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

Financial Highlights - 2017 Compared to 2016

Our pre-tax income for 2017 was $5.7 billion, representing a $935 million decrease compared to the prior year primarily due to higher fuel costs, salaries and related costs and depreciation expense, which were partially offset by increased operating revenue. Pre-tax income, adjusted for special items (a non-GAAP financial measure) was $5.5 billion, a decrease of $621 million, or 10.2%. Special items were primarily related to fuel hedge MTM adjustments and settlements of $259 million in 2017 compared to $450 million in 2016.

Revenue. Compared to 2016, our operating revenue increased $1.6 billion, or 4.0%, on 1.0% higher capacity combined with robust demand and strong revenue momentum, closing 2017 with three consecutive quarters of year-over-year passenger unit revenue growth. Passenger revenue per available seat mile ("PRASM") increased 2.1% led by (1) strong domestic leisure yields, (2) expanded distribution of Branded Fares, (3) an improving business fare environment, (4) strength in the Atlantic region leveraged through U.S. point-of-sale traffic gains, along with business cabin traffic and yield growth, and (5) strong performance in the Caribbean, Central America, Brazil and Mexico leisure markets. Other revenue increased 9.7% partially resulting from growth in our co-brand credit card partnership with American Express.

Operating Expense. Total operating expense increased $2.4 billion and our consolidated operating cost per available seat mile ("CASM") increased 6.4% compared to 2016 to 13.81 cents, primarily due to higher fuel costs, salaries and related costs and depreciation expense. Including our regional carriers, fuel expense increased $771 million compared to the prior year due to a 22.3% increase in the market price per gallon of fuel, partially offset by reduced fuel hedge losses compared to the prior year and profits generated within our refinery segment. Salaries and related costs were higher due to increases for eligible merit, ground and flight attendant employees implemented in the June 2017 quarter. The increase in depreciation expense primarily results from new aircraft deliveries, including B-737-900ER, A321-200, A330-300 and A350-900 aircraft, fleet modifications and accelerated depreciation due to the planned retirement of our MD-88 fleet and two B-767-300ER aircraft.

Non-fuel unit costs ("CASM-Ex, including profit sharing" a non-GAAP financial measure) increased 4.3% to 10.57 cents due to the pay rate increases and depreciation expense discussed above, which were partially offset by productivity gains from our fleet, technology and supply chain initiatives.

The non-GAAP financial measures for pre-tax income, adjusted for special items, and CASM-Ex, including profit sharing, both used above, are defined and reconciled in "Supplemental Information" below.

Results of Operations - 2017 Compared to 2016

Operating Revenue

	Year Ended December 31,						Increase			% Increase
(in millions)	2017			2016
Passenger	$	34,819		$	33,777		1,042			3.1	%
Cargo	729			668			61			9.1	%
Other	5,696			5,194			502			9.7	%
Total	$	41,244		$	39,639		$	1,605		4.0	%

Passenger Revenue

				Increase (Decrease) vs. Year Ended December 31, 2016
(in millions)	Year Ended December 31, 2017			Passenger Revenue		RPMs (Traffic)		ASMs (Capacity)		Passenger Mile Yield		PRASM		Load Factor
Mainline	$	18,878		5.3	%	4.1	%	3.6	%	1.1	%	1.7	%	0.4		pts
Regional carriers	5,714			0.8	%	(2.5	)%	(2.6	)%	3.4	%	3.4	%	—		pts
Domestic	24,592			4.2	%	3.0	%	2.5	%	1.1	%	1.7	%	0.4		pts
Atlantic	5,292			2.1	%	4.8	%	0.3	%	(2.6	)%	1.7	%	3.6		pts
Pacific	2,366			(9.6	)%	(9.0	)%	(7.7	)%	(0.7	)%	(2.0	)%	(1.2	)	pts
Latin America	2,569			8.3	%	4.2	%	2.0	%	4.0	%	6.2	%	1.8		pts
Total	$	34,819		3.1	%	2.2	%	1.0	%	0.9	%	2.1	%	1.0		pt

Passenger revenue increased $1.0 billion over the prior year. PRASM increased 2.1% and passenger mile yield increased 0.9% on 1.0% higher capacity. Load factor was 1.0 point higher than the prior year at 85.6%.

Unit revenues of the domestic region increased 1.7%, resulting from our commercial initiatives, including differentiated products for our customers, known as Branded Fares, and an improving revenue environment. We continue to differentiate our product offerings and enable customer choice through segmentation, including offering Basic Economy throughout our domestic network. Our domestic operations closed 2017 with three consecutive quarters of year-over-year unit revenue growth, with robust demand for both business and leisure. We continue to see improvements in business markets with 81 of the top 100 business markets producing positive yields during the December 2017 quarter, up from 50% from earlier in the year.

Passenger revenues related to our international regions increased 0.5% year-over-year primarily due to strength in the Atlantic and Latin America regions, partially offset by revenue declines in the Pacific. During 2017, we continued to roll out the expansion of our Branded Fares product throughout the international regions.

The Atlantic region closed 2017 with three consecutive quarters of year-over-year unit revenue growth on strong business class bookings. We continue to leverage our alliance partners' hub positions in Europe's leading business markets of London, Amsterdam and Paris to increase the volume of U.S. point-of-sale traffic. The U.K. was particularly robust, with unit revenue growth throughout 2017, including double-digit growth in the second half of 2017. During the year, we expanded our Basic Economy product to mitigate the impact of ultra-low cost carrier capacity increases.

Unit revenue declines in the Pacific primarily resulted from industry capacity growth in the region. We continued to optimize the Pacific region with a 7.7% reduction in capacity during 2017, focused on refining the network to generate incremental value from our Chinese and Korean alliances and differentiating our product offerings, including expanding Basic Economy and selling Comfort+ as a separate fare product. During 2017, we reached an agreement to create a trans-Pacific joint venture with Korean Air, offering an enhanced and expanded network, industry-leading products and service, and a seamless customer experience between the U.S. and Asia. We also retired our last B-747-400 and introduced our new A350-900 with Delta One suites and the Delta Premium Select cabin on routes from Detroit to Tokyo-Narita and Seoul-Incheon, which are driving improvements in both profitability and customer feedback. These efforts are beginning to show results as the Pacific returned to positive PRASM growth during the December 2017 quarter for the first time in more than four years.

Unit revenues increased in Latin America principally resulting from unit revenue improvement in Brazil, related to both improved traffic and higher fares. This improvement was driven by the strengthening of the Brazilian economy and additional connectivity for our customers provided by our relationship with GOL. Increased leisure traffic to Mexico and the Caribbean, and the incremental value provided by our alliance with Aeroméxico also contributed to the Latin America unit revenue improvement. Although unit revenue improved in the Caribbean, hurricane damage in several markets during 2017 resulted in temporary service adjustments. Finally, we continued to differentiate our product offerings, including expanding Basic Economy and selling Comfort+ as a separate fare product in Latin America.

