ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions we may take to mitigate our exposure to such changes. Therefore, actual results may differ.
Aircraft Fuel
Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business. Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of aircraft fuel can have a material effect on our operating results and liquidity. Market prices for aircraft fuel have fluctuated substantially over the past several years and prices continue to be highly volatile, with market spot prices ranging from a low of approximately $0.37 per gallon to a high of approximately $4.40 per gallon during the period from January 1, 2020 to December 31, 2022.
As of December 31, 2022, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices. Based on our 2023 forecasted fuel consumption, we estimate that a one cent per gallon increase in the price of aircraft fuel would increase our 2023 annual fuel expense by approximately $40 million.
Foreign Currency
We are exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated transactions. Our largest exposure comes from the Euro, British pound sterling, Canadian dollar and various Latin American currencies (primarily the Brazilian real). We do not currently have a foreign currency hedge program. We estimate a uniform 10% strengthening in the value of the U.S. dollar from 2022 levels relative to each of the currencies in which we have foreign currency exposure would have resulted in a decrease in pre-tax income of approximately $175 million for the year ended December 31, 2022.
Generally, fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition. See Part I, Item 1A. Risk Factors – “We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control” for additional discussion of this and other currency risks.
Interest
Our earnings and cash flow are affected by changes in interest rates due to the impact those changes have on our interest expense from variable-rate debt instruments and our interest income from short-term, interest-bearing investments.
Our largest exposure with respect to variable-rate debt comes from changes in the relevant benchmark rate underlying such debt financings, principally LIBOR and SOFR. We had variable-rate debt instruments representing 27% of our total long-term debt at December 31, 2022. We currently do not have an interest rate hedge program to hedge our exposure to floating interest rates on our variable-rate debt obligations. If annual interest rates increase 100 basis points, based on our December 31, 2022 variable-rate debt and short-term investments balances, annual interest expense on variable-rate debt would increase by approximately $95 million and annual interest income on short-term investments would increase by approximately $90 million. Additionally, the fair value of fixed-rate debt would have decreased by approximately $670 million for AAG and $480 million for American.
On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The discontinuation date for submission and publication of rates for certain tenors of USD LIBOR (1-month, 3-month, 6-month, and 12-month) was subsequently extended by the ICE Benchmark Administration (the administrator of LIBOR) until June 30, 2023. It is not possible to predict what rate or rates may become the predominant alternative to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. While the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, has chosen SOFR, and specifically Term SOFR, as the recommended risk-free reference rate for the U.S. (calculated based on repurchase agreements backed by treasury securities), we cannot currently predict the extent to which this index will gain widespread acceptance as a replacement for LIBOR. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere.
As of December 31, 2022, we had $9.2 billion of borrowings with interest rates linked to LIBOR. We have commenced the process of amending our LIBOR-based financing agreements to transition them to successor reference rates in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreements with all affected lenders, or to do so on favorable terms. Additionally, the replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long-term debt to be different or higher than expected.
ITEM 8A. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES GROUP INC.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
American Airlines Group Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of American Airlines Group Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholders’ equity (deficit), for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence over realizability of tax operating loss and other carryforwards
As discussed in Notes 1(j) and 6 to the consolidated financial statements, the Company had $4.7 billion of tax operating loss and other carryforwards, which are recorded as deferred tax assets at December 31, 2022. Deferred tax assets are recognized related to tax operating loss and other carryforwards that will reduce future taxable income. The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of the deferred tax assets, will not be realized. In evaluating the need for a valuation allowance, management considers all available positive and negative evidence.
We identified the evaluation of the sufficiency of audit evidence over the realizability of tax operating loss and other carryforwards as a critical audit matter. Evaluating the sufficiency of audit evidence required subjective auditor judgment in order to assess the extent of procedures performed in assessing the realizability of the tax operating loss and other carryforwards.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s deferred tax asset valuation allowance process, including controls related to the realizability of tax operating loss and other carryforwards. We evaluated positive and negative evidence used in assessing whether the tax operating loss and other carryforwards were more likely than not to be realized in the future. We evaluated the reasonableness of management’s projections of future profitability considering historical profitability of the Company, and consistency with industry data. We involved tax professionals with specialized skills and knowledge, who assisted in evaluating the application of tax law. We assessed the sufficiency of audit evidence obtained over the realizability of the tax operating loss and other carryforwards by evaluating the cumulative results of the audit procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
Dallas, Texas
February 22, 2023
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share and per share amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Operating revenues: | | | | | |
Passenger | $ | 44,568 | | | $ | 26,063 | | | $ | 14,518 | |
Cargo | 1,233 | | | 1,314 | | | 769 | |
Other | 3,170 | | | 2,505 | | | 2,050 | |
Total operating revenues | 48,971 | | | 29,882 | | | 17,337 | |
Operating expenses: | | | | | |
Aircraft fuel and related taxes | 13,791 | | | 6,792 | | | 3,402 | |
Salaries, wages and benefits | 12,972 | | | 11,817 | | | 11,229 | |
Regional expenses | 4,385 | | | 3,204 | | | 2,962 | |
Maintenance, materials and repairs | 2,684 | | | 1,979 | | | 1,585 | |
Other rent and landing fees | 2,730 | | | 2,619 | | | 2,004 | |
Aircraft rent | 1,395 | | | 1,425 | | | 1,341 | |
Selling expenses | 1,815 | | | 1,098 | | | 666 | |
Depreciation and amortization | 1,977 | | | 2,019 | | | 2,040 | |
Special items, net | 193 | | | (4,006) | | | (657) | |
Other | 5,422 | | | 3,994 | | | 3,186 | |
Total operating expenses | 47,364 | | | 30,941 | | | 27,758 | |
Operating income (loss) | 1,607 | | | (1,059) | | | (10,421) | |
Nonoperating income (expense): | | | | | |
Interest income | 216 | | | 18 | | | 41 | |
Interest expense, net | (1,962) | | | (1,800) | | | (1,227) | |
Other income, net | 325 | | | 293 | | | 154 | |
Total nonoperating expense, net | (1,421) | | | (1,489) | | | (1,032) | |
Income (loss) before income taxes | 186 | | | (2,548) | | | (11,453) | |
Income tax provision (benefit) | 59 | | | (555) | | | (2,568) | |
Net income (loss) | $ | 127 | | | $ | (1,993) | | | $ | (8,885) | |
| | | | | |
Earnings (loss) per common share: | | | | | |
Basic | $ | 0.20 | | | $ | (3.09) | | | $ | (18.36) | |
Diluted | $ | 0.19 | | | $ | (3.09) | | | $ | (18.36) | |
Weighted average shares outstanding (in thousands): | | | | | |
Basic | 650,345 | | | 644,015 | | | 483,888 | |
Diluted | 655,122 | | | 644,015 | | | 483,888 | |
| | | | | |
See accompanying notes to consolidated financial statements.
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net income (loss) | $ | 127 | | | $ | (1,993) | | | $ | (8,885) | |
Other comprehensive income (loss), net of tax: | | | | | |
Pension, retiree medical and other postretirement benefits | 1,360 | | | 1,161 | | | (772) | |
| | | | | |
| | | | | |
Investments | (3) | | | — | | | — | |
Total other comprehensive income (loss), net of tax | 1,357 | | | 1,161 | | | (772) | |
Total comprehensive income (loss) | $ | 1,484 | | | $ | (832) | | | $ | (9,657) | |
See accompanying notes to consolidated financial statements.
