UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~2019

¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-8957

ALASKA AIR GROUP, INC.



Delaware		91-1292054
(State of Incorporation)		(I.R.S. Employer Identification No.)



Title of each class	Name of each exchange on which registered	Ticker Symbol
Common stock, $0.01 par value	New York Stock Exchange	ALK



19300 International Boulevard,	Seattle, ~~Washington~~	WA	98188
~~Telephone: (206) 392-5040~~



Telephone:	(206)	392-5040

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx☒ No ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filerx	☒	Accelerated filer ¨	☐	Non-accelerated filer¨ (Do not check if a smaller reporting company)	☐	Smaller reporting company ¨	☐	Emerging growth company ¨	☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨☐ No x☒

The registrant has ~~123,044,897~~123,173,426 common shares, par value $0.01, outstanding at October 31, ~~2017~~2019.

This document is also available on our website at http://investor.alaskaair.com.

ALASKA AIR GROUP, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, ~~2017~~2019

TABLE OF CONTENTS

As used in this Form 10-Q, the terms “Air Group,” the ~~"Company,"~~“Company,” “our,” “we” and "us" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc., Virgin America Inc. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, Inc), and Horizon Air Industries, Inc. are referred to as “Alaska,” ~~"Virgin America"~~“Virgin America” and “Horizon” and together as our “airlines.”

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause ~~our~~ actual results to differ from our expectations are:

the competitive environment in our industry;

changes in our operating costs, including fuel, which can be volatile;

our ability to meet our cost reduction goals;

our ability to achieve anticipated synergies and timing thereof in connection with our acquisition of Virgin America;

our ability to successfully integrate the Boeing and Airbus operations;

labor disputes and our ability to attract and retain qualified personnel;

operational disruptions;

~~an aircraft accident or incident;~~

general economic conditions, including the impact of those conditions on customer travel behavior;

the concentration of our revenue from a few key markets;

an aircraft accident or incident;

actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;

our reliance on automated systems and the risks associated with changes made to those systems;

changes in laws and ~~regulations;~~regulations.

~~our ability to successfully integrate the operations of Virgin America into those of Alaska;~~

~~our ability to achieve anticipated synergies and timing thereof in connection with the acquisition of Virgin America.~~

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, ~~2016~~2018, and Item 1A. "Risk Factors" included herein. Please consider our forward-looking statements in light of those risks as you read this report.

PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions)	September 30, 2017		December 31, 2016		September 30, 2019		December 31, 2018
ASSETS
Current Assets
Cash and cash equivalents	$	144	$	328	$	237	$	105
Marketable securities	1,596		1,252		1,382		1,131
Total cash and marketable securities	1,740		1,580		1,619		1,236
Receivables—net	301		302
Inventories and supplies—net	57		47
Receivables - net					377		366
Inventories and supplies - net					63		60
Prepaid expenses and other current assets	116		121		143		125
Total Current Assets	2,214		2,050		2,202		1,787

Property and Equipment
Aircraft and other flight equipment	7,590		6,947		8,492		8,221
Other property and equipment	1,187		1,103		1,272		1,363
Deposits for future flight equipment	531		545		463		439
	9,308		8,595		10,227		10,023
Less accumulated depreciation and amortization	3,078		2,929		3,393		3,242
Total Property and Equipment—Net	6,230		5,666
Total Property and Equipment - Net					6,834		6,781

Operating lease assets					1,647		—
Goodwill	1,934		1,934		1,943		1,943
Intangible assets	135		143
Intangible assets - net					123		127
Other noncurrent assets	226		169		234		274
Other Assets	2,295		2,246		3,947		2,344

Total Assets	$	10,739	$	9,962	$	12,983	$	10,912

~~See accompanying notes to condensed consolidated financial statements.~~

~~ALASKA AIR GROUP, INC.~~

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions, except share amounts)	September 30, 2017			December 31, 2016			September 30, 2019			December 31, 2018
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	97		$	92		$	120		$	132
Accrued wages, vacation and payroll taxes	345			397			391			415
Air traffic liability	1,103			849			1,032			788
Other accrued liabilities	886			878			476			416
Deferred revenue							794			705
Current portion of operating lease liabilities							268			—
Current portion of long-term debt	334			319			265			486
Total Current Liabilities	2,765			2,535			3,346			2,942

Long-Term Debt, Net of Current Portion	2,367			2,645			1,444			1,617
Other Liabilities and Credits

Noncurrent Liabilities
Long-term operating lease liabilities, net of current portion							1,376			—
Deferred income taxes	682			463			708			512
Deferred revenue	682			640			1,177			1,169
Obligation for pension and postretirement medical benefits	323			331			467			503
Other liabilities	429			417			213			418
	2,116			1,851			3,941			2,602
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding	—			—			—			—
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2017 - 129,860,836 shares; 2016 - 129,189,634 shares, Outstanding: 2017 - 123,387,158 shares; 2016 - 123,328,051 shares	1			1
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2019 - 131,770,976 shares; 2018 - 130,813,476 shares, Outstanding: 2019 - 123,277,911 shares; 2018 - 123,194,430 shares							1			1
Capital in excess of par value	156			110			297			232
Treasury stock (common), at cost: 2017 - 6,473,678 shares; 2016 - 5,861,583 shares	(494		)	(443		)
Treasury stock (common), at cost: 2019 - 8,493,065 shares; 2018 - 7,619,046 shares							(621		)	(568		)
Accumulated other comprehensive loss	(289		)	(305		)	(421		)	(448		)
Retained earnings	4,117			3,568			4,996			4,534
	3,491			2,931			4,252			3,751
Total Liabilities and Shareholders' Equity	$	10,739		$	9,962		$	12,983		$	10,912

~~See accompanying notes to condensed consolidated financial statements.~~

~~ALASKA AIR GROUP, INC.~~

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(in millions, except per share amounts)	2017			2016			2017			2016			2019			2018			2019			2018
Operating Revenues
Passenger
Mainline	$	1,562		$	1,073		$	4,390		$	3,036
Regional	262			249			725			682
Total passenger revenue	1,824			1,322			5,115			3,718
Freight and mail	32			31			88			82
Other—net	264			213			768			607
Passenger revenue													$	2,211		$	2,043		6,038			5,724
Mileage Plan other revenue													118			114			346			329
Cargo and other													60			55			169			147
Total Operating Revenues	2,120			1,566			5,971			4,407			2,389			2,212			6,553			6,200

Operating Expenses
Wages and benefits	475			340			1,392			1,008			608			549			1,732			1,629
Variable incentive pay	40			31			98			95			46			27			125			104
Aircraft fuel, including hedging gains and losses	368			225			1,051			593			486			513			1,408			1,397
Aircraft maintenance	88			64			271			197			106			107			341			320
Aircraft rent	70			25			204			80			82			82			247			233
Landing fees and other rentals	124			89			338			232			143			135			388			371
Contracted services	76			63			234			183			72			70			214			227
Selling expenses	91			58			269			162			77			79			236			245
Depreciation and amortization	95			101			275			281			106			99			317			290
Food and beverage service	50			31			145			93			57			53			159			158
Third-party regional carrier expense	30			25			84			72			42			38			125			114
Special items—merger-related costs	24			22			88			36
Other	150			92			424			267			137			141			411			423
Special items - merger-related costs													5			22			39			67
Special items - other													—			—			—			25
Total Operating Expenses	1,681			1,166			4,873			3,299			1,967			1,915			5,742			5,603
Operating Income	439			400			1,098			1,108			422			297			811			597

Nonoperating Income (Expense)
Interest income	9			7			25			20			11			11			31			29
Interest expense	(26		)	(11		)	(77		)	(33		)	(18		)	(22		)	(60		)	(71		)
Interest capitalized	5			6			13			21			4			5			11			14
Other—net	—			—			(1		)	(2		)	(3		)	(7		)	(20		)	(20		)
	(12		)	2			(40		)	6
Income before income tax	427			402			1,058			1,114
Total Nonoperating Income (Expense)													(6		)	(13		)	(38		)	(48		)
Income Before Income Tax													416			284			773			549
Income tax expense	161			146			397			414			94			67			185			135
Net Income	$	266		$	256		$	661		$	700		$	322		$	217		$	588		$	414

Basic Earnings Per Share:	$	2.15		$	2.08		$	5.35		$	5.66		$	2.61		$	1.76		$	4.76		$	3.36
Diluted Earnings Per Share:	$	2.14		$	2.07		$	5.31		$	5.63		$	2.60		$	1.75		$	4.74		$	3.34
Shares used for computation:
Basic	123.467			123.149			123.501			123.648			123.280			123.224			123.330			123.216
Diluted	124.220			123.833			124.341			124.393			124.067			123.864			124.051			123.804

Cash dividend declared per share:	$	0.30		$	0.275		$	0.90		$	0.825

~~See accompanying notes to condensed consolidated financial statements.~~

~~ALASKA AIR GROUP, INC.~~

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2017			2016			2017			2016			2019			2018			2019			2018
Net Income	$	266		$	256		$	661		$	700		$	322		$	217		$	588		$	414

Other Comprehensive Income (Loss):
Related to marketable securities:
Unrealized holding gain (loss) arising during the period	1			(2		)	5			17			4			(2		)	31			(19		)
Reclassification of (gain) loss into Other—net nonoperating income (expense)	(1		)	—			—			(1		)
Reclassification of (gain) loss into Other - net nonoperating income (expense)													(5		)	2			(3		)	5
Income tax effect	—			—			(2		)	(6		)	—			1			(7		)	4
Total	—			(2		)	3			10			(1		)	1			21			(10		)

Related to employee benefit plans:
Reclassification of net pension expense into Wages and benefits	5			5			16			15
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income (expense)													8			7			24			21
Income tax effect	(2		)	(1		)	(5		)	(5		)	(2		)	(2		)	(6		)	(5		)
Total	3			4			11			10			6			5			18			16

Related to interest rate derivative instruments:
Unrealized holding gain (loss) arising during the period	—			1			(2		)	(6		)	(5		)	—			(17		)	8
Reclassification of (gain) loss into Aircraft rent	2			1			4			4
Reclassification of loss into Aircraft rent													1			2			2			3
Income tax effect	(1		)	(1		)	(1		)	1			—			(1		)	3			(3		)
Total	1			1			1			(1		)	(4		)	1			(12		)	8

Other Comprehensive Income	4			3			15			19			1			7			27			14

Comprehensive Income	$	270		$	259		$	676		$	719		$	323		$	224		$	615		$	428

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)



(in millions)	Common Stock Outstanding		Common Stock		Capital in Excess of Par Value			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balances at December 31, 2018	123.194		$	1	$	232		$	(568	)	$	(448	)	$	4,534		$	3,751
Cumulative effect of accounting changes^(a)	—		—		—			—			—			3			3
Net income	—		—		—			—			—			4			4
Other comprehensive income (loss)	—		—		—			—			15			—			15
Common stock repurchase	(0.215	)	—		—			(13		)	—			—			(13		)
Stock-based compensation	—		—		12			—			—			—			12
Cash dividend declared ($0.35 per share)	—		—		—			—			—			(43		)	(43		)
Stock issued for employee stock purchase plan	0.391		—		20			—			—			.			20
Stock issued under stock plans	0.134		—		(3		)	—			—			—			(3		)
Balances at March 31, 2019	123.504		$	1	$	261		$	(581	)	$	(433	)	$	4,498		$	3,746
Net income	—		—		—			—			—			262			262
Other comprehensive income (loss)	—		—		—			—			11			—			11
Common stock repurchase	(0.194	)	—		—			(12		)	—			—			(12		)
Stock-based compensation	—		—		9			—			—			—			9
Cash dividend declared ($0.35 per share)	—		—		—			—			—			(43		)	(43		)
Stock issued under stock plans	0.028		—		—			—			—			—			—
Balances at June 30, 2019	123.338		$	1	$	270		$	(593	)	$	(422	)	$	4,717		$	3,973
Net income	—		—		—			—			—			322			322
Other comprehensive income (loss)	—		—		—			—			1			—			1
Common stock repurchase	(0.465	)	—		—			(28		)	—			—			(28		)
Stock-based compensation	—		—		7			—			—			—			7
Cash dividend declared ($0.35 per share)	—		—		—			—			—			(43		)	(43		)
Stock issued for employee stock purchase plan	0.394		—		20			—			—			—			20
Stock issued under stock plans	0.011		—		—			—			—			—			—
Balances at September 30, 2019	123.278		$	1	$	297		$	(621	)	$	(421	)	$	4,996		$	4,252


(a)	Represents the opening balance sheet adjustment recorded as a result of the adoption of the new lease accounting standard.

~~See accompanying notes to condensed consolidated financial statements.~~

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)

~~ALASKA AIR GROUP, INC.~~



(in millions)	Common Stock Outstanding		Common Stock		Capital in Excess of Par Value			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balances at December 31, 2017	123.061		$	1	$	164		$	(518	)	$	(380	)	$	4,193		$	3,460
Reclassification of tax effects to Retained Earnings	—		—		—			—			(62		)	62			—
Net income	—		—		—			—			—			4			4
Other comprehensive income (loss)	—		—		—			—			2			—			2
Common stock repurchase	(0.186	)	—		—			(13		)	—			—			(13		)
Stock-based compensation	—		—		12			—			—			—			12
Cash dividend declared ($0.32 per share)	—		—		—			—			—			(40		)	(40		)
Stock issued for employee stock purchase plan	0.312		—		17			—			—			—			17
Stock issued under stock plans	0.163		—		(3		)	—			—			—			(3		)
Balances at March 31, 2018	123.350		$	1	$	190		$	(531	)	$	(440	)	$	4,219		$	3,439
Net income	—		—		—			—			—			193			193
Other comprehensive income (loss)	—		—		—			—			5			—			5
Common stock repurchase	(0.204	)	—		—			(13		)	—			—			(13		)
Stock-based compensation	—		—		9			—			—			—			9
Cash dividend declared ($0.32 per share)	—		—		—			—			—			(39		)	(39		)
Stock issued under stock plans	0.058		—		(1		)	—			—			—			(1		)
Balances at June 30, 2018	123.204		$	1	$	198		$	(544	)	$	(435	)	$	4,373		$	3,593
Net income	—		—		—			—			—			217			217
Other comprehensive income (loss)	—		—		—			—			7			—			7
Common stock repurchase	(0.193	)	—		—			(12		)	—			—			(12		)
Stock-based compensation	—		—		8			—			—			—			8
Cash dividend declared ($0.32 per share)	—		—		—			—			—			(40		)	(40		)
Stock issued for employee stock purchase plan	0.320		—		18			—			—			—			18
Stock issued under stock plans	0.030		—		—			—			—			—			—
Balances at September 30, 2018	123.361		$	1	$	224		$	(556	)	$	(428	)	$	4,550		$	3,791

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2017			2016			2019			2018
Cash flows from operating activities:
Net income	$	661		$	700		$	588		$	414
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	275			281			317			290
Stock-based compensation and other	43			19			20			34
Changes in certain assets and liabilities:
Changes in deferred tax provision	217			47			187			122
Increase in air traffic liability	254			116			244			144
Increase in deferred revenue	46			60			97			106
Pension contribution							(65		)	—
Other—net	(139		)	(17		)	(7		)	(124		)
Net cash provided by operating activities	1,357			1,206			1,381			986

Cash flows from investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits	(679		)	(408		)	(286		)	(349		)
Other flight equipment	(70		)	(35		)	(125		)	(76		)
Other property and equipment	(92		)	(66		)	(116		)	(129		)
Total property and equipment additions, including capitalized interest	(841		)	(509		)	(527		)	(554		)
Purchases of marketable securities	(1,408		)	(775		)	(1,446		)	(672		)
Sales and maturities of marketable securities	1,069			638			1,228			857
Other investing activities	38			5			37			36
Net cash used in investing activities	(1,142		)	(641		)	(708		)	(333		)

Cash flows from financing activities:
Proceeds from issuance of debt	—			1,546			356			—
Long-term debt payments	(265		)	(93		)	(752		)	(544		)
Common stock repurchases	(50		)	(193		)	(53		)	(37		)
Dividends paid	(111		)	(102		)	(129		)	(118		)
Other financing activities	27			22			40			33
Net cash provided (used) by financing activities	(399		)	1,180
Net increase (decrease) in cash and cash equivalents	(184		)	1,745
Cash and cash equivalents at beginning of year	328			73
Cash and cash equivalents at end of the period	$	144		$	1,818
Net cash used in financing activities							(538		)	(666		)
Net increase (decrease) in cash, cash equivalents, and restricted cash							135			(13		)
Cash, cash equivalents, and restricted cash at beginning of year							114			197
Cash, cash equivalents, and restricted cash at end of the period							$	249		$	184

Supplemental disclosure:
Cash paid during the period for:
Interest (net of amount capitalized)	$	68		$	12		$	48		$	60
Income taxes	129			321
Income taxes, net of refunds received							2			—

Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents							$	237		$	174
Restricted cash included in Prepaid expenses and other current assets							12			10
Total cash, cash equivalents, and restricted cash at end of the period							$	249		$	184

~~See accompanying notes to condensed consolidated financial statements.~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska ~~Horizon,~~(including Virgin America in 2018) and Horizon. The condensed consolidated financial statements also include McGee Air Services, ~~and, starting December 14, 2016, Virgin America.~~a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States ~~("GAAP")~~(GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, ~~2016~~2018. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, ~~2017~~2019 and the results of operations for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018. Such adjustments were of a normal recurring nature.

Certain reclassifications and rounding adjustments have been made to prior year financial statements to conform to classifications used in the current year.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and nine months ended September 30, ~~2017~~2019 are not necessarily indicative of operating results for the entire year.

~~Recently Issued Accounting Pronouncements~~

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This comprehensive new standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations" to clarify the guidance on determining whether the Company is considered the principal or the agent in a revenue transaction where a third party is providing goods or services to a customer. Entities are permitted to use either a full retrospective or cumulative effect transition method, and are required to adopt all parts of the new revenue standard using the same transition method. The new standard is effective for the Company on January 1, 2018.

At this time, the Company believes the most significant impact to the financial statements will be to Mileage Plan™ revenues and liabilities. The Company currently uses the incremental cost approach for miles earned through travel. As this approach will be eliminated with the standard, the Company will be required to allocate a portion of the ticket price through a relative selling price model and defer revenue recognition until the ticket is flown or unused mileage credits expire. Additionally, unused companion certificates that were previously recognized at expiration will be subject to advanced breakage under the new standard. The Company estimates a net increase to Mileage Plan deferred revenues of approximately $340 million to $380 million at the time of adoption. The allocated value to miles earned through travel will offset passenger revenue during the period they are issued, rather than recorded using the incremental cost approach. As the program is growing significantly, the Company expects revenue recognized under Topic 606 will be less on an annual basis than current accounting practice.