Other Revenue

	Year Ended December 31,						Increase (Decrease)			% Increase (Decrease)
(in millions)	2017			2016
Loyalty programs	$	1,952		$	1,782		$	170		9.5	%
Administrative fees, club and on-board sales	1,252			1,205			47			3.9	%
Ancillary businesses and refinery	1,412			1,129			283			25.1	%
Baggage fees	908			881			27			3.1	%
Other	172			197			(25		)	(12.7	)%
Total	$	5,696		$	5,194		$	502		9.7	%

Loyalty programs. We sell mileage credits to credit card companies, hotels and car rental agencies under marketing agreements. We allocate the consideration received from mileage credit sales to the individual products and services bundled with the sale based on their relative selling prices. We defer the travel component as part of frequent flyer deferred revenue and recognize passenger revenue as the mileage credits are redeemed for travel. The revenue allocated to the remaining deliverables (such as lounge access, baggage fee waivers and brand usage) is recorded in other revenue. We recognize the revenue for these services as they are performed.

The amount of loyalty program revenue changes based on the price paid for mileage credits, the volume of credits sold and our allocation of selling price to the individual products and services. With the adoption of the new revenue recognition standard in 2018, we will increase the value we use to account for the travel component within mileage credit sales. This new value for the travel component will cause a re-allocation of the consideration received from mileage credit sales. The re-allocation will result in less revenue recognized for loyalty programs in other revenue and more revenue in passenger revenue as the frequent flyer awards are redeemed.

Loyalty program revenue increased compared to 2016 related to growth in our co-brand credit card partnership with American Express. Additional information about our frequent flyer program accounting policies can be found in Note 1 of the Notes to the Consolidated Financial Statements.

Administrative fees, club and on-board sales. These revenues primarily relate to travel-related services such as ticket changes and unaccompanied minors and also include amounts collected for on-board sales and Sky Club lounge memberships. We recognize revenue as these services are performed. A significant portion of these fees are travel-related and performed in conjunction with the passenger’s flight. Therefore, the majority of these fees will be reclassified to passenger revenue with our adoption of the new revenue recognition standard in 2018.

Ancillary businesses and refinery. Ancillary businesses and refinery includes aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery sales to third parties. Ancillary businesses and refinery revenues are not related to the generation of a seat mile. Ancillary businesses and refinery sales primarily increased due to sales of non-jet fuel products to third parties by our oil refinery, consistent with stronger pricing of refined products throughout the oil industry.

Baggage fees. The revenue amount shown above represents baggage fees that were sold as a separate component of the passenger’s ticket. Similar to administrative fees described above, baggage services are performed and earned in conjunction with the passenger’s flight, and these fees will be reclassified to passenger revenue with our adoption of the new revenue recognition standard in 2018.

Operating Expense

	Year Ended December 31,						Increase (Decrease)			% Increase (Decrease)
(in millions)	2017			2016
Salaries and related costs	$	10,436		$	10,034		$	402		4.0	%
Aircraft fuel and related taxes	5,733			5,133			600			11.7	%
Regional carriers expense	4,503			4,311			192			4.5	%
Depreciation and amortization	2,235			1,902			333			17.5	%
Contracted services	2,184			1,991			193			9.7	%
Aircraft maintenance materials and outside repairs	1,992			1,823			169			9.3	%
Passenger commissions and other selling expenses	1,787			1,710			77			4.5	%
Landing fees and other rents	1,528			1,490			38			2.6	%
Passenger service	1,067			907			160			17.6	%
Profit sharing	1,065			1,115			(50		)	(4.5	)%
Aircraft rent	351			285			66			23.2	%
Other	2,249			1,986			263			13.2	%
Total operating expense	$	35,130		$	32,687		$	2,443		7.5	%

Salaries and Related Costs. The increase in salaries and related costs is primarily due to increases for eligible merit, ground and flight attendant employees implemented in the June 2017 quarter.

Aircraft Fuel and Related Taxes. Including our regional carriers, fuel expense increased $771 million compared to the prior year due to a 22.3% increase in the market price per gallon of fuel, partially offset by reduced fuel hedge losses compared to the prior year and profits generated within our refinery segment. The table below presents fuel expense, including our regional carriers:

	Year Ended December 31,						Increase			% Increase
(in millions)	2017			2016
Aircraft fuel and related taxes(1)	$	5,733		$	5,133		$	600
Aircraft fuel and related taxes included within regional carriers expense	1,023			852			171
Total fuel expense	$	6,756		$	5,985		$	771		12.9	%

(1)	Includes the impact of fuel hedging and refinery results described further in the table below.

The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):

											Average Price Per Gallon
	Year Ended December 31,						Increase (Decrease)				Year Ended December 31,						Increase (Decrease)
(in millions, except per gallon data)	2017			2016				2017			2016
Fuel purchase cost(1)	$	6,833		$	5,579		$	1,254			$	1.70		$	1.39		$	0.31
Airline segment fuel hedge losses(2)	33			281			(248		)		0.01			0.07			(0.06		)
Refinery segment impact(2)	(110		)	125			(235		)		(0.03		)	0.03			(0.06		)
Total fuel expense	$	6,756		$	5,985		$	771			$	1.68		$	1.49		$	0.19
MTM adjustments and settlements(3)	259			450			(191		)		0.06			0.11			(0.05		)
Total fuel expense, adjusted	$	7,015		$	6,435		$	580			$	1.74		$	1.60		$	0.14

(1)	Market price for jet fuel at airport locations, including related taxes and transportation costs.

(2)	Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk. For additional information regarding the refinery segment impact, see "Refinery Segment" below.

(3)	MTM adjustments and settlements include the effects of the derivative transactions discussed in Note 4 of the Notes to the Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below.

Depreciation and Amortization. The increase in depreciation expense primarily results from new aircraft deliveries, including B-737-900ER, A321-200, A330-300 and A350-900 aircraft, fleet modifications and accelerated depreciation due to the planned retirement of our MD-88 fleet and two B-767-300ER aircraft.

Contracted Services. The increase in contracted services expense predominantly relates to additional contract labor expenses associated with investments in our technology infrastructure and other activities to improve the customer experience.

Aircraft Maintenance Materials and Outside Repairs. Aircraft maintenance materials and outside repairs consist of costs associated with the maintenance of aircraft used in our operations and costs associated with maintenance sales to third parties by our MRO business. The increase in aircraft maintenance materials and outside repairs expense primarily relates to an increase in maintenance activity in order to enhance service reliability of certain aircraft.

Passenger Service. Passenger service expense includes the costs of onboard food and beverage, cleaning and supplies. The increase in passenger service expense predominantly relates to costs associated with enhancements to our onboard product offering and higher traffic.

Aircraft Rent. The increase in aircraft rent primarily results from new leased aircraft deliveries since the prior year, including B-737-900ER and A321-200 aircraft.

Other. The increase in other expense primarily relates to costs associated with sales of non-jet fuel products to third parties by our oil refinery.