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value amounts)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
ASSETS | | | |
Current assets | | | |
Cash | $ | 440 | | | $ | 273 | |
Short-term investments | 8,525 | | | 12,158 | |
Restricted cash and short-term investments | 995 | | | 990 | |
Accounts receivable, net | 2,138 | | | 1,505 | |
Aircraft fuel, spare parts and supplies, net | 2,279 | | | 1,795 | |
Prepaid expenses and other | 892 | | | 615 | |
Total current assets | 15,269 | | | 17,336 | |
Operating property and equipment | | | |
Flight equipment | 39,703 | | | 37,856 | |
Ground property and equipment | 9,913 | | | 9,335 | |
Equipment purchase deposits | 613 | | | 517 | |
Total property and equipment, at cost | 50,229 | | | 47,708 | |
Less accumulated depreciation and amortization | (20,029) | | | (18,171) | |
Total property and equipment, net | 30,200 | | | 29,537 | |
Operating lease right-of-use assets | 8,094 | | | 7,850 | |
Other assets | | | |
Goodwill | 4,091 | | | 4,091 | |
Intangibles, net of accumulated amortization of $827 and $786, respectively | 2,059 | | | 1,988 | |
Deferred tax asset | 3,099 | | | 3,556 | |
Other assets | 1,904 | | | 2,109 | |
Total other assets | 11,153 | | | 11,744 | |
Total assets | $ | 64,716 | | | $ | 66,467 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | |
Current liabilities | | | |
Current maturities of long-term debt and finance leases | $ | 3,274 | | | $ | 2,489 | |
Accounts payable | 2,149 | | | 1,772 | |
Accrued salaries and wages | 1,713 | | | 1,489 | |
Air traffic liability | 6,745 | | | 6,087 | |
Loyalty program liability | 3,169 | | | 2,896 | |
Operating lease liabilities | 1,465 | | | 1,507 | |
Other accrued liabilities | 2,981 | | | 2,766 | |
Total current liabilities | 21,496 | | | 19,006 | |
Noncurrent liabilities | | | |
Long-term debt and finance leases, net of current maturities | 32,389 | | | 35,571 | |
Pension and postretirement benefits | 2,837 | | | 5,053 | |
Loyalty program liability | 5,976 | | | 6,239 | |
Operating lease liabilities | 6,559 | | | 6,610 | |
Other liabilities | 1,258 | | | 1,328 | |
Total noncurrent liabilities | 49,019 | | | 54,801 | |
Commitments and contingencies (Note 11) | | | |
Stockholders' equity (deficit) | | | |
Common stock, $0.01 par value; 1,750,000,000 shares authorized, 650,642,461 shares issued and outstanding at December 31, 2022; 647,727,595 shares issued and outstanding at December 31, 2021 | 6 | | | 6 | |
Additional paid-in capital | 7,291 | | | 7,234 | |
Accumulated other comprehensive loss | (4,585) | | | (5,942) | |
Retained deficit | (8,511) | | | (8,638) | |
Total stockholders' deficit | (5,799) | | | (7,340) | |
Total liabilities and stockholders’ equity (deficit) | $ | 64,716 | | | $ | 66,467 | |
See accompanying notes to consolidated financial statements.
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income (loss) | $ | 127 | | | $ | (1,993) | | | $ | (8,885) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
Depreciation and amortization | 2,298 | | | 2,335 | | | 2,370 | |
Special items, net non-cash | 229 | | | 83 | | | 1,599 | |
Pension and postretirement | (405) | | | (321) | | | (319) | |
Deferred income tax provision (benefit) | 65 | | | (555) | | | (2,568) | |
Share-based compensation | 78 | | | 98 | | | 91 | |
Net gains from sale of property and equipment and sale-leaseback transactions | — | | | (22) | | | (95) | |
Other, net | (37) | | | 38 | | | 47 | |
Changes in operating assets and liabilities: | | | | | |
Decrease (increase) in accounts receivable | (637) | | | (304) | | | 538 | |
Increase in other assets | (775) | | | (402) | | | (38) | |
Increase (decrease) in accounts payable and accrued liabilities | 585 | | | 461 | | | (626) | |
Increase (decrease) in air traffic liability | 658 | | | 1,454 | | | (51) | |
Increase (decrease) in loyalty program liability | 10 | | | (60) | | | 580 | |
Contributions to pension plans | (5) | | | (247) | | | (9) | |
Increase (decrease) in other liabilities | (18) | | | 139 | | | 823 | |
Net cash provided by (used in) operating activities | 2,173 | | | 704 | | | (6,543) | |
Cash flows from investing activities: | | | | | |
Capital expenditures, net of aircraft purchase deposit returns | (2,546) | | | (208) | | | (1,958) | |
Airport construction projects, net of reimbursements | (360) | | | (204) | | | (173) | |
Proceeds from sale-leaseback transactions | 86 | | | 181 | | | 665 | |
Proceeds from sale of property and equipment | 61 | | | 193 | | | 351 | |
Sales of short-term investments | 14,972 | | | 13,923 | | | 2,803 | |
Purchases of short-term investments | (11,257) | | | (19,454) | | | (5,873) | |
Decrease (increase) in restricted short-term investments | 1 | | | (401) | | | (308) | |
Purchase of equity investments | (321) | | | (28) | | | — | |
Other investing activities | — | | | 15 | | | 151 | |
Net cash provided by (used in) investing activities | 636 | | | (5,983) | | | (4,342) | |
Cash flows from financing activities: | | | | | |
Payments on long-term debt and finance leases | (3,752) | | | (7,343) | | | (3,535) | |
Proceeds from issuance of long-term debt | 1,069 | | | 12,190 | | | 11,780 | |
Deferred financing costs | (4) | | | (209) | | | (93) | |
Shares withheld for taxes pursuant to employee stock plans and treasury stock repurchases | (21) | | | (18) | | | (173) | |
Proceeds from issuance of equity | — | | | 460 | | | 2,970 | |
Dividend payments | — | | | — | | | (43) | |
Other financing activities | 77 | | | 208 | | | 88 | |
Net cash provided by (used in) financing activities | (2,631) | | | 5,288 | | | 10,994 | |
Net increase in cash and restricted cash | 178 | | | 9 | | | 109 | |
Cash and restricted cash at beginning of year | 408 | | | 399 | | | 290 | |
Cash and restricted cash at end of year (a) | $ | 586 | | | $ | 408 | | | $ | 399 | |
(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the consolidated balance sheets:
| | | | | | | | | | | | | | | | | |
Cash | $ | 440 | | | $ | 273 | | | $ | 245 | |
Restricted cash included in restricted cash and short-term investments | 146 | | | 135 | | | 154 | |
Total cash and restricted cash | $ | 586 | | | $ | 408 | | | $ | 399 | |
See accompanying notes to consolidated financial statements.