The adoption of the new standard is also expected to result in a change in income statement classification of the majority of ancillary revenues from Other revenue to Passenger revenue. This will affect common industry metrics, such as PRASM and RASM. Certain commission revenue from interline arrangements that were previously offset against related expense will now be classified as Other revenue, which will impact RASM and CASM. Unused ticket revenue that was previously recorded at the time of expiration will now be recorded at the original departure date if that ticket has not been changed or refunded prior to that date, based on estimates of expected expiration. This concept is referred to as ticket breakage. The Company estimates the change in ticket breakage methodology will not have a significant impact on the statements of operations, but will decrease air traffic liability by approximately $70 million to $80 million.

The Company continues to evaluate and model the full impact of the standard and will apply the full retrospective transition method. The overall impact to equity as of the beginning of the retroactive reporting period, including the changes discussed above, as well as other less material changes, is expected to be between $160 million and $190 million.

In February 2016, the FASB issued ASU 2016-02, "Leases" (Topic 842), which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard, a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use-asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. At this time, the Company believes the most significant impact to the financial statements will relate to the recording of a right-of-use asset associated with leased aircraft. Other leases, including airports and real estate, equipment, software and other miscellaneous leases continue to be assessed for impact of the ASU. The new standard is effective for the Company on January 1, 2019. Early adoption of the standard is permitted. The Company has determined that it will not early adopt the standard.

In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation" (Topic 718), which simplifies several aspects of accounting for employee share-based payment awards, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU was adopted prospectively as of January 1, 2017. Prior periods have not been adjusted. The adoption of the standard did not have a material impact on the Company's statements of operations or financial position.

In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other" (Topic 350), which eliminates step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The ASU is effective for the Company beginning January 1, 2019. Early adoption of the standard is permitted. Beginning in fiscal 2017, the Company will be required to perform an impairment test for goodwill arising from its acquisition of Virgin America and has adopted the standard effective January 1, 2017.

In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits" (Topic 715), which will require the Company to present the service cost component of net periodic benefit cost as Wages and benefits in the statements of operations. All other components of net periodic benefit cost will be required to be presented in Nonoperating income (expense) in the statements of operations. These components will not be eligible for capitalization in assets. The ASU is effective for the Company beginning January 1, 2018. Changes to the statements of operations under the ASU are applicable retrospectively. The adoption of this standard will have no impact on Income before income tax or Net income for the periods subject to retrospective reclassification. See Note 6 for the current components of the Company's net periodic benefit costs.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging relationships. The ASU is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact and has not yet determined whether it will early adopt.

NOTE 2. ~~ACQUISITION OF VIRGIN AMERICA~~REVENUE

~~Virgin America~~

~~On December 14, 2016,~~Ticket revenue is recorded as Passenger revenue, and represents the ~~Company acquired 100%~~primary source of the ~~outstanding common shares~~Company's revenue. Also included in Passenger revenue are passenger ancillary revenues, such as bag fees, on-board food and ~~voting interest~~beverage, ticket change fees, and certain revenue from the frequent flyer program. Mileage Plan other revenue includes brand and marketing revenue from the Company's co-branded credit card and other partners and certain interline frequent flyer revenue, net of ~~Virgin America for $57 per share, or total cash consideration of $2.6 billion. Virgin America offers scheduled air transportation throughout the United States~~commissions. Cargo and ~~Mexico primarily from its hub cities of Los Angeles, San Francisco~~other revenue includes freight and mail revenue, and to a lesser extent, ~~Dallas Love Field, to~~ other ~~major business~~ancillary revenue products such as lounge membership and leisure destinations in North America. The Company believes the acquisition of Virgin America will provide broader national reach and position it to better serve guests living on the West Coast. The combined airline has approximately 1,200 daily departures and leverages Alaska's strength in the Pacific Northwest with Virgin America's strength in California. The Company believes that combining loyalty programs and networks will provide greater benefits for its guests and expand its international partner portfolio, giving guests an even more expansive global reach.certain commissions.

~~Merger-related costs~~

The Company ~~incurred pretax merger-related costs~~disaggregates revenue by segment in Note 9. The details within the Company’s statements of ~~$24~~operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Passenger ticket revenue, including ticket breakage and net of taxes and fees	$	1,868	$	1,744	$	5,099	$	4,864
Passenger ancillary revenue	157		146		428		401
Mileage Plan passenger revenue	186		153		511		459
Total Passenger revenue	$	2,211	$	2,043	$	6,038	$	5,724

Mileage Plan™ Loyalty Program

Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Passenger revenue	$	186	$	153	$	511	$	459
Mileage Plan other revenue	118		114		346		329
Total Mileage Plan revenue	$	304	$	267	$	857	$	788

Cargo and Other

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Cargo revenue	$	36	$	36	$	104	$	96
Other revenue	24		19		65		51
Total Cargo and other revenue	$	60	$	55	$	169	$	147

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $19 million and ~~$22~~$27 million from the prior year-end air traffic liability balance for the three months ended September 30, ~~2017~~2019 and ~~2016, respectively,~~2018, and ~~$88~~$582 million and ~~$36~~$540 million for the nine months ended September 30, ~~2017~~2019 and ~~2016, respectively. Costs classified as merger-related are directly attributable to merger activities~~2018.

Mileage Plan^TM assets and ~~are recorded as "Special items—merger-related costs" within the statements of operations.~~ liabilities

The Company ~~expects to continue to incur merger-related costs in~~records a receivable for amounts due from the ~~future~~bank partner and from other partners as mileage credits are sold until the ~~integration continues.~~

~~Fair values~~payments are collected. The Company had $103 million of ~~the assets acquired and the liabilities assumed~~

~~The transaction has been accounted for~~such receivables as a business combination using the acquisition method of accounting, which requires, among other things, assets acquired and liabilities assumed to be recognized on the balance sheet at their fair values as of the acquisition date. As of September 30, ~~2017 the fair values~~2019 and $119 million as of ~~property and equipment and certain liabilities, included in other accrued liabilities and other liabilities, goodwill, intangible assets and deferred income taxes have been prepared on~~December 31, 2018.

The table below presents a preliminary basis and are subject to further adjustments as the Company completes its analysis. There were no significant fair value adjustments made during the three and nine months ended September 30, 2017. The Company will finalize the amounts recognized by December 14, 2017.

~~Fair values~~roll forward of the ~~assets acquired and the liabilities assumed as of the acquisition date of December 14, 2016, at September 30, 2017 and December 31, 2016 were as follows~~total frequent flyer liability (in millions):



	Nine Months Ended September 30,
	2019			2018
Total Deferred Revenue balance at January 1	$	1,874		$	1,725
Travel miles and companion certificate redemption - Passenger revenue	(511		)	(459		)
Miles redeemed on partner airlines - Other revenue	(84		)	(66		)
Increase in liability for mileage credits issued	692			631
Total Deferred Revenue balance at September 30	$	1,971		$	1,831

September 30, 2017 December 31, 2016
Cash and cash equivalents $ 645
$ 645
Receivables 54
44
Prepaid expenses and other current assets 18
16
Property and equipment—provisional 561
560
Intangible assets—provisional 141
143
Goodwill—provisional 1,934
1,934
Other assets 89
84
Total assets 3,442
3,426

Accounts payable 22
22
Accrued wages, vacation and payroll taxes 54
51
Air traffic liabilities 172
172
Other accrued liabilities—provisional 197
196
Current portion of long-term debt 125
125
Long-term debt, net of current portion 360
360
Deferred income taxes—provisional (307 ) (304 )
Deferred revenue 126
126
Other liabilities—provisional 97
82
Total liabilities 846
830

Total purchase price $ 2,596
$ 2,596

NOTE 3. FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

Fair Value of Financial Instruments on a Recurring Basis

As of September 30, ~~2017,~~2019, total cost basis for all marketable securities was ~~$1.6~~$1.4 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the consolidated balance sheet (in millions):


September 30, 2017	Level 1		Level 2			Total
									September 30, 2019								December 31, 2018
									Level 1		Level 2			Total			Level 1		Level 2			Total
Assets
Marketable securities
U.S. government and agency securities	$	359	$	—		$	359		$	379	$	—		$	379		$	293	$	—		$	293
Equity mutual funds									5		—			5			—		—			—
Foreign government bonds	—		48			48			—		25			25			—		26			26
Asset-backed securities	—		232			232			—		201			201			—		190			190
Mortgage-backed securities	—		113			113			—		142			142			—		92			92
Corporate notes and bonds	—		828			828			—		609			609			—		520			520
Municipal securities	—		16			16			—		21			21			—		10			10
Total Marketable securities	359		1,237			1,596			384		998			1,382			293		838			1,131
Derivative instruments
Fuel hedge call options	—		10			10
Fuel hedge—call options									—		7			7			—		4			4
Interest rate swap agreements	—		8			8			—		2			2			—		10			10
Total Assets	359		1,255			1,614			$	384	$	1,007		$	1,391		$	293	$	852		$	1,145

Liabilities
Derivative instruments
Interest rate swap agreements	—		(11		)	(11		)	—		(14		)	(14		)	—		(7		)	(7		)
Total Liabilities	—		(11		)	(11		)	$	—	$	(14	)	$	(14	)	$	—	$	(7	)	$	(7	)

December 31, 2016 Level 1 Level 2 Total
Assets
Marketable securities
U.S. government and agency securities $ 287
$ —
$ 287
Foreign government bonds —
36
36
Asset-backed securities —
138
138
Mortgage-backed securities —
89
89
Corporate notes and bonds —
691
691
Municipal securities —
11
11
Total Marketable securities 287
965
1,252
Derivative instruments
Fuel hedge call options —
20
20
Total Assets 287
985
1,272

Liabilities
Derivative instruments
Interest rate swap agreements —
(5 ) (5 )
Total Liabilities —
(5 ) (5 )

The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

~~Activity for~~Unrealized losses from marketable securities ~~(in millions):~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Proceeds from sales and maturities $ 528
$ 280
$ 1,069
$ 638

~~Maturities for marketable securities (in millions):~~

September 30, 2017 Cost Basis Fair Value
Due in one year or less $ 193
$ 193
Due after one year through five years 1,367
1,367
Due after five years through 10 years 36
36
Due after 10 years —
—
Total $ 1,596
$ 1,596

are primarily attributable to changes in interest rates. Management does not believe any unrealized losses represent other-than-temporary impairments based on its evaluation of available information as of September 30, ~~2017.~~2019.

Maturities for marketable securities (in millions):



September 30, 2019	Cost Basis		Fair Value
Due in one year or less	$	244	$	244
Due after one year through five years	1,105		1,118
Due after five years through 10 years	15		15
Total	$	1,364	$	1,377

Fair Value of Other Financial Instruments

The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash, ~~and~~ Cash Equivalents and Restricted Cash: ~~Carried~~Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at ~~amortized~~ cost, which approximates fair value.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The ~~carrying amount~~adjustment is amortized over the life of the ~~Company's variable-rate~~associated debt. All other fixed-rate debt ~~approximates~~is carried at cost. To estimate the fair ~~value. For~~value of all fixed-rate debt as of September 30, 2019, the Company uses the income approach ~~to determine the estimated fair value, calculated as the sum of future~~by discounting cash flows ~~discounted at~~using borrowing rates for comparable debt over the ~~weighted~~remaining life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt ~~that is not carried at fair value~~ on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):



	September 30, 2019		December 31, 2018
Fixed-rate debt at cost	$	567	$	639
Non-recurring purchase price accounting fair value adjustment	2		3
Total fixed-rate debt	$	569	$	642

Estimated fair value	$	584	$	641

September 30, 2017 December 31, 2016
Carrying amount $ 1,024
$ 1,179
Fair value 1,034
1,199

Assets and Liabilities Measured at Fair Value on Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. No material impairment ~~was recognized~~charges were taken in the three and nine months ended September 30, ~~2017 or~~2019 and September 30, ~~2016.~~2018.

~~NOTE 4. FREQUENT FLYER PROGRAMS~~

~~Frequent flyer program deferred revenue and liabilities included in the consolidated balance sheets (in millions):~~

September 30, 2017 December 31, 2016
Current Liabilities:
Other accrued liabilities $ 509
$ 484
Other Liabilities and Credits:
Deferred revenue 682
638
Other liabilities 24
21
Total $ 1,215
$ 1,143

~~Frequent flyer program revenue included in the consolidated statements of operations (in millions):~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Passenger revenues $ 94
$ 73
$ 276
$ 215
Other—net revenues 122
107
369
318
Total $ 216
$ 180
$ 645
$ 533

NOTE 5.4. LONG-TERM DEBT

Long-term debt obligations on the consolidated balance sheet (in millions):



	September 30, 2019			December 31, 2018
Fixed-rate notes payable due through 2029	$	569		$	642
Variable-rate notes payable due through 2029	1,150			1,473
Less debt issuance costs	(10		)	(12		)
Total debt	1,709			2,103
Less current portion	265			486
Long-term debt, less current portion	$	1,444		$	1,617

Weighted-average fixed-interest rate	3.4		%	4.1		%
Weighted-average variable-interest rate	3.2		%	3.9		%

September 30, 2017 December 31, 2016
Fixed-rate notes payable due through 2028 $ 1,024
$ 1,179
Variable-rate notes payable due through 2028 1,693
1,803
Less debt issuance costs (16 ) (18 )
Total debt 2,701
2,964
Less current portion 334
319
Long-term debt, less current portion $ 2,367
$ 2,645

Weighted-average fixed-interest rate 4.3 % 4.4 %
Weighted-average variable-interest rate 2.6 % 2.4 %

Approximately $745 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, 2019.

During the nine months ended September 30, ~~2017~~2019, the Company made debt payments of ~~$265 million.~~

At $752 million, including the prepayment of $532 million of debt. During the nine months ended September 30, ~~2017~~,2019, the Company obtained additional secured debt financing of $356 million from multiple lenders. The new debt is secured by a total of 12 aircraft.

At September 30, 2019 long-term debt principal payments for the next five years and thereafter are as follows (in millions):



	Total
Remainder of 2019	$	63
2020	268
2021	313
2022	274
2023	234
Thereafter	565
Total	$	1,717

Total
Remainder of 2017 $ 55
2018 350
2019 422
2020 449
2021 422
Thereafter 1,016
Total $ 2,714

Bank Lines of Credit

The Company has ~~three~~3 credit facilities with availability totaling ~~$475 million.~~$516 million as of September 30, 2019. All ~~three~~3 facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility ~~increased from~~ ~~$100 million~~ tofor $250 million ~~in June 2017. It~~ expires in June 2021 and is secured by aircraft. The second credit facility ~~increased from $52~~for $116 million ~~to $75 million in September 2017. It~~ expires in ~~September 2018~~July 2020, with a mechanism for annual renewal, and is secured by aircraft. ~~The~~A third credit facility ~~increased from $100 million to~~ for $150 million ~~in March 2017. It~~ expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has secured letters of credit against the ~~$75~~$116 million facility, but has no plans to borrow using either of the two other facilities. All ~~three~~3 credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company iswas in compliance with this covenant at September 30, ~~2017.~~2019.

NOTE 5. LEASES

In 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for certain operating leases. Under the new standard, a lessee must recognize a liability on the balance sheet representing the lease payments owed, and a lease asset representing its right to use the underlying asset for the lease term. In 2018, the FASB issued ASU 2018-11, "Targeted Improvements - Leases (Topic 842)," which amended Topic 842 to provide a transition method that would not require adjusting comparative period financial information.

The Company transitioned to the new lease accounting standard effective January 1, 2019 utilizing the alternative transition method. Upon transition, the Company recorded a cumulative-effect adjustment to the opening balance of retained earnings of $3 million. The new standard eliminated build-to-suit lease accounting guidance and resulted in the derecognition of build-to-suit assets and liabilities of approximately $150 million each.

The Company elected certain practical expedients under the standard, including the practical expedient allowing a policy election to exclude from recognition short-term lease assets and lease liabilities for leases with an initial term of 12 months or less. Such expense was not material for the nine months ended September 30, 2019. Additionally, the Company elected the available package of practical expedients allowing for no reassessment of lease classification for existing leases, no reassessment of expired contracts, and no reassessments of initial direct costs for existing leases.

The Company has five asset classes for operating leases: aircraft, capacity purchase arrangements with aircraft (CPA aircraft), airport and terminal facilities, corporate real estate and other equipment. All capitalized lease assets have been recorded on the condensed consolidated balance sheet as of September 30, 2019 as Operating lease assets, with the corresponding liabilities recorded as Operating lease liabilities. Consistent with past accounting, operating rent expense is recognized on a straight-line basis over the term of the lease.

At September 30, 2019, the Operating lease assets balance by asset class was as follows (in millions):



	Operating lease assets
Aircraft	$	974
CPA aircraft	609
Airport and terminal facilities	18
Corporate real estate and other	46
Total Operating lease assets	$	1,647

Aircraft

At September 30, 2019, the Company had operating leases for 10 Boeing 737 (B737), 62 Airbus, and 8 Bombardier Q400 aircraft. Additionally, the Company operates 32 Embraer 175 (E175) aircraft through its capacity purchase arrangement with SkyWest Airlines, Inc. (SkyWest). Remaining lease terms for these aircraft extend up to 12 years, with options to extend, subject to negotiation at the end of the term. As extension is not certain, and rates are highly likely to be renegotiated, the extended term is only capitalized when it is reasonably determinable. While aircraft rent is primarily fixed, certain leases contain rental adjustments throughout the lease term which would be recognized as variable expense as incurred. Variable lease expense for aircraft was $1 million and $4 million for the three and nine months ended September 30, 2019, respectively.

Capacity purchase agreements with aircraft (CPA aircraft)

At September 30, 2019, Alaska had CPAs with three carriers, including the Company’s wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity under a CPA with Alaska. Alaska also has CPAs with SkyWest to fly certain routes in the Lower 48 and Canada, and with Peninsula Aviation Services, Inc., (PenAir) to fly certain routes in the state of Alaska. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services. As Horizon is a wholly-owned subsidiary, intercompany leases between Alaska and Horizon have not been recognized under the standard. The agreement with PenAir does not contain a leasing arrangement, resulting in no asset or liability recognized.

Remaining lease terms for CPA aircraft range from 8 years to 11 years. Financial arrangements of the CPAs include a fixed component, representing the costs to operate each aircraft and is capitalized under the new lease accounting standard. CPAs also include variable rent based on actual levels of flying, which is expensed as incurred. Variable lease expense for CPA aircraft for the three and nine months ended September 30, 2019 was not material.