Results of Operations - 2016 Compared to 2015

Operating Revenue

	Year Ended December 31,						Increase (Decrease)			% Increase (Decrease)
(in millions)	2016			2015
Passenger	33,777			34,782			(1,005		)	(2.9	)%
Cargo	668			813			(145		)	(17.8	)%
Other	5,194			5,109			85			1.7	%
Total	$	39,639		$	40,704		$	(1,065	)	(2.6	)%

Passenger Revenue

				Increase (Decrease) vs. Year Ended December 31, 2015
(in millions)	Year Ended December 31, 2016			Passenger Revenue		RPMs (Traffic)		ASMs (Capacity)		Passenger Mile Yield		PRASM		Load Factor
Mainline	$	17,932		—	%	4.3	%	5.2	%	(4.1	)%	(5.0	)%	(0.8	)	pts
Regional carriers	5,672			(3.6	)%	0.6	%	1.0	%	(4.2	)%	(4.6	)%	(0.3	)	pts
Domestic	23,604			(0.9	)%	3.6	%	4.5	%	(4.4	)%	(5.2	)%	(0.6	)	pts
Atlantic	5,185			(6.5	)%	(1.7	)%	0.3	%	(4.9	)%	(6.8	)%	(1.7	)	pts
Pacific	2,616			(12.8	)%	(4.6	)%	(6.6	)%	(8.6	)%	(6.7	)%	1.8		pts
Latin America	2,372			(1.8	)%	3.5	%	0.8	%	(5.1	)%	(2.6	)%	2.3		pts
Total	$	33,777		(2.9	)%	1.7	%	2.1	%	(4.5	)%	(4.9	)%	(0.3	)	pts

Passenger revenue decreased $1.0 billion over the prior year. PRASM decreased 4.9% and passenger mile yield decreased 4.5% on 2.1% higher capacity. Load factor was 0.3 points lower than the prior year at 84.6%.

Unit revenues of the domestic region decreased 5.2%, resulting from weakness in the close-in yield environment during most of the year despite strong volume.

Revenues related to our international regions decreased 7.2% year-over-year primarily due to yield declines resulting from imbalances between supply and demand, principally in the Atlantic region and China, the impact of foreign currency fluctuations, continued reductions in international fuel surcharges and economic challenges in certain regions.

In the Atlantic, the unit revenue decline predominantly resulted from lower yields driven by industry capacity growth outpacing passenger demand and the strength of the U.S. dollar. In core European markets, U.S. point-of-sale demand was strong and recovered quickly following the Brussels airport terrorist attack in March 2016. However, Europe point-of sale demand was soft largely due to the impact of weaker Euro exchange rates.

Unit revenue declines in the Pacific compared to 2015 primarily resulted from lower yen hedge gains, lower international fuel surcharges and yield declines resulting from industry capacity growth between the U.S. and China. During the September 2016 quarter, the U.S. Department of Transportation announced that we were awarded two daytime slot pairs at Tokyo's Haneda Airport (from Los Angeles and Minneapolis). We commenced these routes and canceled other routes in the Pacific region during the December 2016 quarter as part of our ongoing optimization of the Pacific region.

Although Latin America unit revenues declined compared to 2015, unit revenues improved in the second half of 2016 compared to the second half of 2015. An Open Skies agreement between the U.S. and Mexico took effect in August 2016 and our application for antitrust immunity with Aeroméxico was approved in the December 2016 quarter, which continued to strengthen our performance in the important Mexican business markets.

Cargo Revenue

Cargo revenue decreased $145 million, or 17.8%, primarily due to weaker international demand compared to the prior year.

Other Revenue

	Year Ended December 31,						Increase (Decrease)			% Increase (Decrease)
(in millions)	2016			2015
Loyalty programs	$	1,782		$	1,584		$	198		12.5	%
Administrative fees, club and on-board sales	1,205			1,261			(56		)	(4.4	)%
Ancillary businesses and refinery(1)	1,129			1,158			(29		)	(2.5	)%
Baggage fees	881			885			(4		)	(0.5	)%
Other	197			221			(24		)	(10.9	)%
Total	$	5,194		$	5,109		$	85		1.7	%

(1)	Ancillary businesses and refinery includes aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery sales to third parties. These revenues are not related to the generation of a seat mile.

Other revenue increased $85 million, or 1.7%, in 2016 primarily due to increased loyalty programs revenues from our co-brand credit card partnership with American Express resulting from new credit card accounts.

Operating Expense

	Year Ended December 31,						Increase (Decrease)			% Increase (Decrease)
(in millions)	2016			2015
Salaries and related costs	$	10,034		$	8,776		$	1,258		14.3	%
Aircraft fuel and related taxes	5,133			6,544			(1,411		)	(21.6	)%
Regional carriers expense	4,311			4,241			70			1.7	%
Contracted services	1,991			1,848			143			7.7	%
Depreciation and amortization	1,902			1,835			67			3.7	%
Aircraft maintenance materials and outside repairs	1,823			1,848			(25		)	(1.4	)%
Passenger commissions and other selling expenses	1,710			1,672			38			2.3	%
Landing fees and other rents	1,490			1,493			(3		)	(0.2	)%
Profit sharing	1,115			1,490			(375		)	(25.2	)%
Passenger service	907			872			35			4.0	%
Aircraft rent	285			250			35			14.0	%
Other	1,986			2,033			(47		)	(2.3	)%
Total operating expense	$	32,687		$	32,902		$	(215	)	(0.7	)%

Salaries and Related Costs. The increase in salaries and related costs was principally due to pay rate increases given to eligible employees, which includes an 18% pay rate increase for pilots resulting from a new pilot contract ratified in the December 2016 quarter that was retroactive to January 1, 2016. Additionally, in the December 2015 quarter, base pay rates increased 14.5% for eligible merit, ground and flight attendant employees in conjunction with changes in their profit sharing program.

Aircraft Fuel and Related Taxes. Including our regional carriers, fuel expense decreased $1.6 billion compared to the prior year due to an 18% decrease in the market price per gallon of fuel and lower fuel hedge losses, partially offset by a loss from our refinery segment in the current year compared to a profit in the prior year and a 0.7% increase in consumption.

The table below presents fuel expense, including our regional carriers:

	Year Ended December 31,						(Decrease)			% (Decrease)
(in millions)	2016			2015
Aircraft fuel and related taxes(1)	$	5,133		$	6,544		$	(1,411	)
Aircraft fuel and related taxes included within regional carriers expense	852			1,035			(183		)
Total fuel expense	$	5,985		$	7,579		$	(1,594	)	(21.0	)%

(1)	Includes the impact of fuel hedging and refinery results described further in the table below.

The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted:

											Average Price Per Gallon
	Year Ended December 31,						Increase (Decrease)				Year Ended December 31,						Increase (Decrease)
(in millions, except per gallon data)	2016			2015				2016			2015
Fuel purchase cost(1)	$	5,579		$	6,934		$	(1,355	)		$	1.39		$	1.74		$	(0.35	)
Airline segment fuel hedge losses(2)	281			935			(654		)		0.07			0.23			(0.16		)
Refinery segment impact(2)	125			(290		)	415				0.03			(0.07		)	0.10
Total fuel expense	$	5,985		$	7,579		$	(1,594	)		$	1.49		$	1.90		$	(0.41	)
MTM adjustments and settlements(3)	450			1,301			(851		)		0.11			0.33			(0.22		)
Total fuel expense, adjusted	$	6,435		$	8,880		$	(2,445	)		$	1.60		$	2.23		$	(0.63	)

(1)	Market price for jet fuel at airport locations, including related taxes and transportation costs.