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In millions, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings (Deficit) | | Total |
Balance at December 31, 2019 | $ | 4 | | | $ | 3,945 | | | $ | (6,331) | | | $ | 2,264 | | | $ | (118) | |
Net loss | — | | | — | | | — | | | (8,885) | | | (8,885) | |
Other comprehensive loss, net | — | | | — | | | (772) | | | — | | | (772) | |
Issuance of PSP1 Warrants (see Note 1(b)) | — | | | 63 | | | — | | | — | | | 63 | |
Issuance of Treasury Loan Warrants (see Note 1(b)) | — | | | 25 | | | — | | | — | | | 25 | |
Issuance of 1,603,554 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (15) | | | — | | | — | | | (15) | |
Issuance of 129,490,000 shares of AAG common stock pursuant to public stock offerings, net of offering costs | 1 | | | 1,686 | | | — | | | — | | | 1,687 | |
Issuance of 68,561,487 shares of AAG common stock pursuant to an at-the-market offering, net of offering costs | 1 | | | 868 | | | — | | | — | | | 869 | |
Equity component of convertible debt issued, net of tax and offering costs | — | | | 320 | | | — | | | — | | | 320 | |
Purchase and retirement of 6,378,025 shares of AAG common stock | — | | | (145) | | | — | | | — | | | (145) | |
Dividends declared on AAG common stock ($0.10 per share) | — | | | — | | | — | | | (43) | | | (43) | |
Settlement of single-dip unsecured claims held in Disputed Claims Reserve (DCR) | — | | | 56 | | | — | | | — | | | 56 | |
Share-based compensation expense | — | | | 91 | | | — | | | — | | | 91 | |
Balance at December 31, 2020 | 6 | | | 6,894 | | | (7,103) | | | (6,664) | | | (6,867) | |
Net loss | — | | | — | | | — | | | (1,993) | | | (1,993) | |
Other comprehensive income, net | — | | | — | | | 1,161 | | | — | | | 1,161 | |
Issuance of 24,150,764 shares of AAG common stock pursuant to an at-the-market offering, net of offering costs | — | | | 460 | | | — | | | — | | | 460 | |
Impact of adoption of Accounting Standards Update (ASU) 2020-06 related to convertible instruments | — | | | (320) | | | — | | | 19 | | | (301) | |
Issuance of PSP2 and PSP3 Warrants (see Note 1(b)) | — | | | 121 | | | — | | | — | | | 121 | |
Issuance of 2,357,187 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (18) | | | — | | | — | | | (18) | |
Settlement of single-dip unsecured claims held in DCR and retirement of 259,878 shares of AAG common stock | — | | | (1) | | | — | | | — | | | (1) | |
Share-based compensation expense | — | | | 98 | | | — | | | — | | | 98 | |
Balance at December 31, 2021 | 6 | | | 7,234 | | | (5,942) | | | (8,638) | | | (7,340) | |
Net income | — | | | — | | | — | | | 127 | | | 127 | |
Other comprehensive income, net | — | | | — | | | 1,357 | | | — | | | 1,357 | |
Issuance of 2,914,866 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes | — | | | (21) | | | — | | | — | | | (21) | |
Share-based compensation expense | — | | | 78 | | | — | | | — | | | 78 | |
Balance at December 31, 2022 | $ | 6 | | | $ | 7,291 | | | $ | (4,585) | | | $ | (8,511) | | | $ | (5,799) | |
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
1. Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
American Airlines Group Inc. (we, us, our and similar terms, or AAG), a Delaware corporation, is a holding company whose primary business activity is the operation of a major network air carrier, providing scheduled air transportation for passengers and cargo through its mainline operating subsidiary, American Airlines, Inc. (American) and its wholly-owned regional airline subsidiaries, Envoy Aviation Group Inc., PSA Airlines, Inc. (PSA) and Piedmont Airlines, Inc. (Piedmont), that operate under the brand American Eagle. All significant intercompany transactions have been eliminated.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, the loyalty program, deferred tax assets, as well as pension and retiree medical and other postretirement benefits.
(b) Government Assistance
Payroll Support Programs
During 2020 and 2021, American, Envoy Air Inc. (Envoy), Piedmont and PSA (together with American, Envoy and Piedmont, the Subsidiaries) entered into payroll support program agreements (PSP Agreements) with the U.S. Department of Treasury (Treasury) pursuant to the payroll support program established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (PSP1), the payroll support program established under the Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) (PSP2) and the payroll support program established under the American Rescue Plan Act of 2021 (ARP) (PSP3). The aggregate amount of financial assistance received was approximately $12.8 billion, and as partial compensation to the U.S. Government for the provision of financial assistance provided under each of these programs, AAG issued promissory notes and warrants to Treasury.
The table below provides a summary of the financial assistance received and the promissory notes and the warrants issued under each program (in millions, except exercise price amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Program | | Closing Date | | PSP Financial Assistance | | Promissory Notes (1) | | PSP Warrants | | Total | | Warrants Issued (Shares) (2) | | Exercise Price of Warrants |
PSP1 | | April 20, 2020 | | $ | 4,138 | | | $ | 1,757 | | | $ | 63 | | | $ | 5,958 | | | 14.0 | | $ | 12.51 | |
PSP2 | | January 15, 2021 | | 2,427 | | | 1,030 | | | 76 | | | 3,533 | | | 6.6 | | 15.66 | |
PSP3 | | April 23, 2021 | | 2,290 | | | 959 | | | 46 | | | 3,295 | | | 4.4 | | 21.75 | |
Total | | | | $ | 8,855 | | | $ | 3,746 | | | $ | 185 | | | $ | 12,786 | | | 25.0 | | |
(1)See Note 4 for further information on the promissory notes issued.
(2)The payroll support program warrants (PSP Warrants) are subject to certain anti-dilution provisions, do not have any voting rights and are freely transferable, with registration rights. Each warrant expires on the fifth anniversary of the date of issuance, with expiration dates ranging from April 2025 to June 2026, and will be exercisable either through net share settlement or cash, at our option. The warrants were issued solely as compensation to the U.S. Government related to entry into the PSP Agreements. No separate proceeds (apart from the financial assistance described below) were received upon issuance of the warrants or will be received upon exercise thereof.
In connection with the PSP Agreements entered into with Treasury, we were required to comply with the relevant provisions of the CARES Act, the PSP Extension Law, and the ARP, which included the requirement that funds provided pursuant to these programs be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits, the requirement that certain levels of commercial air service be maintained, provisions that prohibited the repurchase of AAG common stock and the payment of common stock dividends as well as provisions that restrict the payment of certain executive
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
compensation. As of December 31, 2022, all of these provisions have expired except for those related to the payment of certain executive compensation, which expire on April 1, 2023.
For accounting purposes, the $12.8 billion of aggregate financial assistance received pursuant to the PSP Agreements was allocated to the promissory notes, warrants and other financial assistance (PSP Financial Assistance). The aggregate principal amount of the promissory notes was recorded as unsecured long-term debt and the total fair value of the warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders’ deficit in the consolidated balance sheets. The remaining amounts were recognized in 2020 and 2021 as a credit to special items, net in the consolidated statements of operations over the period which the continuation of payment of eligible employee wages, salaries and benefits was required.
Treasury Loan Agreement
On September 25, 2020 (the Treasury Loan Closing Date), AAG and American entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which provided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $5.5 billion. Subsequently, on October 21, 2020, AAG and American entered into an amendment to the Treasury Loan Agreement which increased the borrowing amount to up to $7.5 billion. In connection with entry into the Treasury Loan Agreement, on the Treasury Loan Closing Date, AAG also entered into a warrant agreement (the Treasury Loan Warrant Agreement) with Treasury.