Airport and terminal facilities

The Company leases ticket counters, gates, cargo and baggage space, ground equipment, office space and other support areas at numerous airports. For this asset class, the Company has elected to combine lease and non-lease components. The majority of airport and terminal facility leases are not capitalized because they do not meet the definition of controlled assets under the standard, or because the lease payments are entirely variable. For airports where leased assets are identified, and where the contract includes fixed lease payments, operating lease assets and lease liabilities have been recorded. The Company is also commonly responsible for maintenance, insurance and other facility-related expenses and services under these agreements. These costs are recognized as variable expense in the period incurred. Airport and terminal facilities variable lease expense was $86 million and $231 million for the three and nine months ended September 30, 2019, respectively.

In 2018, the Company leased 12 airport slots at LaGuardia Airport and eight airport slots at Reagan National Airport to a third party. For these leases, the Company recorded $3 million and $9 million of lease income during the three and nine months ended September 30, 2019, respectively.

Corporate real estate and other leases

Leased corporate real estate is primarily for office space in hub cities, data centers, land leases, and reservation centers. For this asset class, the Company has elected to combine lease and non-lease components under the standard. Other leased assets are comprised of other ancillary contracts and items including leased flight simulators and spare engines. Variable lease expense related to corporate real estate and other leases for the nine months ended September 30, 2019 was $8 million.

Components of Lease Expense

The impact of leases, including variable lease cost, on earnings for the three and nine months ended September 30, 2019 was as follows (in millions):



	Classification	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Expense
Aircraft	Aircraft rent	$	62		$	186
CPA aircraft	Aircraft rent	20			61
Airport and terminal facilities	Landing fees and other rentals	87			233
Corporate real estate and other	Landing fees and other rentals	5			14
Total lease expense		$	174		$	494
Revenue
Lease income	Cargo and other revenues	(3		)	(9		)
Net lease impact		$	171		$	485

Total rent expense for the three and nine months ended September 30, 2018 was $165 million and $455 million, respectively.

Supplemental Cash Flow Information

Supplemental cash flow information related to leases was as follows (in millions):



	Nine Months Ended September 30, 2019
Cash paid for capitalized operating leases	$	259
Operating lease assets obtained in exchange for lease obligations	$	47

Lease Term and Discount Rate

As most leases do not provide an implicit interest rate, the Company generally utilizes the incremental borrowing rate (IBR) based on information available at the commencement date of the lease to determine the present value of lease payments. The weighted average IBR and weighted average remaining lease term (in years) for all asset classes were as follows at September 30, 2019:



	Weighted Average IBR		Weighted Average Remaining Lease Term
Aircraft	4.1	%	6.7
CPA aircraft	4.3	%	9.5
Airports and terminal facilities	4.1	%	10.2
Corporate real estate and other	4.3	%	36.4

Maturities of Lease Liabilities

Future minimum lease payments under non-cancellable leases as of September 30, 2019 (in millions):



	Aircraft			CPA Aircraft			Airport and Terminal Facilities			Corporate Real Estate & Other
Remainder of 2019	$	63		$	20		1			$	2
2020	234			79			3			7
2021	196			79			3			6
2022	171			79			2			4
2023	116			79			2			4
Thereafter	330			408			12			77
Total lease payments	$	1,110		$	744		$	23		$	100
Less: Imputed interest	(140		)	(135		)	(4		)	(54		)
Total operating lease liabilities	$	970		$	609		$	19		$	46

All future lease contracts have remaining non-cancelable lease terms ranging from 2019 to 2031.

NOTE 6. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs for ~~the~~ qualified defined-benefit plans ~~included~~include the following ~~components~~ (in millions):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Service cost	$	11		$	12		$	32		$	36
Pension expense included in Wages and benefits	11			12			32			36

Interest cost	23			20			67			59
Expected return on assets	(24		)	(27		)	(71		)	(80		)
Amortization of prior service cost (credit)	(1		)	(1		)	(1		)	(1		)
Recognized actuarial loss	9			9			27			25
Pension expense included in Nonoperating Income (Expense)	$	7		$	1		$	22		$	3

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Service cost $ 10
$ 9
$ 30
$ 27
Interest cost 19
18
55
55
Expected return on assets (27 ) (27 ) (80 ) (81 )
Amortization of prior service cost (credit) (1 ) (1 ) (1 ) (1 )
Recognized actuarial loss (gain) 7
7
20
19
Total $ 8
$ 6
$ 24
$ 19

The Company ~~contributed $15~~made a voluntary contribution of $65 million to ~~the~~three defined-benefit pension ~~plan~~plans during the three months ended September 30, ~~2017.~~

2019.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments, excluding operating leases, as of September 30, ~~2017~~2019 (in millions):



	Aircraft Commitments^(a)		Capacity Purchase Agreements ^(b)		Aircraft Maintenance Deposits
Remainder of 2019	$	111	$	34	$	16
2020	504		145		73
2021	475		166		63
2022	333		174		54
2023	194		179		29
Thereafter	36		1,065		10
Total	$	1,653	$	1,763	$	245

Aircraft Leases Facility Leases Aircraft Purchase Commitments
Capacity Purchase Agreements ^(a)
Aircraft Maintenance Deposits Aircraft Maintenance and Parts Management
Remainder of 2017 $ 77
$ 34
$ 168
$ 21
$ 15
$ 8
2018 342
73
956
118
61
32
2019 344
65
806
151
65
35
2020 317
63
352
158
68
37
2021 280
55
273
165
63
40
Thereafter 1,263
204
355
1,250
90
—
Total $ 2,623
$ 494
$ 2,910
$ 1,863
$ 362
$ 152


(a)	Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and aircraft maintenance and parts management.


(b)	Includes all non-aircraft lease costs associated with capacity purchase agreements.

~~Lease Commitments~~

~~Aircraft lease commitments include future obligations for all of the Company's operating airlines—Alaska, Virgin America and Horizon, as well as aircraft leases operated by third-parties. At~~ ~~September 30, 2017~~, the Company had lease contracts for 10 Boeing 737 ("B737") aircraft, 55 Airbus aircraft, 15 Bombardier Q400 aircraft, and 21 Embraer 175 ("E175") with SkyWest Airlines, Inc. ("SkyWest"). The Company has an additional eight scheduled lease deliveries of A321neo aircraft through 2018, as well as 14 scheduled lease deliveries of E175 aircraft through 2018 to be flown by Skywest. All lease contracts have remaining non-cancelable lease terms ranging from 2017 to 2030. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft deliveries in 2020. Options to lease are not reflected in the commitments table above.

~~Facility lease commitments primarily include airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $145 million and~~ ~~$82 million~~ ~~for the~~ ~~three~~ ~~months ended~~ ~~September 30, 2017~~ ~~and~~ ~~2016, and $406 million and $226 million for the nine months ended September 30, 2017 and 2016.~~

Aircraft ~~Purchase~~ Commitments

Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of September 30, ~~2017~~2019, the Company had commitments to purchase ~~48 B737 aircraft (16 B737 NextGen aircraft and~~ 32 B737 ~~MAX~~MAX9 aircraft, with deliveries in the remainder of ~~2017~~2019 through ~~2023) and 23~~2023. Future minimum contractual payments for these aircraft have been updated to reflect the most current anticipated delivery timing for B737 MAX9 aircraft, which has been delayed as a result of the grounding order mandated by the FAA on March 13, 2019. The Company also has commitments to purchase 3 E175 aircraft with deliveries in ~~2018 through 2019, which reflects Horizon's deferral of three E175 aircraft from 2017 to 2018. The Company also~~2023 and has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from ~~2020~~2023 through ~~2022.~~2025. In addition, the Company has options to purchase 37 B737 MAX aircraft from 2021 through 2024 and 30 E175 ~~aircraft.~~aircraft from 2021 through 2023. The Company also has the option to increase capacity flown by SkyWest with 8 additional E175 aircraft with deliveries after 2021. The cancelable purchase commitments and option payments are not reflected in the table above.

~~Capacity Purchase Agreements ("CPAs")~~

At ~~September 30, 2017, Alaska had CPAs with~~ ~~three~~ ~~carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells~~ ~~100%~~ of its capacity to Alaska under a CPA with Alaska. In addition, Alaska has CPAs with SkyWest to fly certain routes in the Lower 48 and Canada and with Peninsula Airways, Inc. ("PenAir") to fly certain routes in the state of Alaska. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services. Future payments (excluding Horizon) are based on minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights such as fuel.

~~Aircraft Maintenance Deposits~~

Virgin America is contractually required to make maintenance deposit payments to aircraft lessors, which represent maintenance reserves made solely to collateralize the lessor for future maintenance events should the Company not perform required maintenance. Most lease agreements provide that maintenance reserves are reimbursable upon completion of the major maintenance event in an amount equal to the lesser of (i) the amount qualified for reimbursement from maintenance reserves held by the lessor associated with the specific major maintenance event or (ii) the qualifying costs related to the specific major maintenance event.

~~Aircraft Maintenance and Parts Management~~

Through its acquisition of Virgin America, the Company has a separate maintenance-cost-per-hour contract for management and repair of certain rotable parts to support airframe and engine maintenance and repair. This agreement requires monthly payments based upon utilization, such as flight hours, cycles and age of the aircraft, and, in turn, the agreement transfers certain risks to the third-party service provider. There are minimum payments under this agreement. Accordingly, payments could differ materially based on actual aircraft utilization.

~~Subsequent to September 30, 2017, Alaska entered into a similar contract for maintenance on its B737-800 aircraft engines. Payments under this agreement are not reflected in the table above.~~

Contingencies

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. ~~Plaintiffs received~~The court certified a class ~~certification~~of approximately 1,800 flight attendants in November 2016. Virgin America filed a motion for summary judgment seeking to dismiss all claims on various federal preemption grounds. In January 2017, the Court denied in part and granted in part Virgin America’s motion. The Company believes the claims in this case are without factual and legal ~~merit~~merit.

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

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

~~Management believes~~The Company is involved in other litigation around the ~~ultimate disposition~~application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these ~~matters is not likely to materially affect the Company's financial position or results of operations.~~ additional disputes are material.

This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of ~~arbitrators,~~ judges and juries.

NOTE 8. SHAREHOLDERS' EQUITY

~~Dividends~~

During the three months ended September 30, 2017, the Company declared and paid cash dividends of $0.30 per share, or $37 million. During the nine months ended September 30, 2017, the Company declared and paid cash dividends of $0.90 per share, or $111 million.

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. ~~The program was paused in the second quarter of 2016 in anticipation of the acquisition of Virgin America. The Company resumed the share repurchase program in the second quarter of 2017.~~ As of September 30, ~~2017,~~2019, the Company has repurchased ~~4.7~~6.7 million shares for ~~$363~~$491 million under this program. ~~Subsequent to September 30, 2017, the Company repurchased an additional 369,182 shares for $25 million.~~

~~Share repurchase activity (in millions, except share amounts):~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Shares Amount Shares Amount Shares Amount Shares Amount
2015 Repurchase Program—$1 billion 355,415
$ 28
—
$ —
612,095
$ 50
2,594,809
$ 193

Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss, net of tax (in millions):



	September 30, 2019			December 31, 2018
Related to marketable securities	$	10		$	(11	)
Related to employee benefit plans	(422		)	(440		)
Related to interest rate derivatives	(9		)	3
Total	$	(421	)	$	(448	)

September 30, 2017 December 31, 2016
Marketable securities $ —
$ (3 )
Employee benefit plans (287 ) (299 )
Interest rate derivatives (2 ) (3 )
Total $ (289 ) $ (305 )

Earnings Per Share ~~("EPS")~~(EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018, anti-dilutive shares excluded from the calculation of EPS were not material.

NOTE 9. OPERATING SEGMENT INFORMATION

Alaska Air Group has ~~three~~two operating airlines—Alaska (including Virgin America after the single operating certificate was received in January 2018) and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with third-party carriers SkyWest and PenAir, under which Alaska receives all passenger revenues.

Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker ~~("CODM")~~(CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of ~~three~~3 reportable operating segments:


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


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


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

~~Mainline~~ ~~- includes Alaska's and Virgin America’s scheduled air transportation for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, Costa Rica and Cuba.~~

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

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

The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.

The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the ~~Company~~Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.

Operating segment information is as follows (in millions):



	Three Months Ended September 30, 2019
	Mainline			Regional		Horizon			Consolidating & Other^(a)			Air Group Adjusted^(b)			Special Items^(c)			Consolidated
Operating revenues
Passenger revenues	$	1,850		$	361	$	—		$	—		$	2,211		$	—		$	2,211
CPA revenues	—			—		112			(112		)	—			—			—
Mileage Plan other revenue	107			11		—			—			118			—			118
Cargo and other	58			1		—			1			60			—			60
Total operating revenues	2,015			373		112			(111		)	2,389			—			2,389
Operating expenses
Operating expenses, excluding fuel	1,226			275		94			(119		)	1,476			5			1,481
Economic fuel	411			75		—			—			486			—			486
Total operating expenses	1,637			350		94			(119		)	1,962			5			1,967
Nonoperating income (expense)
Interest income	17			—		—			(6		)	11			—			11
Interest expense	(18		)	—		(7		)	7			(18		)	—			(18		)
Interest capitalized	4			—		—			—			4			—			4
Other - net	(3		)	—		—			—			(3		)	—			(3		)
Total nonoperating income (expense)	—			—		(7		)	1			(6		)	—			(6		)
Income (loss) before income tax	$	378		$	23	$	11		$	9		$	421		$	(5	)	$	416



	Three Months Ended September 30, 2018
	Mainline			Regional			Horizon			Consolidating & Other^(a)			Air Group Adjusted^(b)			Special Items^(c)			Consolidated
Operating revenues
Passenger revenues	$	1,727		$	316		$	—		$	—		$	2,043		$	—		$	2,043
CPA revenues	—			—			128			(128		)	—			—			—
Mileage Plan other revenue	104			10			—			—			114			—			114
Cargo and other	53			—			2			—			55			—			55
Total operating revenues	1,884			326			130			(128		)	2,212			—			2,212
Operating expenses
Operating expenses, excluding fuel	1,126			267			118			(131		)	1,380			22			1,402
Economic fuel	438			70			—			—			508			5			513
Total operating expenses	1,564			337			118			(131		)	1,888			27			1,915
Nonoperating income (expense)
Interest income	15			—			—			(4		)	11			—			11
Interest expense	(20		)	—			(6		)	4			(22		)	—			(22		)
Interest capitalized	4			—			1			—			5			—			5
Other - net	(5		)	(2		)	—			—			(7		)	—			(7		)
Total nonoperating income (expense)	(6		)	(2		)	(5		)	—			(13		)	—			(13		)
Income (loss) before income tax	$	314		$	(13	)	$	7		$	3		$	311		$	(27	)	$	284

Three Months Ended September 30, 2017
Mainline Regional Horizon
Consolidating & Other^(a)

Air Group Adjusted^(b)

Special Items^(c)
Consolidated
Operating revenues
Passenger
Mainline $ 1,562
$ —
$ —
$ —
$ 1,562
$ —
$ 1,562
Regional —
262
—
—
262
—
262
Total passenger revenues 1,562
262
—
—
1,824
—
1,824
CPA revenues —
—
112
(112 ) —
—
—
Freight and mail 30
1
1
—
32
—
32
Other—net 242
21
1
—
264
—
264
Total operating revenues 1,834
284
114
(112 ) 2,120
—
2,120
Operating expenses
Operating expenses, excluding fuel 1,077
219
105
(112 ) 1,289
24
1,313
Economic fuel 328
45
—
—
373
(5 ) 368
Total operating expenses 1,405
264
105
(112 ) 1,662
19
1,681
Nonoperating income (expense)
Interest income 11
—
—
(2 ) 9
—
9
Interest expense (23 ) —
(4 ) 1
(26 ) —
(26 )
Other 5
—
—
—
5
—
5
Total Nonoperating income (expense) (7 ) —
(4 ) (1 ) (12 ) —
(12 )
Income (loss) before income tax $ 422
$ 20
$ 5
$ (1 ) $ 446
$ (19 ) $ 427


	Three Months Ended September 30, 2016																					Nine Months Ended September 30, 2019
	Mainline			Regional		Horizon			Consolidating & Other^(a)			Air Group Adjusted^(b)			Special Items^(c)				Consolidated			Mainline			Regional		Horizon			Consolidating & Other^(a)			Air Group Adjusted^(b)			Special Items^(c)			Consolidated
Operating revenues
Passenger
Mainline	$	1,073		$	—	$	—		$	—		$	1,073		$	—			$	1,073
Regional	—			249		—			—			249			—				249
Total passenger revenues	1,073			249		—			—			1,322			—			��	1,322
Passenger revenues																						$	5,039		$	999	$	—		$	—		$	6,038		$	—		$	6,038
CPA revenues	—			—		109			(109		)	—			—				—			—			—		340			(340		)	—			—			—
Freight and mail	30			1		—			—			31			—				31
Other—net	190			21		1			1			213			—				213
Mileage Plan other revenue																						312			34		—			—			346			—			346
Cargo and other																						163			2		1			3			169			—			169
Total operating revenues	1,293			271		110			(108		)	1,566			—				1,566			5,514			1,035		341			(337		)	6,553			—			6,553
Operating expenses
Operating expenses, excluding fuel	727			202		99			(109		)	919			22				941			3,545			817		286			(353		)	4,295			39			4,334
Economic fuel	188			34		—			—			222			3				225			1,191			218		—			—			1,409			(1		)	1,408
Total operating expenses	915			236		99			(109		)	1,141			25				1,166			4,736			1,035		286			(353		)	5,704			38			5,742
Nonoperating income (expense)
Interest income	7			—		—			—			7			—				7			50			—		—			(19		)	31			—			31
Interest expense	(7		)	—		(2		)	(2		)	(11		)	—				(11		)	(58		)	—		(22		)	20			(60		)	—			(60		)
Other	5			—		—			1			6			—				6
Total Nonoperating income (expense)	5			—		(2		)	(1		)	2			—				2
Interest capitalized																						11			—		—			—			11			—			11
Other - net																						(20		)	—		—			—			(20		)	—			(20		)
Total nonoperating income (expense)																						(17		)	—		(22		)	1			(38		)	—			(38		)
Income (loss) before income tax	$	383		$	35	$	9		$	—		$	427		$	(25	)		$	402		$	761		$	—	$	33		$	17		$	811		$	(38	)	$	773

Nine Months Ended September 30, 2017
Mainline Regional Horizon
Consolidating & Other^(a)

Air Group Adjusted^(b)