(2)	Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk. For additional information regarding the refinery segment impact, see "Refinery Segment" below.

(3)	MTM adjustments and settlements include the effects of the derivative transactions discussed in Note 4 of the Notes to the Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below.

Regional Carriers Expense. The increase in regional carriers expense was primarily due to increases in aircraft maintenance and scheduled contract carrier rate escalations, partially offset by lower fuel cost from the decrease in the market price of fuel.

Contracted Services. The increase in contracted services expense predominantly related to costs associated with the 2.1% increase in capacity and additional temporary staffing.

Profit Sharing. The decrease in profit sharing was primarily due to an adjustment to the profit sharing calculation during 2016 (paid out in 2017) for merit, ground and flight attendant employees. This adjusted calculation paid 10% of annual profit (as defined by the terms of the program) and, if we exceeded our prior-year results, the program paid 20% of the year-over-year increase in profit to eligible employees. In 2015, our profit sharing program paid 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. The profit sharing program for pilots remained unchanged from the prior year.

Non-Operating Results

	Year Ended December 31,										(Unfavorable) Favorable
(in millions)	2017			2016			2015				2017 vs. 2016			2016 vs. 2015
Interest expense, net	$	(396	)	$	(388	)	$	(481	)		$	(8	)	$	93
Miscellaneous, net	(17		)	72			(164		)		(89		)	236
Total non-operating expense, net	$	(413	)	$	(316	)	$	(645	)		$	(97	)	$	329

At December 31, 2016, the principal amount of debt and capital leases was $7.4 billion. During 2017, we issued $2.5 billion of unsecured notes. As a result of the debt issuances, partially offset by scheduled principal payments, the amount of debt and capital leases was $8.9 billion at December 31, 2017.

Miscellaneous, net is primarily composed of our proportionate share of earnings from our equity investments in Virgin Atlantic and Grupo Aeroméxico, foreign exchange gains/losses and charitable contributions. Our equity investment earnings and foreign exchange gains/losses vary and impact the comparability of miscellaneous, net from period to period.

Income Taxes

Our effective tax rate for 2017 was 37.2%. We recorded a provisional estimate of $150 million related to the Tax Cuts and Jobs Act of 2017, resulting in a 2.6% increase to our effective tax rate. We expect our annual effective tax rate to be between 21% and 23% for 2018. At December 31, 2017, we had approximately $5.1 billion of U.S. federal pre-tax net operating loss carryforwards, which do not begin to expire until 2027. Accordingly, we believe we will not pay cash federal income taxes before 2019. See Note 11 of the Notes to the Consolidated Financial Statements for more information.

Refinery Segment

The refinery primarily produces gasoline, diesel and jet fuel. Monroe exchanges the non-jet fuel products the refinery produces with third parties for jet fuel consumed in our airline operations. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provided approximately 200,000 barrels per day for use in our airline operations during 2017. We believe that the jet fuel supply resulting from the refinery's operation has contributed to the reduction in the market price of jet fuel, and thus lowered our cost of jet fuel compared to what it otherwise would have been.

The refinery recorded operating revenues of $5.0 billion in 2017, compared to $3.8 billion in 2016. Operating revenues in 2017 were primarily composed of $3.2 billion of non-jet fuel products exchanged with third parties to procure jet fuel and $886 million of sales of jet fuel to the airline segment. Refinery revenues increased compared to the prior year due to higher product demand and an increase in margins during the second half of 2017 due to hurricanes that caused extensive refinery closures on the Gulf Coast for several weeks.

The refinery recorded income of $110 million in 2017, compared to a loss of $125 million recorded in 2016. The refinery's income in 2017 was primarily due to higher refined product cracks, lower crude costs and higher throughput levels.

A refinery is subject to annual EPA requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase renewable energy credits, called RINs, from third parties in the secondary market. The refinery, operated by Monroe purchases the majority of its RINs requirement in the secondary market. We recognized $159 million and $171 million of expense related to the RINs requirement in 2017 and 2016, respectively. RINs expense decreased during 2017 primarily as a result of a slight decrease in the unit cost of RINs during 2017 after a significant increase in the unit cost of RINs during 2016.

The Monroe refinery is planning for a shutdown of approximately 60 days in the December 2018 quarter. This planned outage, called a turnaround, is in accordance with the long term maintenance plan for the facility to allow for the safe completion of major repairs and upgrades. During that planned outage, we have identified other sources of fuel to maintain service levels and to mitigate the financial impact.

For more information regarding the refinery's results, see Note 14 of the Notes to the Consolidated Financial Statements.

Financial Condition and Liquidity

We expect to meet our cash needs for the next 12 months from cash flows from operations, cash and cash equivalents, short-term investments and financing arrangements. As of December 31, 2017, we had $5.1 billion in unrestricted liquidity, consisting of $2.6 billion in cash and cash equivalents and short-term investments and $2.5 billion in undrawn revolving credit facilities. During 2017, we used existing cash and cash generated from operations to fund capital expenditures of $3.9 billion, purchase shares of Grupo Aeroméxico and Air France-KLM for $1.2 billion and return $2.4 billion to shareholders. In addition, we used the proceeds from a debt offering and cash generated from operations to contribute $3.2 billion in cash to fund our pension obligation.

Sources of Liquidity

Operating Activities

Cash flows from operating activities continue to provide our primary source of liquidity. We generated positive cash flows from operations of $5.1 billion in 2017, $7.2 billion in 2016 and $7.9 billion in 2015. We also expect to generate positive cash flows from operations in 2018. We had lower operating cash flows in 2017 compared to prior years primarily due to incremental pension plan contributions partially funded through $2.0 billion of debt issuance.

Our operating cash flows can be impacted by the following factors:

Seasonality of Advance Ticket Sales. We sell tickets for air travel in advance of the customer's travel date. When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in air traffic liability. The air traffic liability increases during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months.

Fuel. Including our regional carriers, fuel expense represented 19.2% of our total operating expenses for 2017. The market price for jet fuel is highly volatile, which can impact the comparability of our cash flows from operations from period to period.

Pension Contributions. We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and are frozen for future benefit accruals. Our funding obligations for these plans are governed by the Employee Retirement Income Security Act, as modified by the Pension Protection Act of 2006. In the first half of 2017, we contributed $3.5 billion to our qualified defined benefit pension plans using net proceeds from a $2.0 billion debt issuance, shares of our common stock from treasury with a value of $350 million and existing cash. As a result of these contributions, we satisfied, on an accelerated basis, our 2017 required contributions for our defined benefit plans, including more than $3.0 billion above the minimum funding requirements. We contributed $1.3 billion and $1.2 billion in 2016 and 2015, respectively. We have no minimum funding requirements in 2018. However, in January 2018, we voluntarily contributed approximately $500 million to these plans.