In September 2020, American borrowed $550 million under the Treasury Term Loan Facility and on March 24, 2021, used a portion of the proceeds from the AAdvantage Financing to prepay in full the $550 million of outstanding loans under the Treasury Term Loan Facility and terminated the Treasury Loan Agreement. Pursuant to the Treasury Loan Agreement, AAG issued to Treasury warrants (Treasury Loan Warrants) to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock (the Treasury Loan Warrant Shares), which expire in September 2025. The exercise price of the Treasury Loan Warrant Shares is $12.51 per share, subject to certain anti-dilution provisions provided for in the Treasury Loan Warrant Agreement. For accounting purposes, the fair value for the Treasury Loan Warrant Shares, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit with an offsetting debt discount to the Treasury Term Loan Facility in the consolidated balance sheet. The provisions of the Treasury Loan Warrants are substantially similar to the PSP Warrants.
(c) Recent Accounting Pronouncements
ASU 2020-04: Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2022-06: Deferral of the Sunset Date of Topic 848
ASU 2020-04 provides optional temporary guidance for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. Topic 848 is effective as of March 12, 2020 through December 31, 2022; however, because the intended cessation date of LIBOR was deferred to June 30, 2023, ASU 2022-06 was issued in December 2022 to extend the current relief in Topic 848 through December 31, 2024. We will adopt Topic 848 when our relevant contracts are modified upon transition to alternative reference rates and we do not expect the application of Topic 848 to have a material impact on our consolidated financial statements.
(d) Investments
Short-term investments primarily include debt securities and are classified as available-for-sale and stated at fair value. Realized gains and losses are recorded in nonoperating other income, net on our consolidated statements of operations. Unrealized gains and losses are recorded as a component of accumulated other comprehensive loss on our consolidated balance sheets. For investments in an unrealized loss position, we determine whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. There have been no credit losses.
Equity investments are accounted for under the equity method if we are able to exercise significant influence over an investee. Equity investments for which we do not have significant influence are recorded at fair value or at cost, if fair value is not readily determinable, with adjustments for observable changes in price or impairments (referred to as the measurement alternative). Our share of equity method investees’ financial results and changes in fair value are recorded in nonoperating other income, net on the consolidated statements of operations. See Note 8 for additional information related to our equity investments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(e) Restricted Cash and Short-term Investments
We have restricted cash and short-term investments related primarily to collateral held to support workers’ compensation obligations, collateral associated with the AAdvantage Financing and money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at John F. Kennedy International Airport (JFK).
(f) Accounts Receivable, Net
Accounts receivable primarily consist of amounts due from credit card processing companies for tickets sold to individual passengers, amounts due from airline and non-airline business partners, including our co-branded credit card partners and cargo customers. Receivables from ticket sales are short-term, mostly settled within seven days after sale. Receivables from our business partners are typically settled within 30 days. All accounts receivable are reported net of an allowance for credit losses, which was not material as of December 31, 2022 and 2021. We consider past and future financial and qualitative factors, including aging, payment history and other credit monitoring indicators, when establishing the allowance for credit losses.
(g) Aircraft Fuel, Spare Parts and Supplies, Net
Aircraft fuel is recorded on a first-in, first-out basis. Spare parts and supplies are recorded at average costs less an allowance for obsolescence, which is recognized over the weighted average remaining useful life of the related fleet. We also provide an allowance for spare parts and supplies identified as excess or obsolete to reduce the carrying cost to the lower of cost or net realizable value. Aircraft fuel, spare parts and supplies are expensed when used.
(h) Operating Property and Equipment
Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or the lease term, whichever is less, using the straight-line method. Residual values for aircraft, engines and related rotable parts are generally 5% to 10% of original cost. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated or amortized over the estimated useful life of the asset or the lease term, whichever is less. The estimated useful lives for the principal property and equipment classifications are as follows:
| | | | | |
Principal Property and Equipment Classification | Estimated Useful Life |
Aircraft, engines and related rotable parts | 20 – 30 years |
Buildings and improvements | 5 – 30 years |
Furniture, fixtures and other equipment | 3 – 10 years |
Capitalized software | 5 – 10 years |
Total depreciation and amortization expense was $2.3 billion for each of the years ended December 31, 2022 and 2021 and $2.4 billion for the year ended December 31, 2020.
We assess impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired. An impairment of an asset or group of assets exists only when the sum of the estimated undiscounted cash flows expected to be generated directly by the assets are less than the carrying value of the assets. We group assets principally by fleet-type when estimating future cash flows, which is generally the lowest level for which identifiable cash flows exist. Estimates of future cash flows are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions, including our current fleet plan. If such assets are impaired, the impairment charge recognized is the amount by which the carrying value of the assets exceed their fair value. Fair value reflects management’s best estimate including inputs from published pricing guides and bids from third parties as well as contracted sales agreements when applicable. In 2022, we recorded $149 million in non-cash special impairment charges to write down the carrying value of our retired Airbus A330 fleet to the estimated fair value due to the market conditions for certain used aircraft.
(i) Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, current operating lease liabilities and noncurrent operating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment, current maturities of long-term debt and finance leases and long-term debt and finance leases, net of current maturities, on our consolidated balance sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.
Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on our consolidated balance sheets.
Under certain of our capacity purchase agreements with third-party regional carriers, we do not own the underlying aircraft. However, since we control the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to be leased for accounting purposes. For these capacity purchase agreements, we account for the lease and non-lease components separately. The lease component consists of the aircraft and the non-lease components consist of services, such as the crew and maintenance. We allocate the consideration in the capacity purchase agreements to the lease and non-lease components using their estimated relative standalone prices. See Note 11(b) for additional information on our capacity purchase agreements.
For real estate, we account for the lease and non-lease components as a single lease component.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes.
We provide a valuation allowance for our deferred tax assets when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand. We have determined that positive factors outweigh negative factors in the determination of the realizability of our deferred tax assets.
(k) Goodwill
Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the 2013 merger with US Airways Group, Inc. (US Airways Group). We have one reporting unit. We assess goodwill for impairment annually or more frequently if events or circumstances indicate that the fair value of goodwill may be lower than the carrying value. Our annual assessment date is October 1.
Goodwill is assessed for impairment by initially performing a qualitative assessment. If we determine that it is more likely than not that our goodwill may be impaired, we use a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any. Based upon our annual assessment, there was no goodwill impairment in 2022. The carrying value of our goodwill on our consolidated balance sheets was $4.1 billion as of December 31, 2022 and 2021.
(l) Other Intangibles, Net
Intangible assets consist primarily of certain domestic airport slots and gate leasehold rights, customer relationships, marketing agreements, commercial agreements, international slots and route authorities and tradenames.