Special Items^(c)
Consolidated
Operating revenues
Passenger
Mainline $ 4,390
$ —
$ —
$ —
$ 4,390
$ —
$ 4,390
Regional —
725
—
—
725
—
725
Total passenger revenues 4,390
725
—
—
5,115
—
5,115
CPA revenues —
—
317
(317 ) —
—
—
Freight and mail 84
3
1
—
88
—
88
Other—net 708
57
3
—
768
—
768
Total operating revenues 5,182
785
321
(317 ) 5,971
—
5,971
Operating expenses
Operating expenses, excluding fuel 3,101
625
324
(316 ) 3,734
88
3,822
Economic fuel 924
120
—
—
1,044
7
1,051
Total operating expenses 4,025
745
324
(316 ) 4,778
95
4,873
Nonoperating income (expense)
Interest income 27
—
—
(2 ) 25
—
25
Interest expense (68 ) —
(9 ) —
(77 ) —
(77 )
Other 11
—
1
—
12
—
12
Total Nonoperating income (expense) (30 ) —
(8 ) (2 ) (40 ) —
(40 )
Income (loss) before income tax 1,127
40
(11 ) (3 ) 1,153
(95 ) 1,058


	Nine Months Ended September 30, 2016																				Nine Months Ended September 30, 2018
	Mainline			Regional		Horizon			Consolidating & Other^(a)			Air Group Adjusted^(b)			Special Items^(c)			Consolidated			Mainline			Regional			Horizon			Consolidating & Other^(a)			Air Group Adjusted^(b)			Special Items^(c)			Consolidated
Operating revenues
Passenger
Mainline	$	3,036		$	—	$	—		$	—		$	3,036		$	—		$	3,036
Regional	—			682		—			—			682			—			682
Total passenger revenues	3,036			682		—			—			3,718			—			3,718
Passenger revenues																					$	4,879		$	845		$	—		$	—		$	5,724		$	—		$	5,724
CPA revenues	—			—		322			(322		)	—			—			—			—			—			375			(375		)	—			—			—
Freight and mail	79			3		—			—			82			—			82
Other—net	546			57		3			1			607			—			607
Mileage Plan other revenue																					301			28			—			—			329			—			329
Cargo and other																					142			1			4			—			147			—			147
Total operating revenues	3,661			742		325			(321		)	4,407			—			4,407			5,322			874			379			(375		)	6,200			—			6,200
Operating expenses
Operating expenses, excluding fuel	2,107			580		305			(322		)	2,670			36			2,706			3,392			755			345			(378		)	4,114			92			4,206
Economic fuel	512			90		—			—			602			(9		)	593			1,237			190			—			—			1,427			(30		)	1,397
Total operating expenses	2,619			670		305			(322		)	3,272			27			3,299			4,629			945			345			(378		)	5,541			62			5,603
Nonoperating income (expense)
Interest income	19			—		1			—			20			—			20			39			—			—			(10		)	29			—			29
Interest expense	(23		)	—		(7		)	(3		)	(33		)	—			(33		)	(64		)	—			(16		)	9			(71		)	—			(71		)
Other	15			—		—			4			19			—			19
Total Nonoperating income (expense)	11			—		(6		)	1			6			—			6
Interest capitalized																					12			—			2			—			14			—			14
Other - net																					(9		)	(11		)	—			—			(20		)	—			(20		)
Total nonoperating income (expense)																					(22		)	(11		)	(14		)	(1		)	(48		)	—			(48		)
Income (loss) before income tax	1,053			72		14			2			1,141			(27		)	1,114			$	671		$	(82	)	$	20		$	2		$	611		$	(62	)	$	549


(a)	Includes consolidating entries, ~~Parent Company,~~Air Group parent company, McGee Air Services, and other immaterial business units.


(b)	The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and ~~does not include~~excludes certain income and charges.


(c)	Includes merger-related costs, ~~and~~ mark-to-market fuel-hedge accounting ~~charges.~~adjustments, and other special items.

Total assets were as follows (in millions):



	September 30, 2019			December 31, 2018
Mainline	$	19,129		$	16,853
Horizon	1,231			1,229
Consolidating & Other	(7,377		)	(7,170		)
Consolidated	$	12,983		$	10,912

September 30, 2017 December 31, 2016
Mainline $ 16,382
$ 15,260
Horizon 914
690
Consolidating & Other (6,557 ) (5,988 )
Consolidated $ 10,739
$ 9,962

~~NOTE 10. SUBSEQUENT EVENTS~~

~~On October 30, 2017, the Company received a final decision from a third-party arbitration panel on increased wage rates and retirement contributions for pilots of Alaska Airlines and Virgin America.~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~("MD&A")~~(MD&A) is intended to help the reader understand our company, segment operations and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018. This overview summarizes the MD&A, which includes the following sections:

~~Third~~ ~~Quarter Review—highlights from the~~ ~~third~~ ~~quarter of~~ ~~2017~~ ~~outlining some of the major events that happened during the period and how they affected our financial performance.~~


•	Third Quarter Review—highlights from the third quarter of 2019 outlining some of the major events that happened during the period and how they affected our financial performance.

•

Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and nine months ended September 30, 2019. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2019.


•	Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.

~~Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2017~~. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. As Virgin America was acquired on December 14, 2016, its financial and operational results are reflected in the three and nine months ended September 30, 2017 but not in the comparative prior period. However, for comparability purposes, we have added "Combined Comparative" information for the prior year, which is more fully described below. This section includes forward-looking statements regarding our view of the remainder of 2017.

~~Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.~~

THIRD QUARTER REVIEW

Our consolidated pretax income was ~~$427~~$416 million during the third quarter of ~~2017,~~2019, compared to ~~$402~~$284 million in the third quarter of ~~2016.~~2018. The increase in pretax ~~income of $25 million~~profit was driven primarily ~~driven~~ by an increase in operating revenues of ~~$554~~$177 million ~~partially~~and a decrease in fuel expense of $27 million, offset by ~~a $372 million~~an increase in non-fuel ~~expense and a $143 million increase in fuel expense.~~operating expenses of $79 million.

As we completed the acquisition of Virgin America on December 14, 2016, our results of operations for the three months ended September 30, 2017 include those of Virgin America and the impact of purchase accounting. Our results of operations for the three months ended September 30, 2016 do not include those of Virgin America.

See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure.

~~Operations Performance~~

~~During the~~ ~~third~~ quarter of 2017, our on-time performance was 85.0% for Alaska, 73.3% for Virgin America and 78.6% for Horizon. Air traffic control issues and airport runway construction have negatively impacted our on-time performance, particularly in Seattle, Los Angeles, and San Francisco where we have a large concentration of flights. While these challenges negatively impact all airlines that operate in the affected markets, we plan to continue working to mitigate the impact in 2018. Additionally, pilot shortages at Horizon resulted in approximately 1,300 canceled flights and a reduction in scheduled service into the fourth quarter and early 2018. As a result of these adjustments to the flight schedule and our recent pilot hiring efforts, we anticipate that operational headwinds will be behind us by year end.

~~New Markets~~

We launched 20 new routes during the quarter, which is the most we have ever launched in one quarter. In total, we have announced approximately 40 new markets since the acquisition of Virgin America as we begin to realize the network and revenue synergies from bringing our two airlines together.

Shareholder Return

During the third quarter of ~~2017~~2019, we paid cash dividends of ~~$37~~$43 million and repurchased ~~355,415~~465,354 shares for $28 million. ~~Subsequent to September 30, 2017, we repurchased an additional 369,182 shares for $25 million.~~

Labor Update

~~Each of our represented groups, other than aircraft~~In June 2019, we reached a tentative agreement with the Aircraft Mechanics Fraternal Association (AMFA) to integrate Airbus technicians ~~has been certified by~~into the National Mediation Board as having single carrier status which allows for Virgin America teammates to be represented by unions that currently represent Alaska's work groups and enables work toward single collective bargaining ~~agreements.~~

Weagreement with Boeing technicians, as well as extend the term by two years. This tentative agreement was subsequently ratified by our technicians in July 2019. Also in June 2019, we reached a tentative agreement with the International Association of Machinists (IAM) for new five-year contracts for clerical, office, passenger service, ramp service and stores agents employees, which was subsequently ratified in September 2019. Both the IAM and AMFA agreements included signing bonuses and wage rate increases that were not able to come to an agreement during negotiations or mediation with our pilots, so Alaska and the Air Line Pilots Association presented their respective positions to a third-party arbitration panel duringimplemented in the third quarter. ~~On October 30, 2017,~~The annual impact of these contracts thereafter is expected to be approximately $50 million. During the third quarter, we ~~received~~recognized $24 million in one-time costs for both the AMFA and IAM agreements.

Income Taxes

In September 2019, the Internal Revenue Service clarified certain tax laws relating to bonus depreciation. The result of this clarification was a ~~decision~~$10 million one-time decrease to our income tax expense in the third quarter.

Outlook

With the integration largely behind us, we are focused on improving our returns with the long-term goal of achieving 13% to 15% pretax margins over the business cycle. Current year revenue initiatives, including our Saver Fare product, are providing meaningful revenue growth. We continue to benefit from the arbitration panel on new wage rates and retirement contributions for pilots of Alaska Airlines and Virgin America. This award is binding and is effective November 1, 2017. The wage rates equate to an approximately 33% increase for top-of-scale captains at Virgin America and approximately 16% for top-of-scale captains at Alaska Airlines withfull synergies expected as a ~~3% increase in rates effective April 1, 2018 and April 1, 2019.~~

The decision increases contribution rates for pilots in defined contribution only retirement plans from 13.5% at Alaska and 12% at Virgin America to 15% effective immediately and to 15.5% effective January 1, 2019.

We estimate the impact of this new contract over the status quo to be an incremental cost of approximately $24 million for the remainder of 2017, $150 million in 2018, and $180 million in 2019. Over the liferesult of the ~~contract,~~merger, with the ~~average annualized impact is approximately $160 million~~full run rate expected by 2021. Through cross-fleeting we have moved larger gauge, lower unit cost aircraft into markets with high demand, which we anticipate will continue to ~~$165 million compared~~benefit our results into 2020. This flexibility with our fleet allows us to evaluate all existing and potential new routes, including aircraft type, so that we can maximize our margins and provide the ~~$140 million estimate of our proposal at arbitration.~~

~~Outlook~~

We completed the acquisition of Virgin America on December 14, 2016, positioning us as the fifth largest airline in the U.S. with a unique ability to serve West Coast travelers. The acquisition of Virgin America provides a platform for growth of our low-fare, premium product, a powerful West Coastbest network ~~for our guests and enhanced international partnerships. Additionally, Virgin America provides access to constrained gates, particularly on the East Coast, creating increased~~ utility for our guests.

~~We are focused~~As we move through 2019, we continue to work on ~~the successful integration~~a number of Virgin America, which includes obtaining a Single Operating Certificate ("SOC") in early 2018 and a single Passenger Service System ("PSS"), or more commonly known as the reservations system, in the second quarter of 2018. The single PSS has been accelerated from later in 2018 and is expected to bring forward approximately $20 million of revenue synergies into 2018. Our priority throughout the integration process is to run our airlines well and maintain a safe, compliant and low-cost operation, while providing a remarkable experience for our guests. The combined airline will adopt Alaska’s name and logo, retiring the Virgin America name sometime in late 2019. Over the next several months we will focus on enhancing ournotable guest experience ~~and~~projects. By year-end, we expect that more than half of our Mainline fleet will adopt certain aspects of Virgin America’s brand elements, including enhanced inflight connectivity, inflight entertainment content, mood lighting, music and the relentless desire to make flying a different experience for guests. We will continue to enhance our fresh, healthy, West Coast-inspired onboard food and beverage menus and expect our First Class guests on Alaska will be able to pre-select meals before they fly starting this year. Alaska’s main cabin guests will also be able to pre-pay for their meals in advance in 2018, with Airbus flights soon to follow. Our onboard Free Chat service and free entertainment was added to Airbus flights in August 2017. We also plan to expand the premium class offering on our Airbus fleet beginning in 2018 and have our entire fleet equipped with high-speed satellite Wi-Fi, and that more than half of our Airbus fleet will be retrofitted with updated cabin interiors. These important projects will provide our guests with a more cohesive and connected Alaska experience. In July, we opened our new flagship lounge in the North Satellite of Sea-Tac Airport, and are working closely with the Port of Seattle to open a state-of-the-art 20-gate North Satellite Concourse by Summer 2021. During the third quarter, we also began work on our new lounge at San Francisco International Airport, which is expected to open in early 2020.

~~In January 2018, Alaska Mileage Plan™ will become~~These projects, along with our ~~sole loyalty program, offering~~ongoing rotation of on-board menu offerings, refreshed aircraft interiors, and expanded and updated airport lounges, demonstrates our commitment to providing our guests more ~~rewards, an expansive global partner network~~options and ~~the only major airline loyalty program that still rewards a mile flown with a mile earned on Alaska and Virgin America flights.~~

~~We intend to minimize any disruption to~~significant value. Combined, we expect our guests during the integration efforts by being transparent about the progress we are making and how the changes may affect them. Employee engagement throughout the integration will remain a top priority as well, ensuring that employees remain engaged, informed and excited about the changes. We remain focused on capturing the valuerevenue initiatives and synergies ~~created by combining these two great airlines.~~will contribute $330 million of revenue in 2019.

~~Currently, we~~We expect to grow our combined network capacity by approximately 2.1% in ~~2017 by 7.2%. The growth rate compares 2017 system-wide capacity to historical Air Group~~2019, and ~~Virgin America combined capacity~~approximately 3% - 4% in ~~2016.~~2020. Current schedules indicate competitive capacity will increase by approximately 5%2% in the fourth quarter of ~~2017,~~2019, and increase approximately 9%4% in the first quarter of ~~2018.~~2020. We believe that our product, ~~our~~ operation, ~~our low-cost structure, our~~ engaged employees, ~~our~~ award-winning service, and ~~our award-winning~~competitive Mileage Plan™ program, combined with our strong balance sheet and focus on low costs, give us ~~the ability to compete effectively~~a competitive advantage in our markets.

~~Our current expectations~~Other events

On November 6, 2019, the Board of Directors of Horizon Air elected Joseph A. Sprague to serve as President of Horizon Air, effective immediately. Mr. Sprague previously retired from Alaska Airlines after serving at the company for ~~capacity~~17 years in a variety of key leadership positions, including senior vice president of external relations, vice president of marketing and ~~CASM excluding fuel and special items for the remainder~~vice president of ~~2017 are summarized below. These expectations are from a "Combined Comparative" perspective, calculated as the sum of historical results for~~ Alaska Air ~~Group~~Cargo. Mr. Sprague will succeed Gary L. Beck who has been elected by the Board of Directors of Alaska Airlines to serve as Executive Vice President and ~~Virgin America for~~Chief Operating Officer of Alaska, effective immediately. Prior to his time at Horizon Air, Mr. Beck was vice president of Alaska’s flight operations division from 2008 to 2015. Mr. Beck will report to Ben Minicucci, who will continue to serve as Alaska’s President. Both Mr. Sprague and Mr. Beck will serve on the ~~2016 comparative periods:~~Company’s Executive Committee.

Forecast
Q4 2017
Q4 2016 Combined Comparative^(a)
% Change
Capacity (ASMs in millions) 15,950 - 16,000 14,404 ~ 11%
Cost per ASM excluding fuel and special items (cents)
8.50¢ - 8.55¢ 8.25¢ ~ 3%
Fuel gallons (millions) 204 184 ~ 11%
Economic fuel cost per gallon $1.95 $1.66 ~ 17.5%

Forecast
Full Year 2017
2016 Combined Comparative^(a)
% Change
Capacity (ASMs in millions) 62,130 - 62,160 57,953 ~ 7.2%
Cost per ASM excluding fuel and special items (cents) 8.19¢ - 8.21¢ 8.04¢ ~ 2%
Fuel gallons (millions) 795 739 ~ 7.5%
Economic fuel cost per gallon $1.81 $1.54 ~ 17.5%


^(a)	~~Refer to our Investor Update issued on October 25, 2017 on Form 8-K for further details of the calculation of the three and twelve months ended December 31, 2016 combined data.~~

We currently expect capacity growth of approximately 8% for the full year 2018. We expect unit costs to increase in 2018. This increase is driven by increases in pilot wages as a result of the pilot arbitration decision, a new engine services deal, our growing mix of regional flying, and continued costs associated with the integration.

RESULTSOF OPERATIONS

ADJUSTED (NON-GAAP) RESULTS ANDPER-SHARE AMOUNTS

We believe disclosure of earnings excluding the impact of merger-related costs, mark-to-market gains or losses or other individual special revenues or expenses is useful information to investors because:

By excluding fuel expense and certain special items (including merger-related costs) from our unit metrics, we believe ~~it provides management~~that we have better visibility into the results of operations and our non-fuel cost initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

Cost per ASM ~~("CASM")~~(CASM) excluding fuel and certain special items, such as merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.

Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee annual cash incentive plan, which covers the majority of employees within the Air Group ~~employees.~~organization.

CASM excluding fuel and certain special items is a measure commonly used by industry analysts and we believe it is an important metric by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.

Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as merger-related costs, and mark-to-market hedging adjustments, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

Although we disclose our ~~passenger~~ unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.

OPERATING STATISTICS SUMMARY (unaudited)

~~As the acquisition closed on December 14, 2016, Consolidated~~Below are operating statistics we use to measure operating performance. We often refer to unit revenues and ~~Mainline amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 and not for the prior period.~~adjusted unit costs, which are non-GAAP measures.