Profit Sharing. Our broad-based employee profit sharing program provides that, for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees. In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items.

We paid $1.1 billion in February 2017, $1.5 billion in February 2016, and $1.1 billion in two payments, $756 million in February 2015 and more than $300 million in October 2014, to our employees in recognition of their contributions toward meeting our financial goals. During the year ended December 2017, we recorded $1.1 billion in profit sharing expense based on 2017 pre-tax profit, which was paid to employees in February 2018.

Effective October 1, 2017, we aligned our profit sharing plans under a single formula. Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. Prior to that time, the profit sharing program for pilots used this formula but for 2016 and the first nine months of 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit (as defined by the terms of the program) and, if we exceeded our prior-year results, the program paid 20% of the year-over-year increase in profit to eligible employees. For years prior to 2016, the profit sharing program for merit, ground and flight attendant employees paid according to the current formula. Going forward, all eligible employees will be paid profit sharing under the current formula.

Investing Activities

Capital Expenditures. Our capital expenditures were $3.9 billion in 2017, $3.4 billion in 2016 and $2.9 billion in 2015. Our capital expenditures during 2017 were primarily related to the purchase of B-737-900ER aircraft to replace a portion of our older B-757-200 aircraft, purchases of A321-200 and A330-300 aircraft, advanced deposit payments on future aircraft order commitments and seat density projects for our domestic fleet. Our capital expenditures during 2016 and 2015 were primarily for the purchase of aircraft and modifications to upgrade aircraft interiors that enhance our product offering.

We have committed to future aircraft purchases that will require significant capital investment and have obtained long-term financing commitments for a substantial portion of the purchase price of these aircraft. We expect that we will invest approximately $4.5 billion in 2018 primarily for (1) aircraft, including deliveries of B-737-900ERs, A321-200s and A350-900s, along with advance deposit payments for these and our new A330-900neo and CS100 orders as well as for (2) aircraft modifications, the majority of which relate to increasing the seat density and enhancing the cabins on our domestic fleet. We expect that the 2018 investments will be funded primarily through cash flows from operations.

Equity Investments. During 2017, we completed a $622 million tender offer and settled derivative contracts for $173 million to obtain additional capital stock of Grupo Aeroméxico, increasing our ownership percentage to a non-controlling 49% equity stake in Grupo Aeroméxico. During the December 2017 quarter, we acquired shares of Air France-KLM for $450 million, which provides us with a 10% ownership interest.

Los Angeles International Airport Construction. During 2016, we executed a new lease agreement with Los Angeles World Airports ("LAWA"), which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX over the next seven years. Based on the lease agreement, we are designing and managing the construction of the initial investment of $350 million to renovate gate areas, support space and other amenities for passengers, upgrade the baggage handling systems in the terminals and facilitate the relocation of those airlines located in Terminals 2 and 3 to Terminals 5 and 6 and Tom Bradley International Terminal ("TBIT"). The relocation activities were completed during the June 2017 quarter. Subject to required approvals, we have an option to expand the project, which could cost an additional $1.5 billion and would include (1) redevelopment of Terminal 3 and enhancement of Terminal 2, (2) rebuild of the ticketing, arrival hall and security checkpoint, (3) construction of infrastructure for the planned airport people mover, (4) ramp improvements and (5) construction of a secure connector to the north side of TBIT.

A substantial majority of the project costs will be funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using an $800 million revolving credit facility provided by a group of lenders. The credit facility was executed during 2017. Loans made under the credit facility will be repaid with the proceeds from LAWA’s purchase of completed project assets. We have guaranteed the obligations of the RAIC under the credit facility. We expect to spend approximately $200 million on this project in 2018 using funding provided by the credit agreement and/or cash flows from operations.

New York-LaGuardia Redevelopment. As part of the terminal redevelopment project at LaGuardia Airport, we are partnering with the Port Authority of New York and New Jersey (the “Port Authority”) to replace Terminals C and D with a new state-of-the-art terminal facility consisting of 37 gates across four concourses connected to a central headhouse. The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and 30 percent more concessions space than the existing terminals. The facility will also offer direct access between the parking garage and terminal and improved roadways and drop-off/pick-up areas. The design of the new terminal will integrate sustainable technologies and improvements in energy efficiency. Construction will be phased to limit passenger inconvenience and is expected to be completed by 2026.

In connection with the redevelopment, during 2017, we entered into an amended and restated terminal lease with the Port Authority with a term through 2050. Pursuant to the lease agreement we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off-premises supporting facilities, (2) receive a Port Authority contribution of $600 million to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers. We currently expect our costs for the project to be approximately $3.3 billion and we bear the risks of project construction, including if the project’s actual costs exceed the projected costs. We expect to spend approximately $550 million on this project in 2018 using funding provided by cash flows from operations and/or financing arrangements.

Financing Activities

Debt and Capital Leases. The principal amount of debt and capital leases was $8.9 billion at December 31, 2017. Since December 31, 2009, we have reduced our principal amount of debt and capital leases by $9.4 billion.

During the March 2017 quarter, we issued $2.0 billion in aggregate principal amount of unsecured notes, consisting of $1.0 billion of 2.785% Notes due 2020 and $1.0 billion of 3.625% Notes due 2022. As discussed above, we used the net proceeds from this issuance to make a cash contribution to our qualified defined benefit pension plans. During the December 2017 quarter, we issued $450 million in aggregate principal amount of 2.600% Notes due 2020.

Our Pacific Facilities (including the Term Loan with a principal balance of $1.0 billion) mature in October 2018. We expect to repay this obligation with cash flows from operations, cash and cash equivalents and/or new financing arrangements.

During 2017, we received an upgrade to our credit rating from Standard & Poor's to an investment-grade rating of BBB-. We now have investment-grade ratings from all three major credit rating agencies.

At December 31, 2017, our corporate ratings were:

Rating Agency	Current Rating	Outlook
Fitch	BBB-	Stable
Moody's	Baa3	Stable
Standard & Poor's	BBB-	Stable

Capital Returns to Shareholders. Since first implementing our quarterly dividend in 2013, we have increased the dividend per share by 50% annually and paid $1.9 billion in total dividends, including $731 million in 2017. Through dividends and share repurchases, we have returned $9.8 billion to shareholders since 2013, while reducing outstanding shares by approximately 18% compared to the beginning of 2013. During 2017 alone, we repurchased and retired 33 million shares at a cost of $1.7 billion.

(in millions, except repurchase price)	Share Repurchase Authorization			Average Repurchase Price			Planned Completion Date	Authorization Remaining
May 2014 Program	$	2,000		$	42.86		December 31, 2016	Completed June 2015
May 2015 Program	$	5,000		$	45.32		December 31, 2017	Completed September 2017
May 2017 Program	$	5,000		$	52.13		December 31, 2020		$	4,675

On February 9, 2018, the Board of Directors declared a $0.3050 per share dividend for shareholders of record as of February 23, 2018.

