478        | $751        | $297        | $2,301                        |
| Other Postretirement Benefit Plan Assets: |           |             |             |             |                               |           |             |             |             |                               |
| Deposit administration fund               | $52       | $—          | $—          | $52         | $—                            | $53       | $—          | $—          | $53         | $—                            |

(a) In accordance with the relevant accounting standards, certain investments that are measured at fair value using the net asset value ("NAV") per share (or its equivalent) have not been classified in the fair value hierarchy\. These investments are commingled funds that invest in fixed\-income instruments including bonds, debt securities, and other similar instruments issued by various U\.S\. and non\-U\.S\. public\- or private\-sector entities\. Redemption periods for these investments range from daily to semiannually\.

Equity and Fixed\-Income\.  Equities include investments in both developed market and emerging market equity securities\. Fixed\-income includes primarily U\.S\. and non\-U\.S\. government fixed\-income securities and U\.S\. and non\-U\.S\. corporate fixed\-income securities\.

Deposit Administration Fund\.  This investment is a stable value investment product structured to provide investment income\.

Alternatives\.  Alternative investments consist primarily of investments in hedge funds, real estate and private equity interests\.

Other investments\.  Other investments consist of primarily cash, as well as insurance contracts\.

The reconciliation of United's benefit plan assets measured at fair value using unobservable inputs (Level 3) for the years ended  December 31, 2019  and  2018  is as follows (in millions):

|                                                   |             |              |
| ------------------------------------------------- | ----------- | ------------ |
|                                                   | **2019**    | **2018**     |
| Balance at beginning of year                      | $350        | $383         |
| Actual return (loss) on plan assets:              |             |              |
| Sold during the year                              | 12          | 10           |
| Held at year end                                  | (1

) | (21

) |
| Purchases, sales, issuances and settlements (net) | 48          | (22

) |
| Balance at end of year                            | $409        | $350         |

Funding requirements for tax\-qualified defined benefit pension plans are determined by government regulations\. United's contributions reflected above have satisfied its required contributions through the  2019  calendar year\. In  2020 , employer anticipated contributions to all of United's pension and postretirement plans are at least   $314 million  and approximately   $47 million , respectively\.

The estimated future benefit payments, net of expected participant contributions, in United's pension plans and other postretirement benefit plans as of  December 31, 2019  are as follows (in millions):

|                   |             |                          |
| ----------------- | ----------- | ------------------------ |
|                   | **Pension** | **Other Postretirement** |
| 2020              | $361        | $53                      |
| 2021              | 386         | 56                       |
| 2022              | 399         | 59                       |
| 2023              | 410         | 62                       |
| 2024              | 399         | 64                       |
| Years 2025 – 2029 | 2,219       | 328                      |

72


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

Risk Factors Relating to the Airline Industry

Terrorist attacks, geopolitical conflict or security events may adversely affect our business, financial condition and operating results\.

Terrorist attacks, geopolitical conflict or security events, or fear of any of these events, could have a significant adverse effect on our business\. Despite significant security measures at airports and airlines, the airline industry remains a high profile target for terrorist groups\. We constantly monitor threats from terrorist groups and individuals, including from violent extremists both internationally and domestically, with respect to direct threats against our operations and in ways not directly related to the airline industry\. In addition, the impact on our operations of avoiding areas of the world, including airspace, in which there are geopolitical conflicts and the targeting of commercial aircraft by parties to those conflicts can be significant\. Security events, primarily from external sources but also from potential insider threats, also pose a significant risk to our passenger and cargo operations\. These events could include random acts of violence and could occur in public areas that we cannot control\.

Terrorist attacks, geopolitical conflict or security events, or fear of any of these events, even if not made directly on or involving the airline industry, could have significant negative impact on us by discouraging passengers from flying, leading to decreased ticket sales and increased refunds\. In addition, potential costs from these types of events include increased security costs, impacts from avoiding flight paths over areas in which conflict is occurring, reputational harm and other costs\. If any or all of these types of events occur, they could have a material adverse effect on our business, financial condition and results of operations\.

The global airline industry is highly competitive and, if we cannot successfully compete in the marketplace, our business, financial condition and operating results will be materially adversely affected\.