Definite-Lived Intangible Assets
Definite-lived intangible assets are originally recorded at their acquired fair values, subsequently amortized over their respective estimated useful lives and are assessed for impairment whenever events and circumstances indicate that the assets may be impaired.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
The following table provides information relating to our amortizable intangible assets as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Domestic airport slots | $ | 365 | | | $ | 365 | |
Customer relationships | 300 | | | 300 | |
Marketing agreements | 105 | | | 105 | |
Tradenames | 35 | | | 35 | |
Airport gate leasehold rights | 137 | | | 137 | |
Accumulated amortization | (827) | | | (786) | |
Total | $ | 115 | | | $ | 156 | |
Certain domestic airport slots and airport gate leasehold rights are amortized on a straight-line basis over 25 years. Certain marketing agreements were identified as intangible assets subject to amortization and are amortized on a straight-line basis over approximately 30 years. Customer relationships and tradenames are fully amortized.
We recorded amortization expense related to these intangible assets of $41 million for each of the years ended December 31, 2022, 2021 and 2020. We expect to record annual amortization expense for these intangible assets as follows (in millions):
| | | | | |
2023 | $ | 7 | |
2024 | 7 | |
2025 | 7 | |
2026 | 6 | |
2027 | 6 | |
2028 and thereafter | 82 | |
Total | $ | 115 | |
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets include certain domestic airport slots, international slots and route authorities and in 2022, our commercial agreement with GOL Linhas Aéreas Inteligentes S.A. (GOL). We assess indefinite-lived intangible assets for impairment annually or more frequently if events or circumstances indicate that the fair values of indefinite-lived intangible assets may be lower than their carrying values. Our annual assessment date is October 1.
Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment. If we determine that it is more likely than not that our indefinite-lived intangible assets may be impaired, we use a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any. Based upon our annual assessment, there were no material indefinite-lived intangible asset impairments in 2022. We had $1.9 billion and $1.8 billion of indefinite-lived intangible assets on our consolidated balance sheets as of December 31, 2022 and 2021, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(m) Revenue Recognition
Revenue
The following are the significant categories comprising our operating revenues (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Passenger revenue: | | | | | |
Passenger travel | $ | 41,425 | | | $ | 23,896 | | | $ | 13,456 | |
Loyalty revenue - travel (1) | 3,143 | | | 2,167 | | | 1,062 | |
Total passenger revenue | 44,568 | | | 26,063 | | | 14,518 | |
Cargo | 1,233 | | | 1,314 | | | 769 | |
Other: | | | | | |
Loyalty revenue - marketing services | 2,657 | | | 2,166 | | | 1,825 | |
Other revenue | 513 | | | 339 | | | 225 | |
Total other revenue | 3,170 | | | 2,505 | | | 2,050 | |
Total operating revenues | $ | 48,971 | | | $ | 29,882 | | | $ | 17,337 | |
(1)Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions, which were earned from travel or co-branded credit card and other partners. See “Loyalty Revenue” below for further discussion on these mileage credits.
The following is our total passenger revenue by geographic region (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Domestic | $ | 32,911 | | | $ | 21,453 | | | $ | 11,765 | |
Latin America | 6,150 | | | 3,506 | | | 1,852 | |
Atlantic | 5,070 | | | 965 | | | 654 | |
Pacific | 437 | | | 139 | | | 247 | |
Total passenger revenue | $ | 44,568 | | | $ | 26,063 | | | $ | 14,518 | |
We attribute passenger revenue by geographic region based upon the origin and destination of each flight segment.
Passenger Revenue
We recognize all revenues generated from transportation on American and our regional flights operated under the brand name American Eagle, including associated baggage fees and other inflight services, as passenger revenue when transportation is provided. Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on our consolidated balance sheets. The air traffic liability principally represents tickets sold for future travel on American and partner airlines.
The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. The estimate for tickets expected to expire unused is generally based on an analysis of our historical data. We have consistently applied this accounting method to estimate and recognize revenue from unused tickets at the date of travel. This estimate is periodically evaluated based on subsequent activity to validate its accuracy. Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed.
Various taxes and fees assessed on the sale of tickets to end customers are collected by us as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Loyalty Revenue
We currently operate the loyalty program, AAdvantage. This program awards mileage credits to passengers who fly on American, any oneworld airline or other partner airlines, or by using the services of other program participants, such as our co-branded credit cards, and certain hotels and car rental companies. Mileage credits can be redeemed for travel on American and other participating partner airlines, as well as other non-air travel awards such as hotels and rental cars. For mileage credits earned by AAdvantage loyalty program members, we apply the deferred revenue method.
Mileage credits earned through travel
For mileage credits earned through travel, we apply a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned. The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided. The estimated selling price of mileage credits is determined using an equivalent ticket value approach, which uses historical data, including award redemption patterns by geographic region and class of service, as well as similar fares as those used to settle award redemptions. The estimated selling price of mileage credits is adjusted for an estimate of mileage credits that will not be redeemed using a statistical model based on historical redemption patterns to develop an estimate of the likelihood of future redemption.
Mileage credits sold to co-branded credit cards and other partners
We sell mileage credits to participating airline partners and non-airline business partners, including our co-branded credit card partners, under contracts with remaining terms generally from one to seven years as of December 31, 2022. Consideration received from the sale of mileage credits is variable and payment terms typically are within 30 days subsequent to the month of mileage sale. Sales of mileage credits to non-airline business partners are comprised of two components, transportation and marketing. We allocate the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered.
Our most significant mileage credit partner agreements are our co-branded credit card agreements with Citi and Barclaycard US. We identified two revenue elements in these co-branded credit card agreements: the transportation component and the marketing component.
The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided.
The marketing component includes the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in these agreements, as well as advertising. We recognize the marketing component in other revenue in the period of the mileage credit sale following the sales-based royalty method.
For the portion of our outstanding mileage credits that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining mileage credits are redeemed. Our estimates use a statistical model based on historical redemption patterns to develop an estimate of the likelihood of future redemption.
Cargo Revenue
Cargo revenue is recognized when we provide the transportation.
Other Revenue
Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage credit sales to co-branded credit card and other partners and other marketing related payments. The accounting and recognition for the loyalty program marketing services are discussed above in “Loyalty Revenue.” The remaining amounts included within other revenue relate to airport clubs, other commission revenue, advertising and vacation-related services.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Contract Balances
Our significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on our consolidated balance sheets and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on our consolidated balance sheets.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (in millions) |
Loyalty program liability | $ | 9,145 | | | $ | 9,135 | |
Air traffic liability | 6,745 | | | 6,087 | |
Total | $ | 15,890 | | | $ | 15,222 | |
The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue). Changes in loyalty program liability are as follows (in millions):
| | | | | |
Balance at December 31, 2021 | $ | 9,135 | |
Deferral of revenue | 3,221 | |
Recognition of revenue (1) | (3,211) | |
Balance at December 31, 2022 (2) | $ | 9,145 | |
(1)Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of mileage credits that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as mileage credits that were issued during the period.
(2)Mileage credits can be redeemed at any time and generally do not expire as long as that AAdvantage member has any type of qualifying activity at least every 24 months or if the AAdvantage member is the primary holder of a co-branded credit card. As of December 31, 2022, our current loyalty program liability was $3.2 billion and represents our current estimate of revenue expected to be recognized in the next 12 months based on historical as well as projected trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.