Fuel Hedge Restructuring. During 2016, we entered into transactions to defer settlement of a portion of our hedge portfolio until 2017. These deferral transactions, excluding market movements from the date of inception, provided approximately $300 million in cash receipts during the second half of 2016 and required approximately $300 million in cash payments in 2017.

During the June 2016 quarter, we early terminated certain of our outstanding deferral transactions and made cash payments of $170 million, including normal settlements. As a result, during the year ended December 31, 2017, we reported $20 million in cash receipts and $244 million in cash payments associated with these transactions. For additional information regarding these transactions, see Note 4 to the Notes to the Consolidated Financial Statements.

Undrawn Lines of Credit

We have $2.5 billion available in undrawn revolving lines of credit. Our credit facilities have covenants, including minimum collateral coverage ratios. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them. We currently have a substantial amount of unencumbered assets available to pledge as collateral.

Covenants

We were in compliance with the covenants in our financing agreements at December 31, 2017.

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2017 that we expect will be paid in cash. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax positions and amounts payable under collective bargaining arrangements, among others. In addition, the table does not include expected significant cash payments representing obligations that arise in the ordinary course of business that do not include contractual commitments.

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

	Contractual Obligations by Year**(1)**
(in millions)	2018			2019			2020			2021			2022			Thereafter			Total
Long-term debt (see Note 6)
Principal amount	$	2,183		$	1,359		$	1,983		$	345		$	2,009		$	660		$	8,539
Interest payments	349			247			171			131			82			120			1,100
Capital lease obligations (see Note 7)
Principal amount	97			78			56			34			19			110			394
Interest payments	19			14			9			7			5			16			70
Operating lease payments (see Note 7)	1,735			1,589			1,430			1,156			1,036			9,290			16,236
Aircraft purchase commitments (see Note 10)	3,570			3,370			3,270			3,880			2,450			1,740			18,280
Contract carrier obligations (see Note 10)	1,772			1,603			1,320			793			723			1,975			8,186
Employee benefit obligations (see Note 9)	149			144			130			120			113			5,916			6,572
Other obligations	770			364			314			241			411			459			2,559
Total	$	10,644		$	8,768		$	8,683		$	6,707		$	6,848		$	20,286		$	61,936

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

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

Long-Term Debt, Interest Payments. Represents estimated interest payments under our long-term debt based on the interest rates specified in the applicable debt agreements. Interest payments on variable interest rate debt were calculated using London interbank offered rates ("LIBOR") at December 31, 2017.

Operating Lease Payments. Represents our minimum rental commitments under noncancelable operating leases (including certain aircraft flown by regional carriers).

Aircraft Purchase Commitments. Represents our commitments to purchase 100 A321-200neo, 93 A321-200, 75 CS100, 41 B-737-900ER, 25 A330-900neo and 19 A350-900 aircraft.

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

Employee Benefit Obligations. Represents primarily (1) our estimated minimum required funding for our qualified defined benefit pension plans based on actuarially determined estimates and (2) projected future benefit payments from our unfunded postretirement and postemployment plans. For additional information about our defined benefit pension plan obligations, see "Critical Accounting Policies and Estimates."

Other Obligations. Represents estimated purchase obligations under which we are required to make minimum payments for goods and services, including, but not limited to, insurance, marketing, maintenance, technology, sponsorships and other third-party services and products.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are those that require significant judgments and estimates. Accordingly, the actual results may differ materially from these estimates. For a discussion of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements.

Frequent Flyer Program

Our SkyMiles program offers incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and airlines that participate in the SkyMiles program, as well as through participating companies such as credit card companies, hotels and car rental agencies. We sell mileage credits to non-airline businesses, customers and other airlines. Effective January 1, 2015, the SkyMiles program was modified from a model in which customers earn redeemable mileage credits based on distance traveled to a model based on ticket price. This award change did not affect the way we account for the program.

The SkyMiles program includes two types of transactions that are considered revenue arrangements with multiple deliverables. As discussed below, these are (1) passenger ticket sales earning mileage credits and (2) the sale of mileage credits to participating companies with which we have marketing agreements. Mileage credits are a separate unit of accounting as they can be redeemed by customers in future periods for air travel on Delta and participating airlines, membership in our Sky Club and other program awards.

Passenger Ticket Sales Earning Mileage Credits. Passenger ticket sales earning mileage credits under our SkyMiles program provide customers with (1) mileage credits earned and (2) air transportation. We value each deliverable on a standalone basis. Our estimate of the selling price of a mileage credit is based on an analysis of our sales of mileage credits to other airlines and customers, which is re-evaluated at least annually. We use established ticket prices to determine the estimated selling price of air transportation. We allocate the total amount collected from passenger ticket sales between the deliverables based on their relative selling prices.

We defer revenue for the mileage credits related to passenger ticket sales when the credits are earned and recognize it as passenger revenue when miles are redeemed and services are provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize these amounts in passenger revenue when we provide transportation or when the ticket expires unused. A hypothetical 10% increase in our estimate of the standalone selling price of a mileage credit would decrease passenger revenue by approximately $50 million, as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales.

Sale of Mileage Credits. Customers may earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies with which we have marketing agreements to sell mileage credits. Our contracts to sell mileage credits under these marketing agreements have multiple deliverables, as defined below.

Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. In December 2014, we amended our marketing agreements with American Express, which increased the value we receive under the agreements through 2022. The amended agreements became effective January 1, 2015. We account for the agreements consistent with the accounting method that allocates the consideration received to the individual products and services delivered based on their relative selling prices. We determined our best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) the rate at which we sell mileage credits to other airlines, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value. The increased value received under the amended agreements increases the amount of deferred revenue for the travel component and increases the value of the other deliverables, which are recognized in other revenue as they are provided.

We recognize revenue as we deliver each sales element. We defer the travel deliverable (mileage credits) as part of frequent flyer deferred revenue and recognize passenger revenue as the mileage credits are used for travel. The revenue allocated to the remaining deliverables is recorded in other revenue. We recognize the revenue for these services as they are performed.

Breakage. For mileage credits that we estimate are not likely to be redeemed ("breakage"), we recognize the associated value proportionally during the period in which the remaining mileage credits are expected to be redeemed. We use statistical models to estimate breakage based on historical redemption patterns. A change in assumptions as to the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years. At December 31, 2017, the aggregate deferred revenue balance associated with the SkyMiles program was $4.1 billion. A hypothetical 1% change in the number of outstanding miles estimated to be redeemed would result in a $34 million impact on our deferred revenue liability at December 31, 2017.

Goodwill and Indefinite-Lived Intangible Assets

We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. We assess the value of our goodwill and indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, we consider various market factors, including the key assumptions listed below. We analyze these factors to determine if events and circumstances have affected the fair value of goodwill and indefinite-lived intangible assets. If we determine that it is more likely than not that the asset may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. Under a quantitative approach, we calculate the fair value of the asset using the key assumptions listed below.

When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering both market capitalization and projected discounted future cash flows (an income approach). When we perform a quantitative impairment assessment of our indefinite-lived intangible assets, fair value is estimated based on (1) recent market transactions, where available, (2) the royalty method for the Delta tradename (which assumes hypothetical royalties generated from using our tradename) or (3) projected discounted future cash flows (an income approach).