The airline industry is highly competitive, marked by significant competition with respect to routes, fares, schedules (both timing and frequency), services, products, customer service and loyalty programs\. Consolidation in the airline industry, the rise of subsidized government sponsored international carriers, changes in international alliances and the creation of immunized joint ventures have altered and will continue to alter the competitive landscape in the industry, resulting in the formation of airlines and alliances with increased financial resources, more extensive global networks and competitive cost structures\.

Our domestic operations are subject to competition from traditional network carriers, including American Airlines and United Airlines, national point\-to\-point carriers, including Alaska Airlines, JetBlue Airways and Southwest Airlines, and other discount or ultra low\-cost carriers, including Spirit Airlines, Frontier Airlines and Allegiant Air, some of which may have lower costs than we do and provide service at low fares to destinations served by us\. Point\-to\-point, discount and ultra low\-cost carriers place significant competitive pressure on network carriers in the domestic market\. In particular, we face significant competition at our domestic hubs and key airports either directly at those airports or at the hubs of other airlines that are located in close proximity to our hubs and key airports\. We also face competition in smaller to medium\-sized markets from regional jet operations of other carriers\. Our ability to compete in the domestic market effectively depends, in part, on our ability to maintain a competitive cost structure\. If we cannot maintain our costs at a competitive level, then our business, financial condition and operating results could be materially adversely affected\.

Our international operations are subject to competition from both foreign and domestic carriers\. Competition from government\-owned and subsidized carriers in the Gulf region, including Emirates, Etihad Airways and Qatar Airways, is significant\. These carriers have large numbers of international widebody aircraft on order and have increased service to the U\.S\. These carriers are government\-subsidized, which has allowed them to grow quickly, reinvest in their product and expand their global presence at the expense of U\.S\. airlines\.

Through alliance and other marketing and codesharing agreements with foreign carriers, U\.S\. carriers have increased their ability to sell international transportation, such as services to and beyond traditional European and Asian gateway cities\. Similarly, foreign carriers have obtained increased access to interior U\.S\. passenger traffic beyond traditional U\.S\. gateway cities through these relationships\. In addition, several joint ventures among U\.S\. and foreign carriers have received grants of antitrust immunity allowing the participating carriers to coordinate schedules, pricing, sales and inventory\.

Increased competition in both the domestic and international markets may have a material adverse effect on our business, financial condition and operating results\.

18


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

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments\. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate\.

Evaluation of estimated passenger travel revenue

As discussed in Note 1(k) to the consolidated financial statements, the Company recorded passenger travel revenue of $38\.8 billion for the year ended December 31, 2019\. Passenger travel revenue includes an estimate for the amount of revenue recognized for tickets that will expire unused in whole or in part\. The percentage of passenger tickets that are expected to expire unused is estimated based on an analysis of the Company’s historical data\.

We identified the evaluation of estimated passenger travel revenue as a critical audit matter\. A high degree of auditor judgment was required to assess the underlying assumption made by the Company to develop this estimate\.

The primary procedures we performed to address this critical audit matter included the following\. We tested certain internal controls over the Company’s passenger revenue recognition process, including controls related to the estimation of the percentage of passenger tickets that are expected to expire unused\. We assessed the Company’s estimate of the percentage of passenger tickets expected to expire unused by comparing previous years’ estimates to the actual percentage of passenger tickets expired unused for the year\. We evaluated the estimated amount of revenue recorded in the current year related to passenger tickets that are expected to expire unused by developing an independent expectation using actual historical ticket expirations\. We compared our independent expectation to that of the Company\.

Assessment of the estimated selling price for mileage credits earned through travel

As discussed in Note 1(k) to the consolidated financial statements, the Company applies a relative selling price approach whereby the total amount collected from each applicable passenger ticket sale is allocated between the air transportation and the mileage credits earned\. The mileage credits earned are deferred and recognized in passenger revenue at the time mileage credits are redeemed and transportation is provided\. The Company estimates the selling price of mileage credits earned through travel using an approach based on inputs and assumptions derived from historical data\. Additionally, an adjustment is made to the estimated selling price of mileage credits earned to account for the estimate of mileage credits not expected to be redeemed\. The Company’s loyalty program liability was $8\.6 billion as of December 31, 2019, and the associated passenger revenue for mileage credits redeemed for travel was $3\.2 billion for the year ended December 31, 2019\.

We identified the assessment of the estimated selling price for mileage credits earned through travel, including the estimated number of mileage credits not expected to be redeemed, as a critical audit matter\. A high degree of auditor judgment was required to evaluate the historical data used to develop the estimate\.