	Three Months Ended September 30,			Nine Months Ended September 30,			Three Months Ended September 30,			Nine Months Ended September 30,
	2017	2016	Change^(d)	2017	2016	Change^(d)	2019	2018	Change	2019	2018	Change
Consolidated Operating Statistics:^(a)
Revenue passengers (000)	11,645	9,054	28.6%	33,063	25,536	29.5%	12,574	12,128	3.7%	35,018	34,685	1.0%
RPMs (000,000) "traffic"	13,811	9,601	43.8%	39,073	27,569	41.7%	15,026	14,386	4.4%	42,113	41,272	2.0%
ASMs (000,000) "capacity"	16,164	11,212	44.2%	46,170	32,728	41.1%	17,519	16,943	3.4%	50,006	49,256	1.5%
Load factor	85.4%	85.6%	(0.2) pts	84.6%	84.2%	0.4 pts	85.8%	84.9%	0.9 pts	84.2%	83.8%	0.4 pts
Yield	13.21¢	13.77¢	(4.1)%	13.09¢	13.49¢	(3.0)%	14.71¢	14.20¢	3.6%	14.34¢	13.87¢	3.4%
PRASM	11.29¢	11.79¢	(4.2)%	11.08¢	11.36¢	(2.5)%
RASM	13.12¢	13.97¢	(6.1)%	12.93¢	13.47¢	(4.0)%	13.64¢	13.05¢	4.5%	13.10¢	12.59¢	4.1%
CASM excluding fuel and special items^(b)	7.98¢	8.20¢	(2.7)%	8.09¢	8.16¢	(0.9)%	8.43¢	8.15¢	3.4%	8.59¢	8.35¢	2.9%
Economic fuel cost per gallon^(b)	$1.80	$1.58	13.9%	$1.76	$1.47	19.7%	$2.13	$2.33	(8.6)%	$2.18	$2.26	(3.5)%
Fuel gallons (000,000)	207	140	47.9%	592	410	44.4%	227	218	4.1%	646	631	2.4%
ASMs per fuel gallon	78.1	80.1	(2.5)%	78.0	79.8	(2.3)%	77.2	77.7	(0.6)%	77.4	78.1	(0.9)%
Average full-time equivalent employees (FTEs)	20,743	14,674	41.4%	19,723	14,500	36.0%	22,247	21,804	2.0%	22,000	21,575	2.0%
Mainline Operating Statistics:
Revenue passengers (000)	9,142	6,507	40.5%	25,875	18,432	40.4%	9,655	9,435	2.3%	26,725	27,107	(1.4)%
RPMs (000,000) "traffic"	12,694	8,595	47.7%	36,046	24,767	45.5%	13,538	13,096	3.4%	37,917	37,677	0.6%
ASMs (000,000) "capacity"	14,796	9,987	48.2%	42,398	29,216	45.1%	15,702	15,343	2.3%	44,816	44,730	0.2%
Load factor	85.8%	86.1%	(0.3) pts	85.0%	84.8%	0.2 pts	86.2%	85.4%	0.8 pts	84.6%	84.2%	0.4 pts
Yield	12.31¢	12.49¢	(1.4)%	12.18¢	12.26¢	(0.7)%	13.66¢	13.18¢	3.6%	13.29¢	12.95¢	2.6%
PRASM	10.56¢	10.75¢	(1.8)%	10.36¢	10.39¢	(0.3)%
RASM	12.40¢	12.96¢	(4.3)%	12.22¢	12.53¢	(2.5)%	12.83¢	12.28¢	4.5%	12.30¢	11.90¢	3.4%
CASM excluding fuel and special items^(b)	7.28¢	7.28¢	—%	7.32¢	7.21¢	1.5%	7.81¢	7.34¢	6.4%	7.91¢	7.58¢	4.4%
Economic fuel cost per gallon^(b)	$1.79	$1.57	14.0%	$1.76	$1.46	20.5%	$2.13	$2.32	(8.2)%	$2.17	$2.25	(3.6)%
Fuel gallons (000,000)	183	119	53.8%	526	350	50.3%	193	189	2.1%	549	549	—%
ASMs per fuel gallon	80.9	83.9	(3.6)%	80.6	83.5	(3.5)%	81.4	81.2	0.2%	81.6	81.5	0.1%
Average FTEs	15,862	11,397	39.2%	15,439	11,260	37.1%	16,789	16,499	1.8%	16,599	16,330	1.6%
Aircraft utilization	11.4	10.6	7.5%	11.1	10.7	3.7%	11.3	11.4	(0.9)%	10.9	11.4	(4.4)%
Average aircraft stage length	1,300	1,203	8.1%	1,296	1,218	6.4%	1,281	1,291	(0.8)%	1,298	1,293	0.4%
Operating fleet	218	154	64 a/c	218	154	64 a/c	238	231	7 a/c	238	231	7 a/c
Regional Operating Statistics:^(c)
Revenue passengers (000)	2,503	2,547	(1.7)%	7,188	7,105	1.2%	2,919	2,693	8.4%	8,293	7,578	9.4%
RPMs (000,000) "traffic"	1,117	1,006	11.0%	3,027	2,801	8.1%	1,488	1,290	15.3%	4,196	3,595	16.7%
ASMs (000,000) "capacity"	1,368	1,225	11.7%	3,772	3,512	7.4%	1,817	1,600	13.6%	5,190	4,526	14.7%
Load factor	81.7%	82.1%	(0.4 pts)	80.2%	79.8%	0.4 pts	81.9%	80.6%	1.3 pts	80.8%	79.4%	1.4 pts
Yield	23.48¢	24.75¢	(5.1)%	23.95¢	24.35¢	(1.6)%	24.23¢	24.50¢	(1.1)%	23.81¢	23.49¢	1.4%
PRASM	19.17¢	20.32¢	(5.7)%	19.22¢	19.43¢	(1.1)%
RASM							20.51¢	20.41¢	0.5%	19.93¢	19.32¢	3.2%
Operating fleet	83	69	14 a/c	83	69	14 a/c	94	89	5 a/c	94	89	5 a/c


^(a)	Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.


^(b)	See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.


^(c)	Data presented includes information related to flights operated by Horizon and third-party carriers.


^(d)	~~See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America.~~

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, ~~2017~~2019 TO THREE MONTHS ENDED SEPTEMBER 30, ~~2016~~2018

Our consolidated net income for the three months ended September 30, ~~2017~~2019 was ~~$266~~$322 million, or ~~$2.14~~$2.60 per diluted share, compared to net income of ~~$256~~$217 million, or ~~$2.07~~$1.75 per diluted share, for the three months ended September 30, 2016. As the acquisition of Virgin America closed on December 14, 2016, our financial results include results of Virgin America for the three months ended September 30, 2017, but not for the comparable prior period.2018.

Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, our adjusted net income for the third quarter of ~~2017~~2019 was ~~$278~~$326 million, or ~~$2.24~~$2.63 per diluted share, compared to an adjusted net income of ~~$272~~$237 million, or ~~$2.20~~$1.91 per diluted share, in the third quarter of ~~2016.~~2018. The following tables reconcile our adjusted net income and adjusted earnings per diluted share ~~("EPS")~~(EPS) to amounts as reported in accordance with GAAP:


	Three Months Ended September 30,												Three Months Ended September 30,
	2017						2016						2019						2018
(in millions, except per share amounts)	Dollars			Diluted EPS			Dollars			Diluted EPS			Dollars			Diluted EPS			Dollars			Diluted EPS
Reported GAAP net income and diluted EPS	$	266		$	2.14		$	256		$	2.07
GAAP net income and diluted EPS													$	322		$	2.60		$	217		$	1.75
Mark-to-market fuel hedge adjustments	(5		)	(0.04		)	3			0.02			—			—			5			0.04
Special items—merger-related costs	24			0.20			22			0.18
Income tax effect on special items and fuel hedge adjustments	(7		)	(0.06		)	(9		)	(0.07		)
Special items - merger-related costs													5			0.04			22			0.18
Income tax effect of reconciling items above													(1		)	(0.01		)	(7		)	(0.06		)
Non-GAAP adjusted net income and diluted EPS	$	278		$	2.24		$	272		$	2.20		$	326		$	2.63		$	237		$	1.91

CASM reconciliation is summarized below:


	Three Months Ended September 30,								Three Months Ended September 30,
(in cents)	2017			2016			% Change		2019			2018			% Change
Consolidated:
CASM		10.40	¢		10.40	¢	—	%		11.23	¢		11.30	¢	(1	)%
Less the following components:
Aircraft fuel, including hedging gains and losses	2.27			2.01			12.9	%	2.77			3.02			(8	)%
Special items—merger-related costs	0.15			0.19			(21.1	)%
Special items - merger-related costs									0.03			0.13			(77	)%
CASM excluding fuel and special items		7.98	¢		8.20	¢	(2.7	)%		8.43	¢		8.15	¢	3	%

Mainline:
CASM		9.63	¢		9.41	¢	2.3	%		10.46	¢		10.37	¢	1	%
Less the following components:
Aircraft fuel, including hedging gains and losses	2.19			1.91			14.7	%	2.62			2.89			(9	)%
Special items—merger-related costs	0.16			0.22			(27.3	)%
Special items - merger-related costs									0.03			0.14			(79	)%
CASM excluding fuel and special items		7.28	¢		7.28	¢	—	%		7.81	¢		7.34	¢	6	%

We believe that analysis of specific financial and operational results on a combined basis provides more meaningful year-over-year comparisons. The discussion below includes "Combined Comparative" results for the three months ended September 30, 2016~~, determined as the sum~~ of the historical consolidated results of Air Group and of Virgin America. Virgin America's financial information has been conformed to reflect Air Group's historical financial statement presentation. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented.

~~COMBINED COMPARATIVE OPERATING STATISTICS~~

Three Months Ended September 30,
2017 2016 as Reported 2016 Virgin America 2016 Combined Change
Consolidated:
Revenue passengers (in 000) 11,645 9,054 2,175 11,229 3.7%
RPMs (in 000,000) 13,811 9,601 3,321 12,922 6.9%
ASMs (in 000,000) 16,164 11,212 3,867 15,079 7.2%
Load Factor 85.4% 85.6% (a) 85.7% (0.3) pts
PRASM 11.29¢ 11.79¢ (a) 11.43¢ (1.2)%
RASM 13.12¢ 13.97¢ (a) 13.34¢ (1.6)%
CASMex 7.98¢ 8.20¢ (a) 7.90¢ 1.0%
FTEs 20,743 14,674 2,888 17,562 18.1%

Mainline:
RPMs (in 000,000) 12,694 8,595 3,321 11,916 6.5%
ASMs (in 000,000) 14,796 9,987 3,867 13,854 6.8%
Load Factor 85.8% 86.1% (a) 86.0% (0.2) pts
PRASM 10.56¢ 10.75¢ (a) 10.65¢ (0.8)%


^(a)	~~2016 Combined operating statistics have been recalculated using the combined results.~~

~~COMBINED COMPARATIVE~~ OPERATING REVENUES

Total operating revenues increased ~~$554~~ $177 million, or ~~35%~~8%, during the third quarter of ~~2017~~2019 compared to the same period in ~~2016. On a Combined Comparative basis, total operating revenues increased $108 million or 5%.~~2018. The changes ~~including the reconciliation of the impact of Virgin America on the comparative results,~~ are summarized in the following table:

Three Months Ended September 30, Change
(in millions) 2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Passenger
Mainline $ 1,562
$ 1,073
$ 402
$ 1,475
$ 87
5.9 %
Regional 262
249
—
249
13
5.2 %
Total passenger revenue 1,824
1,322
402
1,724
100
5.8 %
Freight and mail 32
31
—
31
1
3.2 %
Other—net 264
213
44
257
7
2.7 %
Total operating revenues $ 2,120
$ 1,566
$ 446
$ 2,012
$ 108
5.4 %



	Three Months Ended September 30,
(in millions)	2019		2018		% Change
Passenger revenue	$	2,211	$	2,043	8	%
Mileage Plan other revenue	118		114		4	%
Cargo and other	60		55		9	%
Total operating revenues	$	2,389	$	2,212	8	%

Passenger ~~Revenue—Mainline~~Revenue

On a consolidated basis, ~~Mainline passenger~~Passenger revenue for the third quarter of ~~2017~~2019 increased by ~~$489~~$168 million, or ~~46%~~8%, on a ~~48%~~3.6% increase in ~~capacity driven by the~~yield and a 3.4% increase in traffic. The increase in yield is primarily a result of current year revenue initiatives, implemented as a broader plan to drive revenue growth, realized synergies from our acquisition of Virgin America, ~~partially offset by~~and a ~~2% decrease in unit revenues. On a Combined Comparative basis, Mainline passenger revenue for the third quarter of 2017 increased by 6%, due to a 7%~~16% increase in ~~capacity, slightly offset by a 1% decrease in unit revenues compared to the combined third quarter of 2016. The increase in capacity~~premium seat revenue, including First and Premium class product offerings. Increased traffic was driven by ~~our continued network expansion~~new routes and aircraft added to our fleet since the third quarter of 2016. The decrease in PRASM was driven by decreased load factors coupled with lower ticket yields. The lower yields were impacted by our new market growth and by competitor pricing actions felt more acutely in our California markets.2018.

~~Passenger Revenue—Regional~~OPERATING EXPENSES

~~Regional passenger revenue~~Total operating expenses increased 5%$52 million, or 3%, compared to the third quarter of 2016 primarily, driven by a 12% increase in capacity. The increase in capacity was offset by a 6% decrease in PRASM. The decrease in Regional PRASM was largely driven by growth and competitive pricing actions. The operational challenges at Horizon, due in large part to a shortage of pilot

s, resulted in a significant number of flight cancellations that led us to either refund or re-accommodate passengers. We estimate these cancellations resulted in lost revenues for Air Group of approximately $25 million to $30 million.

~~Other—Net~~

Other—net revenue increased $51 million, or 24%, from the third quarter of 2016. Frequent flyer revenue contributed $15 million of the increase, primarily driven by a significant increase in miles sold to our affinity credit card partner in the Mileage Plan program. The remainder of the increase was due to higher ancillary revenues. On a Combined Comparative basis, Other—net revenue increased $7 million, or 3%.

~~COMBINED COMPARATIVE OPERATING EXPENSES~~

~~Total operating expenses increased $515 million, or 44%, compared to the~~ ~~third~~ ~~quarter of~~ ~~2016. On a Combined Comparative basis, total operating expenses increased $159 million, or 10%.~~2018. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


	Three Months Ended September 30,								Change				Three Months Ended September 30,
(in millions)	2017		2016 as Reported		2016 Virgin America		2016 Combined		$ Combined		% Combined		2019		2018		% Change
Fuel expense	$	368	$	225	$	81	$	306	$	62	20.3	%	$	486	$	513	(5	)%
Non-fuel expenses	1,289		919		273		1,192		97		8.1	%
Special items—merger-related costs	24		22		2		24		—		—	%
Non-fuel operating expenses, excluding special items													1,476		1,380		7	%
Special items - merger-related costs													5		22		(77	)%
Total operating expenses	$	1,681	$	1,166	$	356	$	1,522	$	159	10.4	%	$	1,967	$	1,915	3	%

Fuel Expense

Aircraft fuel expense includes ~~both~~ raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio ~~included in our consolidated statement of operations~~ as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

Aircraft fuel expense ~~increased $143~~decreased $27 million, or ~~64%~~5%, compared to the third quarter of ~~2016. On a Combined Comparative basis, aircraft fuel expense increased $62 million or 20%.~~2018. The elements of the change are illustrated in the following table:


	Three Months Ended September 30,														Three Months Ended September 30,
	2017						2016 as Reported				2016 Combined				2019				2018
(in millions, except for per gallon amounts)	Dollars			Cost/Gal			Dollars		Cost/Gal		Dollars		Cost/Gal		Dollars		Cost/Gal		Dollars			Cost/Gal
Raw or "into-plane" fuel cost	$	368		$	1.78		$	218	$	1.55	$	298	$	1.54	$	481	$	2.11	$	520		$	2.38
Losses on settled hedges	5			0.02			4		0.03		5		0.03
(Gains) losses on settled hedges															5		0.02		(12		)	(0.05		)
Consolidated economic fuel expense	373			1.80			222		1.58		$	303	$	1.57	486		2.13		$	508		$	2.33
Mark-to-market fuel hedge adjustments	(5		)	(0.02		)	3		0.02		3		0.02		—		—		5			0.02
GAAP fuel expense	$	368		$	1.78		$	225	$	1.60	$	306	$	1.59	$	486	$	2.13	$	513		$	2.35
Fuel gallons	207						140				192				227				218

~~On a Combined Comparative basis, raw~~Raw fuel expense per gallon for the three months ended September 30, ~~2017 increased~~2019 decreased by ~~16%~~approximately 11% due to ~~higher~~lower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil ~~as well as~~and refining margins associated with the conversion of crude oil to jet fuel. The ~~increase~~decrease in raw fuel price per gallon during the third quarter of ~~2017~~2019 was primarily driven by a ~~76%~~19% decrease in crude oil prices, partially offset by a 4% increase in refining margins, ~~and an 8% increase in crude oil prices,~~ when compared to the prior year. Fuel gallons consumed increased by 159 million gallons, or 8%4%, ~~in line with the increase in~~primarily due to increased capacity.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts. A

key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business ~~because~~as it most closely approximates the net cash outflow associated with purchasing

fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.

WeLosses recognized ~~total losses of $5 million and $4 million~~ for hedges that settled during the third quarter were $5 million in 2019, compared to gains of ~~2017 and 2016 as reported.~~$12 million in the same period in 2018. These amounts represent ~~the net~~cash received from hedges at settlement, offset by cash paid ~~including the~~for premium ~~expense recognized for those hedges.~~expense.

Non-fuel Expenses ~~and Non-special Items~~

The table below provides the reconciliation of the ~~impact of Virgin America on the comparative results for each of our~~ operating expense line items, excluding fuel and special items. Significant operating expense variances from ~~2016~~2018 are more fully described below.


	Three Months Ended September 30,								Change					Three Months Ended September 30,
(in millions)	2017		2016 as Reported		2016 Virgin America		2016 Combined		$ Combined			% Combined		2019		2018		% Change
Wages and benefits	$	475	$	340	$	72	$	412	$	63		15.3	%	$	608	$	549	11	%
Variable incentive pay	40		31		11		42		(2		)	(4.8	)%	46		27		70	%
Aircraft maintenance	88		64		17		81		7			8.6	%	106		107		(1	)%
Aircraft rent	70		25		48		73		(3		)	(4.1	)%	82		82		—	%
Landing fees and other rentals	124		89		28		117		7			6.0	%	143		135		6	%
Contracted services	76		63		16		79		(3		)	(3.8	)%	72		70		3	%
Selling expenses	91		58		34		92		(1		)	(1.1	)%	77		79		(3	)%
Depreciation and amortization	95		101		11		112		(17		)	(15.2	)%	106		99		7	%
Food and beverage service	50		31		13		44		6			13.6	%	57		53		8	%
Third-party regional carrier expense	30		25		—		25		5			20.0	%	42		38		11	%
Other	150		92		23		115		35			30.4	%	137		141		(3	)%
Total non-fuel and non-special operating expenses	$	1,289	$	919	273		1,192		97			8.1	%
Total non-fuel operating expenses, excluding special items														$	1,476	$	1,380	7	%

Wages and Benefits

Wages and benefits increased during the third quarter of ~~2017~~2019 by ~~$135 million, or 40%. On a Combined Comparative basis, total wages and benefits increased by $63~~$59 million, or ~~15%.~~11%, compared to 2018. The primary components of ~~wages~~Wages and benefits ~~including a reconciliation of 2016 on a Combined Comparative basis,~~ are shown in the following table:


	Three Months Ended September 30,								Change				Three Months Ended September 30,
(in millions)	2017		2016 as Reported		2016 Virgin America		2016 Combined		$ Combined		% Combined		2019		2018		% Change
Wages	$	358	$	250	$	58	$	308	$	50	16.2	%	$	460	$	412	12	%
Pension—Defined benefit plans	8		6		—		6		2		33.3	%
Pension—Defined benefit plans service cost													10		12		(17	)%
Defined contribution plans	25		16		5		21		4		19.0	%	34		30		13	%
Medical and other benefits	59		50		6		56		3		5.4	%	71		65		9	%
Payroll taxes	25		18		3		21		4		19.0	%	33		30		10	%
Total wages and benefits	$	475	$	340	$	72	$	412	$	63	15.3	%	$	608	$	549	11	%

OnWages increased $48 million, or 12%, on a ~~Combined Comparative basis, wages increased 16% with an 18% increase~~2% growth in FTEs. The increase ~~in FTEs~~ is ~~attributable~~primarily due to the ~~growth~~recognition of approximately $24 million during the quarter in ~~our business,~~one-time costs following the ratification of the AMFA and IAM contracts, as well as the ~~growth~~impact of increased wage rates for our labor groups as compared to the prior year period.