Key Assumptions. The key assumptions in our impairment tests include: (1) forecasted revenues, expenses and cash flows, (2) terminal period revenue growth and cash flows, (3) an estimated weighted average cost of capital, (4) assumed discount rates depending on the asset and (5) a tax rate. These assumptions are consistent with those hypothetical market participants would use. Since we are required to make estimates and assumptions when evaluating goodwill and indefinite-lived intangible assets for impairment, actual transaction amounts may differ materially from these estimates. In addition, we consider the amount by which the intangible assets' fair values exceeded their respective carrying values in the most recent fair value measurements calculated using a quantitative approach.

Changes in certain events and circumstances could result in impairment or a change from indefinite-lived to definite-lived. Factors which could cause impairment include, but are not limited to, (1) negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related to fuel and employees), (3) lower passenger demand as a result of weakened U.S. and global economies, (4) interruption to our operations due to a prolonged employee strike, terrorist attack or other reasons, (5) changes to the regulatory environment (e.g., diminished slot restrictions or additional Open Skies agreements), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the intangible assets.

We assessed each of the above assumptions in our most recent impairment analyses. The combination of our most recently completed annual results and our projected revenues, expenses and cash flows more than offset any negative events and circumstances. The stabilized operating environment for U.S. airlines has also contributed to improved financial results.

Goodwill. Our goodwill balance, which is related to the airline segment, was $9.8 billion at December 31, 2017. Based upon our qualitative assessment of all relevant factors, including applicable factors noted in "Key Assumptions" above, we determined that there was no indication that goodwill was impaired.

Identifiable Intangible Assets. Our identifiable intangible assets, which are related to the airline segment, had a net carrying amount of $4.8 billion at December 31, 2017, of which $4.7 billion related to indefinite-lived intangible assets. Indefinite-lived assets are not amortized and consist primarily of routes, slots, the Delta tradename and assets related to SkyTeam and collaborative arrangements. Definite-lived assets consist primarily of marketing and maintenance service agreements.

We performed qualitative assessments of our indefinite-lived intangible assets, including applicable factors noted in "Key Assumptions" above, and determined that there was no indication that the assets were impaired. Our qualitative assessments include analyses and weighting of all relevant factors, which impact the fair value of our indefinite-lived intangible assets.

Long-Lived Assets

Our flight equipment and other long-lived assets have a recorded value of $26.6 billion at December 31, 2017. This value is based on various factors, including the assets' estimated useful lives and salvage values. We review flight equipment and other long-lived assets used in operations for impairment losses when events and circumstances indicate the assets may be impaired. Factors which could be indicators of impairment include, but are not limited to, (1) a decision to permanently remove flight equipment or other long-lived assets from operations, (2) significant changes in the estimated useful life, (3) significant changes in projected cash flows, (4) permanent and significant declines in fleet fair values and (5) changes to the regulatory environment. For long-lived assets held for sale, we discontinue depreciation and record impairment losses when the carrying amount of these assets is greater than the fair value less the cost to sell.

To determine whether impairments exist for aircraft used in operations, we group assets at the fleet-type level (the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. If an impairment occurs, the impairment loss recognized is the amount by which the fleet's carrying amount exceeds its estimated fair value. We estimate aircraft fair values using published sources, appraisals and bids received from third parties, as available.

Defined Benefit Pension Plans

We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and frozen for future benefit accruals. As of December 31, 2017, the unfunded benefit obligation for these plans recorded on our Consolidated Balance Sheet was $7.0 billion. During 2017, we contributed $3.5 billion to these plans. We have no minimum funding requirements in 2018. However, in January 2018, we voluntarily contributed approximately $500 million to these plans. The most critical assumptions impacting our defined benefit pension plan obligations and expenses are the discount rate, the expected long-term rate of return on plan assets and life expectancy.

Weighted Average Discount Rate. We determine our weighted average discount rate on our measurement date primarily by reference to annualized rates earned on high-quality fixed income investments and yield-to-maturity analysis specific to our estimated future benefit payments. We used a weighted average discount rate to value the obligations of 3.69% and 4.20% at December 31, 2017 and 2016, respectively. Our weighted average discount rate for net periodic pension benefit cost in each of the past three years has varied from the rate selected on our measurement date, ranging from 4.13% to 4.57% between 2015 and 2017.

Expected Long-Term Rate of Return. Our expected long-term rate of return on plan assets is based primarily on plan-specific investment studies using historical market return and volatility data. Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically. We also expect to receive a premium for investing in less liquid private markets. We review our rate of return on plan assets assumptions annually. Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation. The investment strategy for our defined benefit pension plan assets is to earn a long-term return that meets or exceeds our annualized return target while taking an acceptable level of risk and maintaining sufficient liquidity to pay current benefits and other cash obligations of the plan. This is achieved by investing in a globally diversified mix of public and private equity, fixed income, real assets, hedge funds and other assets and instruments. Our expected long-term rate of return on assets for net periodic pension benefit cost for the year ended December 31, 2017 was 8.96%.

The impact of a 0.50% change in these assumptions is shown in the table below:

Change in Assumption	Effect on 2018 Pension Expense				Effect on Accrued Pension Liability at December 31, 2017
0.50% decrease in weighted average discount rate		$	(9	) million		$	1.4	billion
0.50% increase in weighted average discount rate		$	5	million		$	(1.2	) billion
0.50% decrease in expected long-term rate of return on assets		$	73	million		$	—
0.50% increase in expected long-term rate of return on assets		$	(73	) million		$	—

Life Expectancy. Changes in life expectancy may significantly change our benefit obligations and future expense. We use the Society of Actuaries ("SOA") published mortality data, other publicly available information and our own perspective of future longevity to develop our best estimate of life expectancy. The SOA publishes annual updated mortality tables for U.S. plans and updated improvement scale. Each year we consider updates by the SOA in setting our mortality assumptions for purposes of measuring pension and other postretirement and postemployment benefit obligations.

Funding. Our funding obligations for qualified defined benefit plans are governed by the Employee Retirement Income Security Act. The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules ("Alternative Funding Rules") for defined benefit plans that are frozen. We elected the Alternative Funding Rules under which the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period and is calculated using an 8.85% discount rate.

While the Pension Protection Act makes our funding obligations for these plans more predictable, factors outside our control continue to have an impact on the funding requirements. Estimates of future funding requirements are based on various assumptions and can vary materially from actual funding requirements. Assumptions include, among other things, the actual and projected market performance of assets, statutory requirements and demographic data for participants. For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.

Recent Accounting Standards

Revenue from Contracts with Customers

On January 1, 2018, we will adopt ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" using the full retrospective method. While the adoption will not have a significant impact on earnings, the classification of certain revenues that are currently classified in other revenue will be reclassified to passenger revenue. These include baggage fees, administrative charges and other travel-related fees, all of which will be deemed part of the single performance obligation of providing passenger transportation. These revenues, which are approximately $2 billion annually, will be reclassified from the current presentation in other revenue to passenger revenue.