The air traffic liability principally represents tickets sold for future travel on American and partner airlines. The balance in our air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is generally one year. Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months. In response to the COVID-19 pandemic, we extended the contract duration for certain tickets to September 30, 2022, principally those tickets which were issued in 2020 and 2021. Additionally, we extended the contract duration to December 31, 2022 for tickets to certain international destinations. For 2022, $4.8 billion of revenue was recognized in passenger revenue that was included in our air traffic liability at December 31, 2021. Tickets issued in 2022 and thereafter are no longer subject to change fees which provides more flexibility for customers to change travel plans. Given this new flexibility offered to our customers, our estimate of revenue that will be recognized from the air traffic liability for future flown or unused tickets may be subject to variability and differ from historical experience.
(n) Maintenance, Materials and Repairs
Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under certain flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists.
(o) Selling Expenses
Selling expenses include credit card fees, commissions, third party distribution channel fees and advertising. Selling expenses associated with passenger revenue are expensed when the transportation or service is provided. Advertising costs are expensed as incurred. Advertising expense was $105 million for each of the years ended December 31, 2022 and 2021 and $57 million for the year ended December 31, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(p) Share-based Compensation
We account for our share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award. The majority of our stock awards are time vested restricted stock units, and the fair value of such awards is based on the market price of the underlying shares of AAG common stock on the date of grant. See Note 14 for further discussion of share-based compensation.
(q) Foreign Currency Gains and Losses
Foreign currency gains and losses are recorded as part of other income, net within total nonoperating expense, net on our consolidated statements of operations. For the years ended December 31, 2022, 2021 and 2020, respectively, foreign currency losses were $38 million, $4 million and $24 million.
(r) Other Operating Expenses
Other operating expenses includes costs associated with aircraft food and catering, crew travel, ground and cargo handling, passenger accommodation, international navigation fees, aircraft cleaning and certain general and administrative expenses.
(s) Regional Expenses
Our regional carriers provide scheduled air transportation under the brand name “American Eagle.” The American Eagle carriers include our wholly-owned regional carriers as well as third-party regional carriers. Our regional carrier arrangements are in the form of capacity purchase agreements. Expenses associated with American Eagle operations are classified as regional expenses on the consolidated statements of operations.
Regional expenses for the years ended December 31, 2022, 2021, and 2020 include $321 million, $316 million and $325 million of depreciation and amortization, respectively, and $5 million, $6 million and $13 million of aircraft rent, respectively.
In 2022, 2021, and 2020, we recognized $592 million, $495 million and $438 million, respectively, of expense under our capacity purchase agreement with Republic Airways Inc. (Republic). We hold a 25% equity interest in Republic Airways Holdings Inc. (Republic Holdings), the parent company of Republic.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
2. Special Items, Net
Special items, net on our consolidated statements of operations consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Fleet impairment (1) | $ | 149 | | | $ | — | | | $ | 1,484 | |
Litigation reserve adjustments | 37 | | | (19) | | | — | |
PSP Financial Assistance (2) | — | | | (4,162) | | | (3,710) | |
Severance expenses (3) | — | | | 168 | | | 1,408 | |
Mark-to-market adjustments on bankruptcy obligations, net | — | | | (3) | | | (49) | |
Labor contract expenses (4) | — | | | — | | | 228 | |
Other operating special items, net | 7 | | | 10 | | | (18) | |
Mainline operating special items, net | 193 | | | (4,006) | | | (657) | |
| | | | | |
PSP Financial Assistance (2) | — | | | (539) | | | (444) | |
Regional pilot retention program (5) | — | | | 61 | | | — | |
Fleet impairment (1) | — | | | 27 | | | 117 | |
Severance expenses (3) | — | | | 2 | | | 18 | |
Other operating special items, net | 5 | | | — | | | — | |
Regional operating special items, net | 5 | | | (449) | | | (309) | |
Operating special items, net | 198 | | | (4,455) | | | (966) | |
| | | | | |
Mark-to-market adjustments on equity and other investments, net (6) | 71 | | | 31 | | | 135 | |
Debt refinancing, extinguishment and other, net | 3 | | | 29 | | | 35 | |
Nonoperating special items, net | 74 | | | 60 | | | 170 | |
| | | | | |
Income tax special items, net | (9) | | | — | | | — | |
(1)Fleet impairment for 2022 included a non-cash impairment charge to write down the carrying value of our retired Airbus A330 fleet to the estimated fair value due to the market conditions for certain used aircraft.
Fleet impairment for 2021 and 2020 included charges resulting from the retirement of certain aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic. In 2021, we retired our remaining Embraer 140 fleet resulting in a non-cash write down of these regional aircraft. In 2020, we retired our entire Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain Embraer 140 and Bombardier CRJ200 aircraft resulting in a $1.5 billion non-cash write down of mainline and regional aircraft and associated spare parts and $109 million in cash charges primarily for impairment of ROU assets and lease return costs.
(2)The PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the payroll support programs established by the U.S. Government. See Note 1(b) for further information.
(3)Severance expenses include salary and medical costs primarily associated with certain team members who opted into voluntary early retirement programs offered as a result of reductions to our operation due to the COVID-19 pandemic.
(4)Labor contract expenses primarily related to one-time charges due to the ratification of a new contract with the Transport Workers Union and International Association of Machinists & Aerospace Workers (TWU-IAM Association) for our maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.
(5)Our regional pilot retention program provides for, among other things, a cash retention bonus paid in the fourth quarter of 2021 to eligible captains at our wholly-owned regional carriers included on the pilot seniority list as of September 1, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(6)Mark-to-market adjustments on equity and other investments, net principally included net unrealized gains and losses associated with certain equity investments and certain other investments. See Note 8 for further information related to our equity investments.