Medical and other benefits expense increased $6 million, or 9%, primarily due to increased volume of high-dollar value medical claims as compared to the prior-year period, and an overall cost increase in ~~McGee Air Services which has brought certain airport ground service positions in-house that were previously reflected in our Contracted~~medical services ~~expense. Additionally, irregular operations~~ and ~~flight cancellations~~products.

Variable Incentive Pay

Variable incentive pay expense increased $19 million, or 70%, during the third quarter ~~resulted~~of 2019 compared to the same period in ~~significant overtime for our customer service agents and reservations agents.~~2018. The increase is primarily the result of adjustments taken in the third quarter of 2018 to revise the estimate of full year performance-based pay based on tracking in relation to 2018 goals.

~~Depreciation~~Landing fees and ~~Amortization~~other rentals

~~Depreciation~~Landing fees and ~~amortization~~other rental expense ~~decreased~~increased by $6$8 million, or 6%, during the third quarter of ~~2017~~2019 compared to the same period in ~~2016. On a Combined Comparative basis, depreciation~~2018. The increase is primarily due to an increase in capacity of 3.4% as compared to the prior year period, as well as rate increases at many of our West Coast airports, including our hub airports.

Depreciation and Amortization

Depreciation and amortization expense decreased by $17 million, or 15%. This decrease was primarily driven by a change in the estimated useful lives of certain B737 operating aircraft and related parts from 20 years to 25 years, which was effective October 1, 2016, partially offset by aircraft additions since September 30, 2016.

~~Other Operating Expenses~~

~~Other operating expenses~~ increased by ~~$58~~$7 million, or ~~63%~~7%, during the third quarter of ~~2017~~2019 compared to the same period in ~~2016. On a Combined Comparative basis, other operating expenses increased by $35 million, or 30%. The increase is~~2018, primarily due to ~~additional costs incurred for crew hotel costs, passenger disruption costs, training costs for front-line employees, scrapped parts inventory,~~the addition of 14 owned E175s and ~~certain information technology costs. These increases were largely driven by~~six owned B737-900ERs to our fleet since the ~~growth in our business and increased costs from flight cancellations and delays during the quarter. .~~

~~Nonoperating Income (Expense)~~

~~During the~~ third quarter of ~~2017 we~~2018.

Special Items - Merger-related Costs

We recorded ~~nonoperating expense~~special items of ~~$12~~$5 million in the third quarter of 2019 for merger-related costs associated with our acquisition of Virgin America, compared to ~~income of $2~~$22 million in the same period ~~in 2016. On a Combined Comparative basis, nonoperating expense increased by $9 million, primarily due to interest expense~~of 2018. Costs incurred in the ~~current year on the debt issued in 2016 to finance the acquisition~~third quarter of ~~Virgin America.~~2019 are primarily a result of certain technology integration costs.

~~Additional Segment Information~~ADDITIONAL SEGMENT INFORMATION

Refer to Note 9 of the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline recorded ~~adjusted~~ pretax profit of ~~$422~~$378 million in the third quarter of ~~2017~~2019, compared to ~~$383~~$314 million in the third quarter of ~~2016. On a Combined Comparative basis, Mainline adjusted pretax profit decreased by $48 million.~~2018. The table below provides the reconciliation of the impact of Virgin America on the comparative results for our Mainline segment, excluding merger-related costs and mark-to-market fuel-hedge accounting charges:

Three Months Ended September 30,
(in millions) 2017 2016 as Reported 2016 Virgin America 2016 Combined $ Change
Mainline
Operating revenues $ 1,834
$ 1,293
$ 446
$ 1,739
$ 95
Non-fuel, non-special operating expenses 1,077
727
273
1,000
77
Economic fuel 328
188
81
269
59
Operating income 429
378
92
470
(41 )
Nonoperating income (expense) (7 ) 5
(5 ) —
(7 )
Pretax profit $ 422
$ 383
$ 87
$ 470
$ (48 )

~~The $48~~$64 million ~~decrease~~increase in ~~Combined Comparative~~ pretax profit was primarily driven by a ~~$77~~$123 million increase in ~~non-fuel operating expenses~~Passenger revenues and a ~~$59~~$27 million ~~increase~~decrease in economic fuel cost, partially offset by a ~~$95~~$100 million increase in non-fuel operating ~~revenues.~~ expenses.

The increase in ~~non-fuel expense~~Mainline passenger revenue for the third quarter of 2019 was primarily driven by the impact of our revenue initiatives and synergies, as well as continued improvement in our trans-con markets as compared to the prior year.

Lower raw fuel prices, partially offset by a slight increase in gallons consumed, drove the decrease in Mainline fuel expense. Non-fuel operating expenses increased due to higher wages ~~to support our growth~~and benefits as a result of new wage rates and signing bonuses following the ratification of the AMFA and IAM contracts, increased variable pay expense as described further above, and higher ~~other operating expenses~~aircraft ownership costs as described above. The increase in economic fuel expense was driven by higher raw fuel costs and refining margins. The increase in operating revenues was primarily driven by higher capacity and an increase in frequent flyer revenue as described above.we continue to add to our Mainline fleet.

Regional

~~Our~~ Regional operations ~~contributed~~generated a pretax profit of ~~$20~~$23 million in the third quarter of ~~2017~~2019, compared to ~~$35~~a pretax loss of $13 million in the third quarter of ~~2016.~~2018. The ~~decrease in~~shift to pretax profit was attributable to ~~higher non-fuel operating expense, due to increased capacity and the operational disruptions at Horizon during the third quarter. Increased costs were partially offset by~~ a ~~$13~~$47 million increase in operating revenues, ~~as described~~partially offset by a $5 million increase in ~~Passenger Revenue—Regional.~~fuel costs and an $8 million increase in non-fuel operating expenses.

Regional passenger revenue increased 14% compared to the third quarter of 2018, primarily driven by a 14% increase in capacity. The increase in capacity is due to an increase in departures from new E175 deliveries, and an increase in average aircraft stage length.

The increase in non-fuel operating expenses is primarily due to the 14% increase in capacity.

Horizon

Horizon ~~incurred~~achieved a pretax profit of $5$11 million in the third quarter of ~~2017~~2019, compared to $9a pretax profit of $7 million in the third quarter of ~~2016. The change in pretax~~2018. Increased profit ~~was~~is primarily ~~driven by~~due to a ~~$4 million increase~~reduction in operating ~~revenue, partially offset by~~costs on higher ~~non-fuel operating expenses attributable to higher wage and pilot training expense as a result of~~productivity, combined with increased flying over the ~~increase in FTEs, along with other increased costs associated with flight cancellations during the current quarter.~~ prior year.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2019 TO NINE MONTHS ENDED SEPTEMBER 30, ~~2016~~2018

Our consolidated net income for the nine months ended September 30, ~~2017~~2019 was ~~$661~~$588 million, or ~~$5.31~~$4.74 per diluted share, compared to net income of ~~$700~~$414 million, or ~~$5.63~~$3.34 per diluted share, for the nine months ended September 30, 2016. As the acquisition of Virgin America closed on December 14, 2016, our financial results include results of Virgin America for the nine months ended September 30, 2017, but not for the prior periods.2018.

~~Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, our~~Our adjusted net income for the nine months ended September 30, ~~2017~~2019 was ~~$721~~$617 million, or ~~$5.79~~$4.97 per diluted share, compared to an adjusted net income of ~~$717~~$461 million, or ~~$5.77~~$3.72 per diluted share, in the nine months ended September 30, ~~2016.~~2018. The following tables reconcile our adjusted net income and adjusted diluted EPS to amounts as reported in accordance with GAAP:


	Nine Months Ended September 30,												Nine Months Ended September 30,
	2017						2016						2019						2018
(in millions, except per share amounts)	Dollars			Diluted EPS			Dollars			Diluted EPS			Dollars			Diluted EPS			Dollars			Diluted EPS
Reported GAAP net income and diluted EPS	$	661		$	5.31		$	700		$	5.63		$	588		$	4.74		$	414		$	3.34
Mark-to-market fuel hedge adjustments	7			0.06			(9		)	(0.07		)	(1		)	(0.01		)	(30		)	(0.24		)
Special items—merger-related costs	88			0.70			36			0.29
Income tax effect on special items and fuel hedge adjustments	(35		)	(0.28		)	(10		)	(0.08		)
Special items - merger-related costs													39			0.31			67			0.54
Special items - other^(a)													—			—			25			0.20
Income tax effect of reconciling items above													(9		)	(0.07		)	(15		)	(0.12		)
Non-GAAP adjusted net income and diluted EPS	$	721		$	5.79		$	717		$	5.77		$	617		$	4.97		$	461		$	3.72

Our operating costs per ASM are summarized below:

Nine Months Ended September 30,
(in cents) 2017 2016 % Change
Consolidated:
CASM
10.55 ¢
10.08 ¢ 4.7 %
Less the following components:
Aircraft fuel, including hedging gains and losses 2.27
1.81
25.4 %
Special items—merger-related costs 0.19
0.11
72.7 %
CASM excluding fuel and special items
8.09 ¢
8.16 ¢ (0.9 )%

Mainline:
CASM
9.72 ¢
9.06 ¢ 7.3 %
Less the following components:
Aircraft fuel, including hedging gains and losses 2.19
1.72
27.3 %
Special items—merger-related costs 0.21
0.13
61.5 %
CASM excluding fuel and special items
7.32 ¢
7.21 ¢ 1.5 %

~~COMBINED COMPARATIVE OPERATING STATISTICS~~

Nine Months Ended September 30,
2017 2016 as Reported 2016 Virgin America 2016 Combined Change
Consolidated:
Revenue passengers (in 000) 33,063 25,536 6,029 31,565 4.7%
RPMs (in 000,000) 39,073 27,569 9,101 36,670 6.6%
ASMs (in 000,000) 46,170 32,728 10,821 43,549 6.0%
Load Factor 84.6% 84.2% (a) 84.2% 0.4 pts
PRASM 11.08¢ 11.36¢ (a) 11.10¢ (0.2)%
RASM 12.93¢ 13.47¢ (a) 12.95¢ (0.2)%
CASMex 8.09¢ 8.16¢ (a) 7.98¢ 1.4%
FTEs 19,723 14,500 2,771 17,271 14.2%

Mainline:
RPMs (in 000,000) 36,046 24,767 9,101 33,868 6.4%
ASMs (in 000,000) 42,398 29,216 10,821 40,037 5.9%
Load Factor 85.0% 84.8% (a) 84.6% 0.4 pts
PRASM 10.36¢ 10.39¢ (a) 10.37¢ (0.1)%



	Nine Months Ended September 30,
(in cents)	2019			2018			% Change
Consolidated:
CASM		11.48	¢		11.38	¢	1	%
Less the following components:
Aircraft fuel, including hedging gains and losses	2.82			2.84			(1	)%
Special items - merger-related costs	0.07			0.14			(49	)%
Special items - other^(a)	—			0.05			(100	)%
CASM excluding fuel and special items		8.59	¢		8.35	¢	3	%

Mainline:
CASM		10.65	¢		10.49	¢	2	%
Less the following components:
Aircraft fuel, including hedging gains and losses	2.65			2.70			(2	)%
Special items - merger-related costs	0.09			0.15			(40	)%
Special items - other^(a)	—			0.06			(100	)%
CASM excluding fuel and special items		7.91	¢		7.58	¢	4	%


(a)	~~2016 Combined operating statistics have been recalculated using~~ Special items - other is the ~~combined results.~~employee tax reform bonus awarded in January 2018.

~~COMBINED COMPARATIVE~~ OPERATING REVENUES

Total operating revenues increased$~~1.6 billion~~353 million, or ~~35%~~6%, during the first nine months of ~~2017~~2019 compared to the same period in ~~2016. On a Combined Comparative basis, total operating revenues increased $330 million, or 6%~~2018. The changes ~~including the reconciliation of the impact of Virgin America on the comparative results,~~ are summarized in the following table:

Nine Months Ended September 30, Change
(in millions) 2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Passenger
Mainline $ 4,390
$ 3,036
$ 1,115
$ 4,151
$ 239
5.8 %
Regional 725
682
—
682
43
6.3 %
Total passenger revenue 5,115
3,718
1,115
4,833
282
5.8 %
Freight and mail 88
82
—
82
6
7.3 %
Other—net 768
607
119
726
42
5.8 %
Total operating revenues $ 5,971
$ 4,407
$ 1,234
$ 5,641
$ 330
5.9 %



	Nine Months Ended September 30,
(in millions)	2019		2018		% Change
Passenger revenue	$	6,038	$	5,724	5	%
Mileage Plan other revenue	346		329		5	%
Cargo and other	169		147		15	%
Total operating revenues	$	6,553	$	6,200	6	%

Passenger ~~Revenue—Mainline~~Revenue

~~Mainline passenger~~On a consolidated basis, Passenger revenue for the first nine months of ~~2017~~2019 increased~~45%~~ by $314 million, or 5%, on a ~~45%increase~~ ~~in capacity, driven primarily by the acquisition of Virgin America, and flat PRASM compared to the same period in~~ ~~2016. On a Combined Comparative basis, mainline passenger revenue for the nine months ended September 30, 2017 increased 6%, primarily due to a 6%~~2% increase in capacity, ~~on flat PRASM.~~3% higher ticket yields and a slight increase in load factor. The increase in capacity was driven by our continued network expansion ~~since September 30, 2016.~~and fleet growth. Increased yields are largely the result of current year revenue initiatives implemented as a broader plan to drive revenue growth and the realization of synergies from our acquisition of Virgin America.

~~Passenger Revenue—Regional~~Mileage Plan other revenue

~~Regional passenger~~On a consolidated basis, Mileage Plan other revenue increased by ~~$43~~ $17 million, or 5%, in the first nine months of 2019 compared to the first nine months of 2018, due largely to increased commissions received from our affinity card partner from growth in overall cardholders.

Cargo and other

On a consolidated basis, Cargo and other revenue increased $22 million, or 6%15%, in the first nine months of 2019 compared to the first nine months of 2018. The increase is primarily attributable to increased freight and mail volumes on our freighters as a result of new contracts entered into in late 2018 and revenue from our subleased slots at LaGuardia and Reagan National airports.

OPERATING EXPENSES

Total operating expenses increased $139 million, or 2%, compared to the first nine months of ~~2016, due to a~~ 7%~~increase~~ ~~in capacity on more regional flying, partially offset by a~~ 1%~~decrease~~ ~~in PRASM.~~

~~Other—Net~~

~~Other—net revenue~~ ~~increased$161 million, or~~ ~~27%, from the first~~ ~~nine~~ ~~months of~~ ~~2016~~. On a Combined Comparative basis, other—net revenue increased $42 million, or 6%. Mileage Plan revenue contributed $40 million of the increase primarily driven by an increase in miles sold to our affinity credit card partner.

~~COMBINED COMPARATIVE OPERATING EXPENSES~~

~~Total operating expenses~~ ~~increased$1.6 billion, or~~ ~~48%, compared to the first~~ ~~nine~~ ~~months of~~ ~~2016. On a Combined Comparative basis, total operating expenses increased $533 million, or 12%~~2018. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


	Nine Months Ended September 30,								Change				Nine Months Ended September 30,
(in millions)	2017		2016 as Reported		2016 Virgin America		2016 Combined		$ Combined		% Combined		2019		2018		% Change
Fuel expense	$	1,051	$	593	$	229	$	822	$	229	27.9	%	$	1,408	$	1,397	1	%
Non-fuel expenses	3,734		2,670		804		3,474		260		7.5	%
Special items—merger-related costs	88		36		8		44		44		100.0	%
Non-fuel operating expenses, excluding special items													4,295		4,114		4	%
Special items - merger-related costs													39		67		(42	)%
Special items - other													—		25		NM
Total operating expenses	$	4,873	$	3,299	$	1,041	$	4,340	$	533	12.3	%	$	5,742	$	5,603	2	%

Fuel Expense

Aircraft fuel expense increased ~~$458~~$11 million, or ~~77%~~1%, compared to the nine months ended September 30, ~~2016. On a Combined Comparative basis, aircraft fuel expense increased $229 million, or 28%.~~2018. The elements of the change are illustrated in the following table:


	Nine Months Ended September 30,																Nine Months Ended September 30,
	2017				2016 as Reported						2016 Combined						2019					2018
(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars			Cost/Gal			Dollars			Cost/Gal			Dollars			Cost/Gal		Dollars			Cost/Gal
Raw or "into-plane" fuel cost	$	1,030	$	1.74	$	590		$	1.44		$	801		$	1.44		$	1,397		$	2.16	$	1,450		$	2.30
Losses on settled hedges	14		0.02		12			0.03			32			0.06
(Gains) losses on settled hedges																	12			0.02		(23		)	(0.04		)
Consolidated economic fuel expense	1,044		1.76		602			1.47			$	833		$	1.50		1,409			2.18		$	1,427		$	2.26
Mark-to-market fuel hedge adjustments	7		0.01		(9		)	(0.02		)	(11		)	(0.02		)	(1		)	—		(30		)	(0.05		)
GAAP fuel expense	$	1,051	$	1.77	$	593		$	1.45		$	822		$	1.48		$	1,408		$	2.18	$	1,397		$	2.21
Fuel gallons	592				410						554						646					631

~~On a Combined Comparative basis, the~~The raw fuel price per gallon ~~increased 21%~~decreased 6% due to ~~higher~~lower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The ~~increase~~decrease in raw fuel price per gallon during the first nine months of ~~2017~~2019 was driven by a ~~19% increase~~15% decrease in crude oil prices, ~~and~~partially offset by a ~~38%~~15% increase in refining margins.

WeLosses recognized ~~losses of $14 million and $12 million~~ for hedges that settled in the first nine months of ~~2017 and 2016 as reported.~~2019 were $12 million, compared to gains of $23 million in the same period in 2018. These amounts represent ~~the~~cash received from settled hedges, offset by cash paid for premium ~~expense, offset by cash received from those hedges.~~expense.

We currently expect our economic fuel price per gallon to be ~~higher~~approximately 8% lower in the fourth quarter of ~~2017~~2019 compared to the fourth quarter of ~~2016~~2018 due to our current estimate of ~~higher~~lower crude prices, ~~and higher~~partially offset by increased refining margins.