In addition, the adoption of the new standard increases the rate used to account for frequent flyer miles. We currently analyze our standalone sales of mileage credits to other airlines and customers to establish the accounting value for frequent flyer miles. Considering the guidance in the new standard, we will change our valuation of a mileage credit to an analysis of the award redemption value. The new valuation considers the value a passenger receives by redeeming miles rather than paying cash for an award ticket. This change increases our frequent flyer liability by approximately $2 billion. The mileage deferral and redemption rates are approximately the same; therefore, assuming stable volume, there would not be a significant change in revenue recognized from the program for a given period.

The adoption of the new standard will also reduce our air traffic liability by approximately $500 million. This change primarily results from estimating the tickets that will expire unused and recognizing revenue at the scheduled flight date rather than when the unused tickets expire.

Retirement Benefits

In 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715)." This standard requires an entity to report the service cost component in the same line item as other compensation costs. The other components of net (benefit) cost will be required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. In 2017, we recorded $50 million of non-service costs that will be reclassified to non-operating expense upon adoption. This standard is effective for interim and annual reporting periods beginning after December 15, 2017. We will adopt the standard effective January 1, 2018.

See the table below for the unaudited impact resulting from the adoption of these standards on our Consolidated Financial Statements.

	Year Ended December 31,
	2017													2016
(Unaudited) (in millions, except per share data and statistics)	As Reported			Revenue from Contracts with Customers			Retirement Benefits			As Adjusted				As Reported			Revenue from Contracts with Customers			Retirement Benefits			As Adjusted
Income statement:
Passenger revenue	$	34,819		$	2,297		$	—		$	37,116			$	33,777		$	2,189		$	—		$	35,966
Cargo revenue	729			15			—			744				668			16			—			684
Other revenue	5,696			(2,418		)	—			3,278				5,194			(2,394		)	—			2,800
Operating expense	(35,130		)	(92		)	50			(35,172		)		(32,687		)	(92		)	325			(32,454		)
Non-operating expense	(413		)	(3		)	(50		)	(466		)		(316		)	(2		)	(325		)	(643		)
Income tax provision	(2,124		)	(171		)	—			(2,295		)		(2,263		)	105			—			(2,158		)
Net income	3,577			(372		)	—			3,205				4,373			(178		)	—			4,195
Diluted earnings per share	$	4.95		$	(0.52	)	—			$	4.43			$	5.79		$	(0.24	)	—			$	5.55
Operating statistics:
Pre-tax margin	13.8		%	(0.4		)%	—		%	13.4		%		16.7		%	(0.6		)%	—		%	16.1		%
Passenger mile yield(1)		15.99	¢		1.06	¢	—				17.05	¢			15.85	¢		1.03	¢	—				16.88	¢
PRASM(1)		13.69	¢		0.90	¢	—				14.59	¢			13.41	¢		0.87	¢	—				14.28	¢
TRASM(1)		16.22	¢		(0.04	)¢	—				16.18	¢			15.74	¢		(0.08	)¢	—				15.66	¢
CASM(1)		13.81	¢		0.04	¢		(0.02	)¢		13.83	¢			12.98	¢		0.04	¢		(0.13	)¢		12.89	¢
Balance sheet:
Deferred income taxes, net	$	935		$	419		$	—		$	1,354			$	3,064		$	589		$	—		$	3,653
Air traffic liability	4,888			(524		)	—			4,364				4,626			(546		)	—			4,080
Frequent flyer deferred revenue (current and noncurrent)	4,118			2,082			—			6,200				3,926			1,877			—			5,803
Other accrued and other noncurrent liabilities	3,969			241			—			4,210				3,785			268			—			4,053
Retained earnings	9,636			(1,380		)	—			8,256				7,903			(1,009		)	—			6,894

(1)	Refer to the "Glossary of Defined Terms" below for the definition of these terms.

Supplemental Information

We sometimes use information ("non-GAAP financial measures") that is derived from the Consolidated Financial Statements but that is not presented in accordance with GAAP. Under the U.S. Securities and Exchange Commission rules, non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results.

The following table shows a reconciliation of pre-tax income (a GAAP measure) to pre-tax income, adjusted for special items (a non-GAAP financial measure). We adjust pre-tax income for the following items to determine pre-tax income, adjusted for special items, for the reasons described below:

•

MTM adjustments and settlements. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period. Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown.

•	Investment MTM adjustments. We record our proportionate share of earnings from our equity investments in Virgin Atlantic and Aeroméxico in non-operating expense. We adjust for Virgin Atlantic's and Aeroméxico's MTM adjustments to allow investors to better understand and analyze our core financial performance in the periods shown.

	Year Ended December 31,
(in millions)	2017			2016
Pre-tax income	$	5,701		$	6,636
Adjusted for:
MTM adjustments and settlements	(259		)	(450		)
Investment MTM adjustments	8			(115		)
Pre-tax income, adjusted for special items	$	5,450		$	6,071

The following table shows a reconciliation of CASM (a GAAP measure) to CASM-Ex, including profit sharing (a non-GAAP financial measure). We adjust CASM for the following items to determine CASM-Ex, including profit sharing for the reasons described below:

•	Aircraft fuel and related taxes. The volatility in fuel prices impacts the comparability of year-over-year financial performance. The adjustment for aircraft fuel and related taxes (including our regional carriers) allows investors to better understand and analyze our non-fuel costs and year-over-year financial performance.

•

Other expenses. Other expenses include aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery cost of sales to third parties. Because these businesses are not related to the generation of a seat mile, we adjust for the costs related to these sales to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry.

	Year Ended December 31,
	2017			2016
CASM (cents)		13.81	¢		12.98	¢
Adjusted for:
Aircraft fuel and related taxes	(2.66		)	(2.38		)
Other expenses	(0.58		)	(0.47		)
CASM-Ex, including profit sharing		10.57	¢		10.13	¢

Glossary of Defined Terms

ASM - Available Seat Mile. A measure of capacity. ASMs equal the total number of seats available for transporting passengers during a reporting period multiplied by the total number of miles flown during that period.

CASM - (Operating) Cost per Available Seat Mile. The amount of operating cost incurred per ASM during a reporting period. CASM is also referred to as "unit cost."

CASM-Ex, including profit sharing - The amount of operating cost incurred per ASM during a reporting period, adjusted for aircraft fuel and related taxes, other expenses, including aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery cost of sales to third parties.

Passenger Load Factor - A measure of utilized available seating capacity calculated by dividing RPMs by ASMs for a reporting period.

Passenger Mile Yield or Yield - The amount of passenger revenue earned per RPM during a reporting period.

PRASM - Passenger Revenue per ASM. The amount of passenger revenue earned per ASM during a reporting period. PRASM is also referred to as "unit revenue."

RPM - Revenue Passenger Mile. One revenue-paying passenger transported one mile. RPMs equal the number of revenue passengers during a reporting period multiplied by the number of miles flown by those passengers during that period. RPMs are also referred to as "traffic."

TRASM - Total Revenue per ASM. The amount of total revenue earned per ASM during a reporting period.