OVERVIEW

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (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, 2019, and as updated in our Form 8-K on May 5, 2020. The updated risk factors are also set forth herein in section Item 1A. "Risk Factors." This overview summarizes the MD&A, which includes the following sections:

•First Quarter Review-highlights from the first quarter of 2020 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 months ended March 31, 2020. 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 2020.

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

FIRST QUARTER REVIEW

COVID-19 Impacts and Response

The impacts of COVID-19 on our business have been unprecedented, and have presented us with some of the greatest challenges in our 88 year history. We experienced strong demand in January and February 2020. However, in March 2020 the cancellation of large public events, suspension of business travel, closure of popular tourist destinations and implementation of stay-at-home orders throughout the country drove demand for air travel to historic lows.

We are uncertain when, and at what rate, demand may return. Flown capacity for April was more than 80% below prior year, and cuts for May will also exceed 80%. Reductions in June are expected to be similar. Capacity reductions for the remainder of the year will be evaluated and shared as we monitor trends in demand. As a result of reduced capacity, we have parked 156 Mainline and 13 Horizon aircraft, including the permanent parking of 12 Mainline aircraft. We have also worked with SkyWest to suspend flying for eight aircraft and reduce minimum flying commitments for those aircraft that remain in service.

We have taken action to reduce costs and our overall cash burn. In March, we implemented a company-wide hiring freeze, reduced salaries of senior management, reduced management hours by 10%, and offered voluntary short-term and incentive leave programs to all employees. To date, over 5,000 employees have taken voluntary leave. We have reduced our monthly cash burn rate from approximately $400 million in March to $260 million in April. We are committed to reducing monthly cash burn to $200 million by June, and to break-even by the end of 2020. This will require difficult decisions for cost reduction and relies on some demand returning as well.

Throughout the crisis, our focus on safety has remained unchanged. In response to COVID-19, we have evaluated the many ways in which our guests and employees interact, and have implemented the following measures to ensure health and safety for all traveling:

•Implemented enhanced cleaning procedures on aircraft, including the use of high-grade, EPA-registered disinfectants and electrostatic sanitizing spray. Additionally, all planes are equipped with hospital-grade HEPA filters.

•Provided guests with a "Peace-of-Mind" waiver, allowing changes to ticketed travel without change or cancellation fees.


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•Taken additional steps to ensure guest health and safety including limiting load factors and seat availability, and suspending or reducing most in-flight services.

•Announced a requirement for our employees to wear masks when they are working and unable to practice appropriate social distancing and for our guests while traveling on our aircraft, in line with Centers for Disease Control recommendations.

Subsequent to quarter end, we received $992 million in funding from the Payroll Support Program under the CARES Act. Of this total, more than $700 million is in the form of a grant which will be used to directly offset payroll expenses incurred through September 30, 2020.

We have also obtained financing of $875 million since the end of 2019. As of May 12, 2020, our cash and marketable securities balance was approximately $2.8 billion.

Financial Overview

Our consolidated pretax loss was $317 million during the first quarter of 2020, compared to pretax profit of $6 million in the first quarter of 2019. The shift to pretax loss was driven primarily by a decrease in operating revenues of $240 million stemming from the sharp decline in demand and an increase in non-fuel operating expenses of $142 million, including $160 million in special charges from asset impairment, offset by a decrease in fuel expense of $36 million.

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.

RESULTS OF OPERATIONS

ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS

We believe disclosure of earnings excluding the impact of impairment and other charges, 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 impairment charges and merger-related costs) from our unit metrics, we believe 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) excluding fuel and certain special items, such as impairment charges and 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 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 impairment charges, 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.


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•Although we disclose our 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.


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