3. Earnings (Loss) Per Common Share
The following table provides the computation of basic and diluted earnings (loss) per common share (EPS) (in millions, except share and per share amounts):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Basic EPS: | | | | | |
Net income (loss) | $ | 127 | | | $ | (1,993) | | | $ | (8,885) | |
Weighted average common shares outstanding (in thousands) | 650,345 | | | 644,015 | | | 483,888 | |
Basic EPS | $ | 0.20 | | | $ | (3.09) | | | $ | (18.36) | |
| | | | | |
Diluted EPS: | | | | | |
| | | | | |
| | | | | |
Net income (loss) for purposes of computing diluted EPS | $ | 127 | | | $ | (1,993) | | | $ | (8,885) | |
Share computation for diluted EPS (in thousands): | | | | | |
Basic weighted average common shares outstanding | 650,345 | | | 644,015 | | | 483,888 | |
Dilutive effect of restricted stock unit awards | 1,579 | | | — | | | — | |
Dilutive effect of certain PSP Warrants and Treasury Loan Warrants | 3,198 | | | — | | | — | |
| | | | | |
Diluted weighted average common shares outstanding | 655,122 | | | 644,015 | | | 483,888 | |
Diluted EPS | $ | 0.19 | | | $ | (3.09) | | | $ | (18.36) | |
The following were excluded from the calculation of diluted EPS because inclusion of such shares would be antidilutive (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
6.50% convertible senior notes | 61,728 | | | 61,728 | | | 31,882 | |
Restricted stock unit awards | 3,987 | | | 3,420 | | | 4,584 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
In addition, certain shares underlying our PSP Warrants and Treasury Loan Warrants for the years ended December 31, 2022, 2021 and 2020, were excluded from the calculation of diluted EPS because inclusion of such shares would be antidilutive.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
4. Debt
Long-term debt included on our consolidated balance sheets consisted of (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Secured | | | |
2013 Term Loan Facility, variable interest rate of 6.14%, installments through 2025 (a) | $ | 1,752 | | | $ | 1,770 | |
2014 Term Loan Facility, variable interest rate of 6.14%, installments through 2027 (a) | 1,196 | | | 1,208 | |
December 2016 Term Loan Facility (a) | — | | | 1,188 | |
11.75% senior secured notes, interest only payments until due in July 2025 (b) | 2,500 | | | 2,500 | |
10.75% senior secured IP notes, interest only payments until due in February 2026 (b) | 1,000 | | | 1,000 | |
10.75% senior secured LGA/DCA notes, interest only payments until due in February 2026 (b) | 200 | | | 200 | |
5.50% senior secured notes, installments beginning in July 2023 until due in April 2026 (c) | 3,500 | | | 3,500 | |
5.75% senior secured notes, installments beginning in July 2026 until due in April 2029 (c) | 3,000 | | | 3,000 | |
AAdvantage Term Loan Facility, variable interest rate of 8.99%, installments beginning in July 2023 through April 2028 (c) | 3,500 | | | 3,500 | |
Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 2.88% to 7.13%, averaging 3.74%, maturing from 2023 to 2034 (d) | 9,175 | | | 9,357 | |
Equipment loans and other notes payable, fixed and variable interest rates ranging from 3.33% to 8.01%, averaging 5.95%, maturing from 2023 to 2034 (e) | 3,170 | | | 3,433 | |
Special facility revenue bonds, fixed interest rates ranging from 2.25% to 5.38%, maturing from 2026 to 2036 (f) | 1,050 | | | 1,129 | |
| 30,043 | | | 31,785 | |
Unsecured | | | |
PSP1 Promissory Note, interest only payments until due in April 2030 (g) | 1,757 | | | 1,765 | |
PSP2 Promissory Note, interest only payments until due in January 2031 (g) | 1,030 | | | 1,035 | |
PSP3 Promissory Note, interest only payments until due in April 2031 (g) | 959 | | | 946 | |
6.50% convertible senior notes, interest only payments until due in July 2025 (h) | 1,000 | | | 1,000 | |
3.75% senior notes, interest only payments until due in March 2025 (i) | 500 | | | 500 | |
5.000% senior notes | — | | | 750 | |
| 5,246 | | | 5,996 | |
Total long-term debt | 35,289 | | | 37,781 | |
Less: Total unamortized debt discount, premium and issuance costs | 386 | | | 458 | |
Less: Current maturities | 3,059 | | | 2,315 | |
Long-term debt, net of current maturities | $ | 31,844 | | | $ | 35,008 | |
As of December 31, 2022, the maximum availability under our revolving credit and other facilities is as follows (in millions):
| | | | | |
2013 Revolving Facility | $ | 736 | |
2014 Revolving Facility | 1,631 | |
April 2016 Revolving Facility | 446 | |
Short-term Revolving and Other Facilities | 220 | |
Total | $ | 3,033 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
As of December 31, 2022, American had an undrawn $150 million short-term revolving credit facility which expired in January 2023. American also had $70 million of available borrowing base under cargo receivables facility that was set to expire in December 2022, but which has been extended through December 2023.
Secured financings, including revolving credit and other facilities, are collateralized by assets, consisting primarily of aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots, certain receivables, certain intellectual property and certain loyalty program assets.
At December 31, 2022, the maturities of long-term debt are as follows (in millions):
| | | | | |
2023 | $ | 3,059 | |
2024 | 3,535 | |
2025 | 9,317 | |
2026 | 4,480 | |
2027 | 4,515 | |
2028 and thereafter | 10,383 | |
Total | $ | 35,289 | |
(a) 2013 and 2014 Credit Facilities, April 2016 Revolving Facility and December 2016 Credit Facilities
2013 Credit Facilities
In November 2019, American and AAG entered into the Sixth Amendment to Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of May 21, 2015 (as previously amended, the 2013 Credit Agreement; the revolving credit facility established thereunder, the 2013 Revolving Facility; the term loan facility established thereunder, the 2013 Term Loan Facility; and the 2013 Revolving Facility together with the 2013 Term Loan Facility, the 2013 Credit Facilities), which reduced the total aggregate commitments under the 2013 Revolving Facility to $750 million from $1.0 billion. In addition, certain lenders party to the 2013 Credit Agreement extended the maturity date of a substantial portion of their commitments under the 2013 Revolving Facility to October 2024 from October 2023. As of December 31, 2022, there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility.
2014 Credit Facilities
In November 2019, American and AAG entered into the Seventh Amendment to Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of April 20, 2015 (as previously amended, the 2014 Credit Agreement; the revolving credit facility established thereunder, the 2014 Revolving Facility; the term loan facility established thereunder, the 2014 Term Loan Facility; and the 2014 Revolving Facility together with the 2014 Term Loan Facility, the 2014 Credit Facilities), which increased the total aggregate commitments under the 2014 Revolving Facility to $1.6 billion from $1.5 billion. In addition, certain lenders party to the 2014 Credit Agreement extended the maturity date of a substantial portion of their commitments under the 2014 Revolving Facility to October 2024 from October 2023.
In January 2020, American and AAG entered into the Eighth Amendment to the 2014 Credit Agreement, pursuant to which American refinanced the 2014 Term Loan Facility, increasing the total aggregate principal amount outstanding to $1.2 billion, reducing the LIBOR margin from 2.00% to 1.75%, with a LIBOR floor of 0%, and reducing the base rate margin from 1.00% to 0.75%. In addition, the maturity date for the 2014 Term Loan Facility was extended to January 2027 from October 2021. As of December 31, 2022, there were no borrowings or letters of credit outstanding under the 2014 Revolving Facility.
April 2016 Revolving Facility
In November 2019, American and AAG entered into the Fifth Amendment to Credit and Guaranty Agreement, amending the Credit and Guaranty Agreement dated as of April 29, 2016 (as previously amended, the April 2016 Credit Agreement; the revolving credit facility established thereunder, the April 2016 Revolving Facility), which increased the total aggregate commitments under the April 2016 Revolving Facility to $450 million from $300 million. In addition, certain lenders party to the April 2016 Credit Agreement extended the maturity date of a substantial portion of their commitments under the April 2016 Revolving Facility to October 2024 from October 2023. As of December 31, 2022, there were no borrowings outstanding under the April 2016 Revolving Facility.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
December 2016 Credit Facilities
In December 2016, American and AAG entered into the Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016 (as amended, the December 2016 Credit Agreement; the term loan facility established thereunder, the December 2016 Term Loan Facility; and together with the revolving credit facility contemplated but never established thereunder, the December 2016 Credit Facilities). In December 2022, American repaid in full the $1.2 billion aggregate principal amount of outstanding term loans under the December 2016 Term Loan Facility which was due to mature in December 2023 and terminated the December 2016 Credit Facilities.