Non-fuel Expense and Non- special items

The table below provides the reconciliation of the impact of Virgin America on the comparative results for each of our operating expense line items, excluding fuel and special items. Significant operating expense variances from 2016 are more fully described below.


	Nine Months Ended September 30,								Change					Nine Months Ended September 30,
(in millions)	2017		2016 as Reported		2016 Virgin America		2016 Combined		$ Combined			% Combined		2019		2018		% Change
Wages and benefits	$	1,392	$	1,008	$	219	$	1,227	$	165		13.4	%	$	1,732	$	1,629	6	%
Variable incentive pay	98		95		25		120		(22		)	(18.3	)%	125		104		20	%
Aircraft maintenance	271		197		51		248		23			9.3	%	341		320		7	%
Aircraft rent	204		80		143		223		(19		)	(8.5	)%	247		233		6	%
Landing fees and other rentals	338		232		83		315		23			7.3	%	388		371		5	%
Contracted services	234		183		47		230		4			1.7	%	214		227		(6	)%
Selling expenses	269		162		96		258		11			4.3	%	236		245		(4	)%
Depreciation and amortization	275		281		29		310		(35		)	(11.3	)%	317		290		9	%
Food and beverage service	145		93		39		132		13			9.8	%	159		158		1	%
Third-party regional carrier expense	84		72		—		72		12			16.7	%	125		114		10	%
Other	424		267		72		339		85			25.1	%	411		423		(3	)%
Total non-fuel and non-special operating expenses	$	3,734	$	2,670	804		3,474		260			7.5	%
Total non-fuel operating expenses, excluding special items														$	4,295	$	4,114	4	%

Wages and Benefits

Wages and benefits increased during the first nine months of ~~2017~~2019 by $~~384~~103 million, or ~~38%, compared to~~ ~~2016~~6%. ~~On a Combined Comparative basis, total wages and benefits increased by $165 million or 13%, compared to 2016.~~ The primary components of wages and benefits are shown in the following table:


	Nine Months Ended September 30,								Change				Nine Months Ended September 30,
(in millions)	2017		2016 as Reported		2016 Virgin America		2016 Combined		$ Combined		% Combined		2019		2018		% Change
Wages	$	1,055	$	749	$	171	$	920	$	135	14.7	%	$	1,305	$	1,230	6	%
Pension—Defined benefit plans	24		19		—		19		5		26.3	%
Pension—Defined benefit plans service cost													31		36		(14	)%
Defined contribution plans	73		49		18		67		6		9.0	%	100		88		14	%
Medical and other benefits	163		135		18		153		10		6.5	%	203		186		9	%
Payroll taxes	77		56		12		68		9		13.2	%	93		89		4	%
Total wages and benefits	$	1,392	$	1,008	$	219	$	1,227	$	165	13.4	%	$	1,732	$	1,629	6	%

~~On a Combined Comparative basis, wages~~Wages increased ~~$135~~$75 million, or ~~15%~~6%, on a ~~14%~~2% increase in FTEs. The increase ~~in FTEs~~ is ~~attributable~~primarily due to the ~~growth~~recognition of ~~our business~~approximately $24 million during the third quarter in one-time costs following the ratification of the AMFA and ~~increased staffing during irregular operations,~~IAM contracts, as well as the ~~growth in McGee Air Services which has brought certain airport ground service positions in-house that were previously reflected in our Contracted services expense. The remainder~~impact of ~~the increase is driven by higher~~increased wage rates for ~~certain~~our labor ~~groups. The first nine months~~groups as compared to the prior year period.

Costs associated with our defined contribution plans increased $12 million, or 14%, primarily due to a step increase in employer contributions for our pilot workgroup, as well an overall increase to the eligible wage base.

Medical and other benefits expense increased $17 million, or 9%, primarily due to increased volume of ~~2017 also include $9 million of ratification bonus expense in connection with~~high-dollar value medical claims as compared to the ~~agreement reached with Horizon's pilots during the second quarter.~~prior-year period as well as FTE growth.

For the full year, we expect wages and benefits to increase at a rate greater than capacity growth, ~~on a combined comparative basis,~~ due to higher wage rates for certain labor groups and ~~the continued growth of McGee Air Services. Our forecast includes the impact of the pilot arbitration decision which was received subsequent to quarter end,~~higher medical and ~~results in an estimated $24 million of incremental costs in the fourth quarter of 2017.~~defined-contribution costs.

Variable Incentive Pay

Variable incentive pay expense increased $21 million, or 20%, during the first nine months of ~~2017 by $3 million, or 3% compared to 2016. On a Combined Comparative basis, variable incentive pay decreased $22 million, or 18% due to expectations of lower performance-based pay~~2019 as compared to the ~~prior year based on how we are tracking~~same period in ~~relation~~2018. The increase is primarily the result of a higher wage base and expectation of a higher payout rate for our annual bonus in 2019 as compared to 2018.

Aircraft Maintenance

Aircraft maintenance expense increased by $21 million, or 7%, during the first nine months of 2019 compared to the ~~current year's goals.~~same period in 2018. The increase is primarily due to heavier volumes from the timing of maintenance events, specifically from our Airbus aircraft, as compared to the prior-year period.

For the full year, we expect ~~variable incentive pay~~aircraft maintenance expense to be approximately 2 - 3% higher than in 2018, for the reasons mentioned above.

Aircraft Rent

Aircraft rent expense increased by $14 million, or 6%, during the first nine months of 2019 compared to the same period in 2018, primarily due to the annualization of expense for our leased E175s under our CPA agreement with SkyWest, and leased A321neos delivered in 2018 and 2019.

For the full year, we expect aircraft rent expense to be approximately 5 - 6% higher than in 2018, for the reasons mentioned above.

Contracted Services

Contracted services decreased by $13 million, or 6%, during the first nine months of 2019 compared to the same period in 2018. This decrease is primarily a result of lower contractor and consulting spend due to the timing of certain project work and an overall reduction in pricing from many of our vendor partners.

For the full year, we expect contracted services expense to be approximately 6 - 7% lower than in ~~2016 on a combined comparative basis, due to lower achievement against performance-based pay metrics than prior year.~~2018, for the reasons mentioned above.

Depreciation and Amortization

Depreciation and amortization ~~expense decreased $6~~increased $27 million, or 2%9%, during the first nine months of 2019 compared to ~~2016. On a Combined Comparative basis, depreciation~~the same period in 2018, primarily due to the addition of 14 owned E175s and ~~amortization decreased $35 million, or 11%. This decrease was primarily driven by a change in~~six owned B737-900ERs to our fleet since the ~~estimated useful lives~~third quarter of ~~certain B737 operating aircraft and related parts from 20 years to 25 years, which was effective October 1, 2016, partially offset by aircraft additions since September 30, 2016.~~2018.

For the full year, we expect depreciation and amortization to be ~~5-6% lower~~approximately 8 - 9% higher than ~~in 2016 on a combined comparative basis~~2018 for the ~~same~~ reasons mentioned above.

~~Food and Beverage Service~~

Food and beverage service expense increased $52 million, or 56%. On a Combined Comparative basis, food and beverage service expense increased $13 million, or 10% due to increased number of passengers, premium class offerings and enhancements to our onboard menu offerings to provide higher quality food and beverage products.

For the full year, we expect food and beverage expense to be approximately 11-12% higher than in 2016 on a combined comparative basis, in line with the increase in passengers in the current year, and enhancements to our onboard menu offerings.

~~Third-Party~~Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest and ~~Pen Air~~PenAir under our CPAs, increased ~~$12~~$11 million, or ~~17%~~10%, during the first nine months of 2019 compared to ~~2016.~~the same period in 2018. The increase is primarily due to ~~the additional six E175 aircraft operated~~a 6.4% increase in capacity flown by SkyWest inas compared to the ~~current~~prior year.

For the full year, we expect ~~Third-party~~third-party regional carrier expense to ~~increase~~be higher than 2018 due to increased flying by our regional partners.

~~Other Operating Expenses~~

Other operating expenses increased by $157 million, or 59%, compared to the first nine months of 2016. On a Combined Comparative basis, other operating expenses increased by $85 million, or 25%. The increase was due to higher costs associated with irregular operations, crew and training costs, higher IT costs, an increase in scrapped parts inventory, and higher property taxes. The first nine months of 2016 also included a benefit of an insurance claim reimbursement we received in the prior year.

~~For the full year, we expect other expenses to be higher than in 2016 in line with the trends described above.~~

Special Items—Merger-Related Costs

We recorded special items of ~~$88~~$39 million in the first nine months of 2019 for merger-related costs associated with our acquisition of Virgin America, compared to $67 million in the first nine months of ~~2017, compared to $36 million as reported and $44 million on a Combined Comparative basis in the first nine months of 2016.~~2018. Costs incurred in the first nine months of ~~2017 consisted~~2019 are primarily a result of ~~severance~~expenses associated with Airbus flight attendant and ~~retention and IT~~pilot vacation balances, which were subject to a one-time true-up in accordance with the integrated labor agreements, as well as certain technology integration costs.

We expect to incur merger-related costs for the remainder of ~~2017, and continuing through 2019.~~2019, although at a lesser rate.

~~Nonoperating Income (Expense)~~ADDITIONAL SEGMENT INFORMATION

During the first nine months of 2017, we had nonoperating expense of $40 million, compared to income of $6 million in the same period in 2016. On a Combined Comparative basis, nonoperating expense increased by $32 million, primarily due to interest expense incurred in the current year on the debt issued in 2016 to finance the acquisition of Virgin America.

~~Additional Segment Information~~

Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline adjusted pretax profit was ~~$1.13 billion in the first~~ ~~nine~~ ~~months of~~ ~~2017, compared to $1.05 billion in the same period in~~ ~~2016~~. On a Combined Comparative basis, Mainline adjusted pretax profit decreased by $111 million. The table below provides the reconciliation of the impact of Virgin America on the comparative results for our Mainline segment, excluding merger-related costs and mark-to-market fuel-hedge accounting charges:

Nine Months Ended September 30,
(in millions) 2017 2016 as Reported 2016 Virgin America 2016 Combined $ Change
Mainline
Operating revenues $ 5,182
$ 3,661
$ 1,234
$ 4,895
$ 287
Non-fuel, non-special operating expenses 3,101
2,107
804
2,911
190
Economic fuel 924
512
231
743
181
Operating income 1,157
1,042
199
1,241
(84 )
Nonoperating income (expense) (30 ) 11
(14 ) (3 ) (27 )
Pretax profit $ 1,127
$ 1,053
$ 185
$ 1,238
$ (111 )

The $111 million decrease in Combined Comparative pretax profit was driven by a $181 million increase in Mainline fuel expense, a $190 million increase in Mainline non-fuel operating expenses, and a $27 million increase in nonoperating expense. These increases were offset by a $287 million increase in Mainline passenger revenue. Higher raw fuel prices and an increase in gallons consumed drove the increase in Mainline fuel expense. Non-fuel operating expenses increased due to higher wages to support our growth and higher other operating expenses as described above. Nonoperating expense increased primarily due to increased interest expense. Mainline revenue increased due to higher capacity from the new routes we have added over the past twelve months.

~~Regional~~

~~Our Regional operations contributed a pretax profit of $40~~$761 million in the first nine months of ~~2017,~~2019, compared to ~~$72~~$671 million in the same period in 2018. The $90 million increase in pretax profit was driven by a $192 million increase in Mainline operating revenue and a $46 million decrease in Mainline fuel expense. These improvements were primarily offset by a $153 million increase in Mainline non-fuel operating expenses.

As compared to the prior year, increased Mainline revenues are primarily attributable to a 3% increase in yields, driven by our revenue initiatives and pricing improvements in many of our markets. Non-fuel operating expenses increased primarily due to increased aircraft ownership, wages and maintenance costs as compared to the prior year. Lower raw fuel prices drove the decrease in Mainline fuel expense.

Regional

Our Regional operations broke even in the first nine months of 2019, compared to a pretax loss of $82 million in the first nine months of ~~2016.~~2018. The ~~decrease in pretax profit~~improvement was attributable to ~~higher non-fuel operating expense, due in large part to increased capacity and higher raw fuel costs, partially offset by~~ a ~~$43~~$161 million increase in operating revenues, ~~as described~~partially offset by a $28 million increase in ~~Passenger Revenue—Regional.~~fuel costs and a $62 million increase in non-fuel operating expenses. The increase in non-fuel operating expenses is primarily due to the 15% increase in capacity.

Horizon

Horizon ~~incurred~~achieved a pretax ~~loss~~profit of ~~$11~~$33 million in the first nine months of ~~2017,~~2019, compared to pretax profit of ~~$14~~$20 million in the same period in ~~2016. The change was driven by higher non-fuel expenses and lower CPA Revenues (100% of which are from Alaska and eliminated in consolidation). Non-fuel expenses increased~~2018, primarily due to ~~higher wage~~improved cost management through better productivity and training expense as a result of the increase in FTE’s, increased costs associated with flight cancellations primarily due to a shortage of pilots necessary to fly the schedule, and a $9 million ratification bonus expense in connection with the agreement with Horizon's pilots.improved operational performance.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are:

Our existing cash and marketable securities balance of ~~$1.7~~$1.6 billion,, and our expected cash from operations;

Our 64123 unencumbered aircraft ~~in our operating fleet~~ that could be financed, if necessary;

Our combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million. ~~Information about these facilities can be found in Note 5 to the condensed consolidated financial statements.~~

During the nine months ended September 30, ~~2017,~~2019, we took free and clear delivery of ~~ten~~four B737-900ER ~~aircraft~~ and ~~ten~~four E175 aircraft. We made net debt payments totaling ~~$265~~$396 million, including the prepayment of certain loans, offset by new borrowings, undertaken as part of our broader plan of reducing balance sheet leverage and lowering interest expense. We also continued to return capital to our shareholders by paying dividends totaling $129 million and ~~paid dividends totaling $111 million.~~repurchasing $53 million of our common stock.

The table below presents the major indicators of financial condition and liquidity:


(in millions)	September 30, 2017			December 31, 2016			Change	September 30, 2019			December 31, 2018			Change
Cash and marketable securities	$	1,740		$	1,580		10.1 %	$	1,619		$	1,236		31 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	29		%	31		%	(2) pts	23		%	20		%	3 pts
Long-term debt, net of current portion	$	2,367		$	2,645		(10.5)%	$	1,444		$	1,617		(11)%
Shareholders’ equity	$	3,491		$	2,931		19.1%	$	4,252		$	3,751		13%
Long-term debt-to-capital including net present value of aircraft operating lease payments^(a)	53		%	59		%	(6) pts



Debt-to-capitalization, adjusted for operating leases
(in millions)	September 30, 2019			December 31, 2018			Change
Long-term debt, net of current portion	$	1,444		$	1,617		(11)%
Capitalized operating leases^(a)	1,644			1,768			^(a)
Adjusted debt	$	3,088		$	3,385		(9)%
Shareholders' equity	4,252			3,751			13%
Total invested capital	$	7,340		$	7,136		3%

Debt-to-capitalization, including operating leases	42		%	47		%	(5) pts

(a)

~~Calculated using~~Following the adoption of the new lease accounting standard on January 1, 2019, this represents the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of ~~remaining~~ aircraft lease ~~payments for aircraft in our operating fleet as of~~payments. This change had no meaningful impact to the ~~balance sheet date.~~ratio.

We expect our debt-to-capitalization ratio to be approximately 41% by December.



Net adjusted debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)	September 30, 2019
Adjusted debt	$	3,088
Current portion of long-term debt	265
Total adjusted debt	3,353
Less: Cash and marketable securities	(1,619		)
Net adjusted debt	$	1,734

(in millions)	Last Twelve Months Ended September 30, 2019
GAAP Operating Income^(a)	$	857
Adjusted for:
Special items	79
Mark-to-market fuel hedge adjustments	51
Depreciation and amortization	425
Aircraft rent	329
EBITDAR	$	1,741

Net adjusted debt to EBITDAR	1.0x


(a)	Operating income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.

The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.

ANALYSIS OF OUR CASH FLOWS

Cash Provided by Operating Activities

For the first nine months of ~~2017,~~2019, net cash provided by operating activities was $1.4 billion, compared to ~~$1.2 billion~~$986 million during the same period in ~~2016.~~2018. The ~~$151~~$395 million increase in our operating cash flows is primarily attributable to ~~increased ticket sales for future travel~~a $174 million increase in net income, as well as a greater increase in our air traffic liability and higher depreciation and amortization expense in 2019 as compared to the ~~prior year resulting from the overall growth~~same period in ~~our business and the addition of Virgin America. This was partially~~2018. These increases were offset by a ~~decrease~~$65 million voluntary pension contribution made in ~~our net income, which was impacted by higher fuel costs and $88 million~~the third quarter of ~~merger-related costs.~~2019.

We typically generate positive cash flows from operations and expect to use that cash flow to purchase aircraft and capital equipment, make scheduled debt payments, and return capital to shareholders.

Cash Used in Investing Activities

Cash used in investing activities was ~~$1.1 billion~~$708 million during the first nine months of ~~2017~~,2019, compared to ~~$641~~$333 million during the same period of ~~2016~~.2018. Our capital expenditures were ~~$841~~$527 million in the first nine months of ~~2017, an increase~~2019, a decrease of ~~$332~~$27 million compared to the nine months ended September 30, ~~2016.~~2018. This is primarily driven by ~~more~~lower cash outlays for deliveries of and advance deposits on aircraft ~~purchases and higher spend on other equipment~~in 2019 as compared to the same period of ~~2016.~~2018. Our net purchases of marketable securities ~~increased by $202~~were $218 million ~~from~~in the ~~prior year,~~first nine months of 2019, compared to net sales of $185 million in the nine months ended September 30, 2018. The shift to net purchases is primarily driven by stronger operating cash flows as compared to 2018. Internally, we analyze and manage our cash and marketable securities balance in the ~~first nine months of 2017.~~aggregate.

The table below reflects our full-year expectation for capital expenditures based on our current intentions. It does not reflect our actual contractual obligations at this time, nor does it reflect the capital expenditures that would be incurred if we exercised options or cancelable purchase commitments that are available to us. We have options to acquire 37 B737 aircraft with deliveries from 2021 through 2024, and ~~additional expenditures if~~ options ~~are exercised.~~to acquire 30 E175 aircraft with deliveries in 2021 to 2023. Options will be exercised only if we believe return on invested capital targets can be met. The table below excludes any associated capitalized interest.

(in millions) 2017 2018 2019
Aircraft and aircraft purchase deposits—firm $ 780
$ 820
$ 635
Other flight equipment 100
135
170
Other property and equipment 170
240
205
Total property and equipment additions $ 1,050
$ 1,195
$ 1,010
Option aircraft and aircraft deposits, if exercised^(a)
$ —
$ 170
$ 665



(in millions)	2019		2020
Expected capital expenditures	$	700	$	775


~~(a)~~	We have options to acquire 37 B737 aircraft with deliveries from 2020 through 2024, and options to acquire 30 E175 aircraft with deliveries in 2019 to 2021. Amounts above also include payments toward cancelable purchase commitments for 30 A320neo aircraft with deliveries from 2020 through 2022.