The primary procedures we performed to address this critical audit matter included the following\. We tested certain internal controls over the Company’s loyalty program accounting process, including controls related to the estimation of the selling price for mileage credits earned through travel\. We evaluated that the Company’s methodology used to develop the estimated selling price of mileage credits earned through travel, including estimated mileage credits not expected to be redeemed, was consistent with that of historical periods\. We performed sensitivity analyses over the estimated selling price of mileage credits earned through travel, including estimated mileage credits not expected to be redeemed\. We assessed the results of the sensitivity analyses to the Company’s recorded amount of loyalty program liability and the associated passenger revenue\. We compared the Company’s estimate of mileage credits not expected to be redeemed to that of other airlines within the industry\.

/s/ KPMG LLP

We have served as the Company’s auditor since 2014\.

Dallas, Texas

February 19, 2020

71


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

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

**Number** | **Description**                                                                                |
| 10\.2                         | [First Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of November 14, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016, amending the Loan Agreement, dated as of May 23, 2013, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\., as borrower), as the borrower, American Airlines Group Inc\., as parent and guarantor (as successor in interest to US Airways Group, Inc\., as parent and guarantor), the lenders from time to time party thereto, Citibank N\.A\., as administrative agent and collateral agent (as successor in interest to Citicorp North America Inc\., as administrative agent and collateral agent), and certain other parties thereto (incorporated by reference to Exhibit 10\.2 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000009/ex10210k2017.htm) |
| 10\.3                         | [First Amendment and Restatement Agreement, dated as of April 20, 2015, in relation to the Credit and Guaranty Agreement, dated as of October 10, 2014 (as amended), among American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.), American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), the Revolving Lenders (as defined therein) party thereto, the 2015 Term Loan Lenders (as defined therein) party thereto and Citibank N\.A\., as administrative agent and collateral agent (incorporated by reference to Exhibit 10\.4 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515261937/d945812dex104.htm)                                                                                |
| 10\.4                         | [First Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of October 26, 2015, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.), the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.6 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516474605/d78287dex106.htm)                                                                                |
| 10\.5                         | [Second Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of September 22, 2016, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516742263/d247546dex101.htm)                                                                                |
| 10\.6                         | [Third Amendment to the Amended and Restated Credit and Guaranty Agreement, dated as of June 14, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517239325/d416225dex102.htm)                                                                                |
| 10\.7                         | [Fourth Amendment to the Amended and Restated Credit and Guaranty Agreement, dated as of August 21, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.7 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000016/ex10110qq118.htm) \*                                                                                |
| 10\.8                         | [Fifth Amendment to the Amended and Restated Credit and Guaranty Agreement, dated as of September 17, 2018, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2018 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000039/ex10110qq318.htm) \*                                                                                |
| 10\.9                         | [Sixth Amendment to the Amended and Restated Credit and Guaranty Agreement, dated as of December 10, 2018, amending the Amended and Restated Credit and Guaranty Agreement, dated as of April 20, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Citibank N\.A\., as administrative agent, and certain other parties thereto\.](https://americanairlines.gcs-web.com/email-alerts/ex10910k2018.htm) \*\*                                                                                |
| 10\.10                        | [First Amendment and Restatement Agreement, dated as of May 21, 2015, in relation to the Credit and Guaranty Agreement, dated as of June 27, 2013 (as amended), among American Airlines Group Inc\. (as successor in interest to US Airways Group, Inc\.), American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), the Revolving Lenders (as defined therein) party thereto, the 2015 Term Loan Lenders (as defined therein) party thereto and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10\.5 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515261937/d945812dex105.htm)                                                                                |
| 10\.11                        | [First Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of October 26, 2015, amending the Amended and Restated Credit and Guaranty Agreement, dated as of May 21, 2015, among American Airlines, Inc\. (as successor in interest to US Airways, Inc\.), American Airlines Group Inc\., (as successor in interest to US Airways Group, Inc \.), the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.8 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516474605/d78287dex108.htm)                                                                                |

193


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

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

**Number** | **Description**                                                                                |
| 10\.21                        | [Supplemental Agreement No\. 6, dated as of April 21, 2015, to Purchase Agreement No\. 3219 between American Airlines, Inc\. and The Boeing Company, dated as of October 15, 2008, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515261937/d945812dex102.htm) \*                   |
| 10\.22                        | [Supplemental Agreement No\. 7, dated as of September 12, 2016, to Purchase Agreement No\. 3219 dated as of October 15, 2008, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516742263/d247546dex103.htm) \*                                                                                |
| 10\.23                        | [Supplemental Agreement No\. 8, dated as of January 26, 2017, to Purchase Agreement No\. 3219 dated as of October 15, 2008, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex103.htm) \*                                                                                |
| 10\.24                        | [Supplemental Agreement No\. 9, dated as of April 24, 2017, to Purchase Agreement No\. 3219 dated as of October 15, 2008, by and between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.5 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517239325/d416225dex105.htm) \*                                                                                |
| 10\.25                        | [Supplemental Agreement No\. 10, dated as of May 11, 2017, to Purchase Agreement No\. 3219 dated as of October 15, 2008, by and between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.6 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517239325/d416225dex106.htm) \*                                                                                |
| 10\.26                        | [A320 Family Aircraft Purchase Agreement, dated as of July 20, 2011, between American Airlines, Inc\. and Airbus S\.A\.S\. (incorporated by reference to Exhibit 10\.4 to AMR’s report on Form 10\-Q for the quarter ended September 30, 2011 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000119312511274936/d236673dex104.htm) \*                                                                                |
| 10\.27                        | [Amendment No\. 1, dated as of January 11, 2013, to A320 Family Aircraft Purchase Agreement between American Airlines, Inc\. and Airbus S\.A\.S\., dated as of July 20, 2011 (incorporated by reference to Exhibit 10\.8 to AMR’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620113000040/d516424dex108.htm) \*                                                                                |
| 10\.28                        | [Amendment No\. 2, dated as of May 30, 2013, to A320 Family Aircraft Purchase Agreement between American Airlines, Inc\. and Airbus S\.A\.S, dated as of July 20, 2011 (incorporated by reference to Exhibit 10\.2 to AMR’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620113000067/d567093dex102.htm) \*                                                                                |
| 10\.29                        | [Amendment No\. 3, dated as of November 20, 2013, to A320 Family Aircraft Purchase Agreement between American Airlines, Inc\. and Airbus S\.A\.S\., dated as of July 20, 2011 (incorporated by reference to Exhibit 10\.27 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000004/d682697dex1027.htm) \*                                                                                |
| 10\.30                        | [Amendment No\. 4, dated as of June 18, 2014, to the A320 Family Aircraft Purchase Agreement between Airbus S\.A\.S\., as seller, and American Airlines, Inc\., as buyer, dated as of July 20, 2011, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000014/d759439dex101.htm) \* |
| 10\.31                        | [Amendment No\. 5, dated as of June 24, 2014, to the A320 Family Aircraft Purchase Agreement between Airbus S\.A\.S\., as seller, and American Airlines, Inc\., as buyer, dated as of July 20, 2011, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000014/d759439dex102.htm) \* |
| 10\.32                        | [Amendment No\. 6, dated as of July 1, 2014, to the A320 Family Aircraft Purchase Agreement between Airbus S\.A\.S\., as seller, and American Airlines, Inc\., as buyer, dated as of July 20, 2011, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000014/d759439dex103.htm) \*  |
| 10\.33                        | [Amendment No\. 7, dated as of November 25, 2014, to the A320 Family Aircraft Purchase Agreement between Airbus S\.A\.S\., as seller, and American Airlines, Inc\., as buyer, dated as of July 20, 2011, as amended, restated, amended and restated, supplemented or otherwise (incorporated by reference to Exhibit 10\.51 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515061145/d829913dex1051.htm) \*      |
| 10\.34                        | [Amendment No\. 8, dated as of June 11, 2015, to the A320 Family Aircraft Purchase Agreement between American Airlines, Inc\. and Airbus S\.A\.S\., dated as of July 20, 2011, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.1 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515261937/d945812dex101.htm) \*                       |
| 10\.35                        | [Amendment No\. 9, dated as of September 23, 2015, to the A320 Family Aircraft Purchase Agreement, dated as of July 20, 2011, between American Airlines, Inc\. and Airbus S\.A\.S\. (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2015 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312515351246/d14219dex103.htm) \*                                                                                |
| 10\.36                        | [Purchase Agreement No\. 03735, dated as of February 1, 2013, between American Airlines, Inc\., and The Boeing Company (incorporated by reference to Exhibit 10\.7 to AMR’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620113000040/d516424dex107.htm) \*                                                                                |

192