Cash Used byin Financing Activities

~~Net cash~~Cash used byin financing activities was ~~$399~~$538 million during the first nine months of ~~2017~~2019 compared to ~~net cash provided by financing activities of~~ ~~$1.2 billion~~$666 million during the same period in ~~2016. The change is due to $1.5 billion of debt financing cash inflow in the prior period for the Virgin America acquisition.~~2018. During the first nine months of ~~2017~~2019, we made debt payments of ~~$265~~$752 million,, including the prepayment of $532 million of debt, dividend payments totaling ~~$111~~$129 million,, and had ~~$50~~$53 million in common stock repurchases. These payments were partially offset by the receipt of funds from new secured debt financing of $356 million in the first nine months of 2019.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Aircraft Commitments

As of September 30, ~~2017,~~2019, we have firm orders to purchase or lease 9336 aircraft. We also have cancelable purchase commitments for 30 Airbus A320neo with deliveries from ~~2020~~2023 through ~~2022.~~2025. We could incur a loss of pre-delivery payments and credits as a cancellation fee. We also have options to acquire 37 B737 aircraft with deliveries from ~~2020~~2021 through 2024 and 30 E175 aircraft with deliveries from ~~2019~~2021 through ~~2021.~~2023. In addition to the 2132 E175 aircraft currently operated by SkyWest in our regional fleet, we have options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft.

The following table summarizes expected fleet activity by year as of September 30, ~~2017:~~2019, and are subject to change:


	Actual Fleet	Expected Fleet Activity							Actual Fleet	Expected Fleet Activity
Aircraft	September 30, 2017	Q4 2017 Additions	Q4 2017 Removals		December 31, 2017	2018-2019 Changes		December 31, 2019	September 30, 2019	2019 Additions	2019 Removals		December 31, 2019	2020 Changes		December 31, 2020
B737 Freighters & Combis^(a)	5	2	(3	)	4	(1	)	3
B737 Freighters									3	—	—		3	—		3
B737 Passenger Aircraft(a)	148	4	(1	)	151	19		170	163	1	—		164	9		173
Airbus Passenger Aircraft	65	3	—		68	4		72	72	1	(2	)	71	(1	)	70
Total Mainline Fleet	218	9	(4	)	223	22		245	238	2	(2	)	238	8		246
Q400 operated by Horizon(b)	52	—	—		52	(15	)	37	32	2	(1	)	33	(1	)	32
E175 operated by Horizon^(b)	10	—	—		10	23		33	30	—	—		30	—		30
E175 operated by third party^(c)	21	2	—		23	12		35	32	—	—		32	—		32
Total Regional Fleet	83	2	—		85	20		105	94	2	(1	)	95	(1	)	94
Total	301	11	(4	)	308	42		350	332	4	(3	)	333	7		340


^(a)	~~Remaining 2017 changes reflect retirement~~Two of the three ~~combis and~~B737 MAX9 aircraft that were originally scheduled for delivery in 2019 have been shifted to 2020 in light of the ~~reintroduction~~MAX grounding, based on our current estimate of ~~two B737-700 aircraft as freighters.~~the expected delivery dates.


^(b)	~~Reflects recent deferral of three~~Two Q400 aircraft that were previously removed from ~~2017~~our operating fleet will be returning to ~~2018.~~


^(c)	~~Reflects third-quarter addition of ten aircraft flown by SkyWest under our CPA~~revenue service. We expect these additions to ~~be delivered~~occur in ~~2017 and 2018.~~late 2019.

For future firm orders and ~~if we exercise our options for additional deliveries,~~option exercises, we may finance the aircraft through ~~internally generated~~ cash flow from operations, long-term debt, or lease arrangements.

Fuel Hedge Positions

All of our ~~current~~future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we ~~benefit from~~are hedged against volatile crude oil price increases. During a period of decline in crude oil prices, ~~as there is no~~we only forfeit cash ~~outlay other than the premiums we pay to enter into the contracts.~~previously paid for hedge premiums. Our crude oil positions are as follows:

Approximate % of Expected Fuel Requirements Weighted-Average Crude Oil Price per Barrel Average Premium Cost per Barrel
Fourth Quarter 2017 50 % $ 61
$ 2
First Quarter 2018 50 % 62
2
Second Quarter 2018 40 % $ 61
$ 2
Third Quarter 2018 30 % 60
2
Fourth Quarter 2018 20 % 60
2
Full Year 2018 35 % 61
2
First Quarter 2019 10 % 62
2
Total 2019 2 % $ 62
$ 2



	Approximate % of Expected Fuel Requirements		Weighted-Average Crude Oil Price per Barrel		Average Premium Cost per Barrel
Remainder 2019	50	%	$	74	$	2
First Quarter 2020	50	%	70		2
Second Quarter 2020	40	%	68		2
Third Quarter 2020	30	%	68		2
Fourth Quarter 2020	20	%	66		2
Full Year 2020	35	%	$	68	$	2
First Quarter 2021	10	%	63		2
Full Year 2021	2	%	$	63	$	2

Contractual Obligations

The following table provides a summary of our ~~principal payments under current and long-term debt obligations, operating lease commitments, aircraft purchase commitments and other~~ obligations as of September 30, ~~2017~~2019. For agreements with variable terms, amounts included reflect our minimum obligations.

(in millions) Remainder of 2017 2018 2019 2020 2021 Beyond 2021 Total
Current and long-term debt obligations $ 55
$ 350
$ 422
$ 449
$ 422
$ 1,016
$ 2,714
Operating lease commitments ^(a)
111
415
409
380
335
1,467
3,117
Aircraft maintenance deposits ^(b)
15
61
65
68
63
90
362
Aircraft purchase commitments ^(c)
168
956
806
352
273
355
2,910
Interest obligations ^(d)
18
89
77
63
48
108
403
Aircraft maintenance and parts management ^(e)
8
32
35
37
40
—
152
Other obligations ^(f)
22
125
158
165
172
1,277
1,919
Total $ 397
$ 2,028
$ 1,972
$ 1,514
$ 1,353
$ 4,313
$ 11,577



(in millions)	Remainder of 2019		2020		2021		2022		2023		Beyond 2023		Total
Current and long-term debt obligations	$	63	$	268	$	313	$	274	$	234	$	565	$	1,717
Aircraft lease commitments	83		313		275		250		195		738		1,854
Facility lease commitments	3		10		9		6		6		89		123
Aircraft maintenance deposits	16		73		63		54		29		10		245
Aircraft purchase commitments	111		504		475		333		194		36		1,653
Interest obligations ^(a)	14		48		39		29		23		38		191
Other obligations ^(b)	34		152		173		181		186		1,079		1,805
Total	$	324	$	1,368	$	1,347	$	1,127	$	867	$	2,555	$	7,588


(a)	Operating lease commitments generally include aircraft operating leases, airport property and hangar leases, office space, and other equipment leases. Included here are E175 aircraft that are operated by SkyWest under capacity purchase agreements.


~~(b)~~	~~Aircraft maintenance deposits relate to leased Airbus aircraft.~~


~~(c)~~	~~Represents non-cancelable contractual commitments for aircraft and engines.~~


~~(d)~~	For variable-rate debt, future obligations are shown above using forecasted interest rates ~~in effect~~ as of September 30, ~~2017.~~2019.


~~(e)~~(b)	Includes minimum obligations under engine and parts management and maintenance agreements with third-party vendors. Subsequent to September 30, 2017, the Company signed a parts management and maintenance agreement which includes minimum obligationsPrimarily comprised of ~~approximately $459 million over a nine-year period, not included in the table above.~~


~~(f)~~	~~Includes minimum obligations~~non-aircraft lease costs associated with ~~the SkyWest third-party CPA.~~capacity purchase agreements.

Credit Card Agreements

We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the ~~contractually-specified level,~~agreement or if our cash and marketable securities balance ~~falls~~fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance ~~falls~~fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.

Deferred Income Taxes

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

While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income and cash taxes payable in the ~~short term~~ short-term

are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, ~~pending~~any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control. We believe that we will have the liquidity available to make our future tax payments.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates ~~for~~during the three months ended September 30, ~~2017.~~2019. For information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018.

GLOSSARY OF AIRLINE TERMS

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus ~~the present value of future~~capitalized operating ~~lease payments)~~leases) divided by total equity plus adjusted debt

Diluted Earnings per Share - represents earnings per share ~~("EPS")~~(EPS) using fully diluted shares outstanding

Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of settled fuel-hedging contracts in the period

Free Cash Flow - total operating cash flow generated less cash paid for capital expenditures

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737, ~~and~~ Airbus 320 family and Airbus 321neo jets and all associated revenues and costs

~~PRASM~~Net adjusted debt - ~~passenger revenue per ASM; commonly called “passenger unit revenue”~~long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities

Net adjusted debt to EBITDAR - represents net adjusted debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage ~~Plan~~Plan™ and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon, SkyWest and PenAir. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity ~~purchased~~purchase arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, ~~2017~~2019, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of September 30, ~~2017~~2019.

Changes in Internal Control over Financial Reporting

~~Except as noted below, there~~There have been no changes in ~~our~~the Company’s internal ~~control~~controls over financial reporting during the quarter ended September 30, ~~2017~~2019, that have materially affected, or are reasonably likely to materially affect, our internal ~~control~~controls over financial reporting.

In the fourth quarter of 2016, we acquired Virgin America (see Note 2). As permitted by Securities and Exchange Commission Staff interpretive guidance for newly acquired businesses, management excluded Virgin America from its annual evaluation ofOur internal control over financial reporting asis based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of December 31, 2016. We are implementing internal controls over significant processes specific to the acquisition that we believe are appropriate in consideration of related integration of operations, systems, control activities, and accounting for the merger and merger-related transactions. AsSponsoring Organizations of the ~~date of this Quarterly Report on Form 10-Q, we are in the process of further integrating the acquired Virgin America operations into our overall internal controls over financial reporting.~~Treadway Commission (the COSO Framework).

PART II

ITEM 1. LEGAL PROCEEDINGS

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

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. ~~Plaintiffs received~~The court certified a class ~~certification~~of approximately 1,800 flight attendants in November 2016. Virgin America filed a motion for summary judgment seeking to dismiss all claims on various federal preemption grounds. In January 2017, the Court denied in part and granted in part Virgin America’s motion. Virgin AmericaThe Company believes the claims in this case are without factual and legal ~~merit~~merit.

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

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

This table provides certain information with respect to our purchases of shares of our common stock during the third quarter of ~~2017.~~2019.

Total Number of
Shares Purchased

Average Price
Paid per Share

Maximum remaining
dollar value of shares
that can be purchased
under the plan
(in millions)
July 1, 2017 - July 31, 2017 5,770
$ 84.37

August 1, 2017 - August 31, 2017 349,645
78.52

September 1, 2017 - September 30, 2017 —
—

Total 355,415
$ 78.61
$ 637



	Total Number of Shares Purchased	Average Price Paid per Share		Maximum remaining dollar value of shares that can be purchased under the plan (in millions)
July 1, 2019 - July 31, 2019	68,509	$	64.05
August 1, 2019 - August 31, 2019	279,370	58.99
September 1, 2019 - September 30, 2019	117,475	64.26
Total	465,354	$	61.06	$	509

The shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following documents are filed as part of this report:


1.	Exhibits: See Exhibit Index.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



ALASKA AIR GROUP, INC.

/s/ CHRISTOPHER M. BERRY
Christopher M. Berry
Vice President Finance and Controller

November ~~2, 2017~~7, 2019

EXHIBIT INDEX

Exhibit
Number
Exhibit
Description
Form Date of First Filing Exhibit Number
3.1
Amended and Restated Certificate of Incorporation of Registrant
10-Q August 3, 2017 3.1
10.1*
Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended February 14, 2017
10-Q May 5, 2017 10.1
10.2*
Alaska Air Group Performance Based Pay Plan, Amended and Restated January 18, 2017
10-Q May 5, 2017 10.2
31.1†
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
31.2†
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
32.1†
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
32.2†
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
101.INS†
XBRL Instance Document

101.SCH†
XBRL Taxonomy Extension Schema Document

101.CAL†
XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†
XBRL Taxonomy Extension Label Linkbase Document

101.PRE†
XBRL Taxonomy Extension Presentation Linkbase Document

† Filed herewith
* Indicates management contract or compensatory plan arrangement



Exhibit Number	Exhibit Description	Form	Date of First Filing	Exhibit Number
3.1	Amended and Restated Certificate of Incorporation of Registrant	10-Q	August 3, 2017	3.1
31.1†	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	10-Q
31.2†	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	10-Q
32.1†	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	10-Q
32.2†	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	10-Q
101.INS†	XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.
101.SCH†	XBRL Taxonomy Extension Schema Document
101.CAL†	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†	XBRL Taxonomy Extension Label Linkbase Document
101.PRE†	XBRL Taxonomy Extension Presentation Linkbase Document

†	Filed herewith
*	Indicates management contract or compensatory plan arrangement

4645



PART I.	FINANCIAL INFORMATION	4
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2123
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	41
ITEM 4.	CONTROLS AND PROCEDURES	42
PART II.	OTHER INFORMATION	43
ITEM 4.1.	~~CONTROLS AND PROCEDURES~~LEGAL PROCEEDINGS	43
~~PART II.~~ITEM 1A.	~~OTHER INFORMATION~~RISK FACTORS	4443
ITEM 1.2.	~~LEGAL PROCEEDINGS~~	44
~~ITEM 1A.~~	~~RISK FACTORS~~	44
~~ITEM 2.~~	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	43
ITEM 4.	MINE SAFETY DISCLOSURES	44
ITEM 3.5.	~~DEFAULTS UPON SENIOR SECURITIES~~OTHER INFORMATION	44
ITEM 4.6.	~~MINE SAFETY DISCLOSURES~~EXHIBITS	44
~~ITEM 5.~~	~~OTHER INFORMATION~~SIGNATURES	44
~~ITEM 6.~~	~~EXHIBITS~~	45
	~~SIGNATURES~~	45



	September 30, 2017		December 31, 2016
Carrying amount	$	1,024	$	1,179
Fair value	1,034		1,199



	September 30, 2017		December 31, 2016
Current Liabilities:
Other accrued liabilities	$	509	$	484
Other Liabilities and Credits:
Deferred revenue	682		638
Other liabilities	24		21
Total	$	1,215	$	1,143



	Total
Remainder of 2017	$	55
2018	350
2019	422
2020	449
2021	422
Thereafter	1,016
Total	$	2,714



	Aircraft Leases		Facility Leases		Aircraft Purchase Commitments		Capacity Purchase Agreements ^(a)		Aircraft Maintenance Deposits		Aircraft Maintenance and Parts Management
Remainder of 2017	$	77	$	34	$	168	$	21	$	15	$	8
2018	342		73		956		118		61		32
2019	344		65		806		151		65		35
2020	317		63		352		158		68		37
2021	280		55		273		165		63		40
Thereafter	1,263		204		355		1,250		90		—
Total	$	2,623	$	494	$	2,910	$	1,863	$	362	$	152



	Three Months Ended September 30, 2017
	Mainline			Regional		Horizon			Consolidating & Other^(a)			Air Group Adjusted^(b)			Special Items^(c)			Consolidated
Operating revenues
Passenger
Mainline	$	1,562		$	—	$	—		$	—		$	1,562		$	—		$	1,562
Regional	—			262		—			—			262			—			262
Total passenger revenues	1,562			262		—			—			1,824			—			1,824
CPA revenues	—			—		112			(112		)	—			—			—
Freight and mail	30			1		1			—			32			—			32
Other—net	242			21		1			—			264			—			264
Total operating revenues	1,834			284		114			(112		)	2,120			—			2,120
Operating expenses
Operating expenses, excluding fuel	1,077			219		105			(112		)	1,289			24			1,313
Economic fuel	328			45		—			—			373			(5		)	368
Total operating expenses	1,405			264		105			(112		)	1,662			19			1,681
Nonoperating income (expense)
Interest income	11			—		—			(2		)	9			—			9
Interest expense	(23		)	—		(4		)	1			(26		)	—			(26		)
Other	5			—		—			—			5			—			5
Total Nonoperating income (expense)	(7		)	—		(4		)	(1		)	(12		)	—			(12		)
Income (loss) before income tax	$	422		$	20	$	5		$	(1	)	$	446		$	(19	)	$	427



	Nine Months Ended September 30, 2017
	Mainline			Regional		Horizon			Consolidating & Other^(a)			Air Group Adjusted^(b)			Special Items^(c)			Consolidated
Operating revenues
Passenger
Mainline	$	4,390		$	—	$	—		$	—		$	4,390		$	—		$	4,390
Regional	—			725		—			—			725			—			725
Total passenger revenues	4,390			725		—			—			5,115			—			5,115
CPA revenues	—			—		317			(317		)	—			—			—
Freight and mail	84			3		1			—			88			—			88
Other—net	708			57		3			—			768			—			768
Total operating revenues	5,182			785		321			(317		)	5,971			—			5,971
Operating expenses
Operating expenses, excluding fuel	3,101			625		324			(316		)	3,734			88			3,822
Economic fuel	924			120		—			—			1,044			7			1,051
Total operating expenses	4,025			745		324			(316		)	4,778			95			4,873
Nonoperating income (expense)
Interest income	27			—		—			(2		)	25			—			25
Interest expense	(68		)	—		(9		)	—			(77		)	—			(77		)
Other	11			—		1			—			12			—			12
Total Nonoperating income (expense)	(30		)	—		(8		)	(2		)	(40		)	—			(40		)
Income (loss) before income tax	1,127			40		(11		)	(3		)	1,153			(95		)	1,058



	Forecast Q4 2017	Q4 2016 Combined Comparative^(a)	% Change
Capacity (ASMs in millions)	15,950 - 16,000	14,404	~ 11%
Cost per ASM excluding fuel and special items (cents)	8.50¢ - 8.55¢	8.25¢	~ 3%
Fuel gallons (millions)	204	184	~ 11%
Economic fuel cost per gallon	$1.95	$1.66	~ 17.5%



	Forecast Full Year 2017	2016 Combined Comparative^(a)	% Change
Capacity (ASMs in millions)	62,130 - 62,160	57,953	~ 7.2%
Cost per ASM excluding fuel and special items (cents)	8.19¢ - 8.21¢	8.04¢	~ 2%
Fuel gallons (millions)	795	739	~ 7.5%
Economic fuel cost per gallon	$1.81	$1.54	~ 17.5%