Certain details of our 2013 and 2014 Credit Facilities (collectively referred to as the Credit Facilities) and April 2016 Revolving Facility are shown in the table below as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2013 Credit Facilities | | 2014 Credit Facilities | | | | |
| 2013 Term Loan | | 2013 Revolving Facility | | 2014 Term Loan | | 2014 Revolving Facility | | April 2016 Revolving Facility | | |
Aggregate principal issued or credit facility availability (in millions) | $1,919 | | $736 | | $1,280 | | $1,631 | | $446 | | |
Principal outstanding or drawn (in millions) | $1,752 | | $— | | $1,196 | | $— | | $— | | |
Maturity date | June 2025 | | October 2024 | | January 2027 | | October 2024 | | October 2024 | | |
LIBOR margin | 1.75% | | 2.00% | | 1.75% | | 2.00% | | 2.00% | | |
The term loans under each of the Credit Facilities are repayable in annual installments in an amount equal to 1.00% of the aggregate principal amount issued, with any unpaid balance due on the respective maturity dates. Voluntary prepayments may be made by American at any time.
The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility provide that American may from time to time borrow, repay and reborrow loans thereunder. The 2013 Revolving Facility and 2014 Revolving Facility have the ability to issue letters of credit thereunder in an aggregate amount outstanding at any time up to $100 million and $200 million, respectively. The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility are each subject to an undrawn annual fee of 0.63%.
Subject to certain limitations and exceptions, the Credit Facilities and April 2016 Revolving Facility are secured by collateral, including certain spare parts, slots, route authorities, simulators and leasehold rights. American has the ability to make future modifications to the collateral pledged, subject to certain restrictions. American’s obligations under the Credit Facilities and April 2016 Revolving Facility are guaranteed by AAG. The Credit Facilities and April 2016 Revolving Facility contain events of default customary for similar financings, including cross default and cross-acceleration to other material indebtedness.
(b) Senior Secured Notes
11.75% Senior Secured Notes
In June 2020, American issued $2.5 billion aggregate principal amount of 11.75% senior secured notes due 2025 (the 11.75% Senior Secured Notes) at a price equal to 99% of their aggregate principal amount. The 11.75% Senior Secured Notes bear interest at a rate of 11.75% per annum (subject to increase if the collateral coverage ratio described below is not met). Interest on the 11.75% Senior Secured Notes is payable semiannually in arrears on January 15 and July 15 of each year, which began on January 15, 2021. The 11.75% Senior Secured Notes will mature on July 15, 2025. The obligations of American under the 11.75% Senior Secured Notes are fully and unconditionally guaranteed on a senior unsecured basis by AAG.
The 11.75% Senior Secured Notes are American’s senior secured obligations. Subject to certain limitations and exceptions, the 11.75% Senior Secured Notes are secured on a first-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in Australia, Canada, the Caribbean, Central America, China, Hong Kong, Japan, Mexico, South Korea, and Switzerland (collectively, the First Lien 11.75% Senior Secured Notes Collateral). American’s obligations with respect to the 11.75% Senior Secured Notes are also secured on a second-lien basis by security interests
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in the European Union and the United Kingdom (collectively, the Second Lien 11.75% Senior Secured Notes Collateral and together with the First Lien 11.75% Senior Secured Notes Collateral, the 11.75% Senior Secured Notes Collateral). The Second Lien 11.75% Senior Secured Notes Collateral also secures the 2014 Credit Facilities on a first-lien basis.
American may redeem the 11.75% Senior Secured Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the 11.75% Senior Secured Notes being redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any, to (but not including) the redemption date.
10.75% Senior Secured Notes
On September 25, 2020 (the 10.75% Senior Secured Notes Closing Date), American issued $1.0 billion in initial principal amount of senior secured IP notes (the IP Notes) and $200 million in initial principal amount of senior secured LGA/DCA notes (the LGA/DCA Notes and together with the IP Notes, the 10.75% Senior Secured Notes). The obligations of American under the 10.75% Senior Secured Notes are fully and unconditionally guaranteed (the 10.75% Senior Secured Notes Guarantees) on a senior unsecured basis by AAG. The 10.75% Senior Secured Notes bear interest at a rate of 10.75% per annum in cash. Interest on the 10.75% Senior Secured Notes is payable semiannually in arrears on September 1 and March 1 of each year, which began on March 1, 2021. The 10.75% Senior Secured Notes will mature on February 15, 2026.
The IP Notes are secured by a first lien security interest on certain intellectual property of American, including the “American Airlines” trademark and the “aa.com” domain name in the United States and certain foreign jurisdictions (the IP Collateral), and a second lien on certain slots related to American’s operations at New York LaGuardia and Ronald Reagan Washington National airports and certain other assets (the LGA/DCA Collateral and together with the IP Collateral, the 10.75% Senior Secured Notes Collateral). Subject to certain conditions, American will be permitted to incur up to $4.0 billion of additional pari passu debt and unlimited second lien debt secured by the IP Collateral securing the IP Notes. The LGA/DCA Notes are secured by a first lien security interest in the LGA/DCA Collateral.
On or prior to the fourth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at a redemption price equal to 100% of the principal amount of the 10.75% Senior Secured Notes redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any. After the fourth anniversary of the 10.75% Senior Secured Notes Closing Date and on or prior to the fifth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at a redemption price equal to 105.375% of the principal amount of the 10.75% Senior Secured Notes redeemed, together with accrued and unpaid interest thereon, if any. After the fifth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at par, together with accrued and unpaid interest thereon, if any.
(c) AAdvantage Financing
On March 24, 2021 (the AAdvantage Financing Closing Date), American and AAdvantage Loyalty IP Ltd., a Cayman Islands exempted company incorporated with limited liability and an indirect wholly-owned subsidiary of American (Loyalty Issuer and, together with American, the AAdvantage Issuers), completed the offering of $3.5 billion aggregate principal amount of 5.50% Senior Secured Notes due 2026 (the 2026 Notes) and $3.0 billion aggregate principal amount of 5.75% Senior Secured Notes due 2029 (the 2029 Notes, and together with the 2026 Notes, the AAdvantage Notes). The AAdvantage Notes are fully and unconditionally guaranteed on a senior unsecured basis by the SPV Guarantors and AAG.
Concurrent with the issuance of the AAdvantage Notes, the AAdvantage Issuers, as co-borrowers, entered into a term loan credit and guaranty agreement, dated March 24, 2021, providing for a $3.5 billion term loan facility (the AAdvantage Term Loan Facility and collectively with the AAdvantage Notes, the AAdvantage Financing) and pursuant to which the full $3.5 billion of term loans (the AAdvantage Loans) were drawn on the AAdvantage Financing Closing Date. The AAdvantage Loans are fully and unconditionally guaranteed (together with the AAdvantage Note Guarantees, the AAdvantage Guarantees) by the SPV Guarantors and AAG.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Subject to certain permitted liens and other exceptions, the AAdvantage Notes, AAdvantage Loans and AAdvantage Guarantees provided by the SPV Guarantors are secured by a first-priority security interest in, and pledge of, various agreements with respect to the AAdvantage program (the AAdvantage Agreements) (including all payments thereunder) and certain IP Licenses, certain deposit accounts that will receive cash under the AAdvantage Agreements, certain reserve accounts, the equity of each of Loyalty Issuer and the SPV Guarantors and substantially all other assets of Loyalty Issuer and the SPV Guarantors including American’s rights to certain data and other intellectual property used in the AAdvantage program (subject to certain exceptions) (collectively, the AAdvantage Collateral).
Payment Terms of the AAdvantage Notes and AAdvantage Loans under the AAdvantage Term Loan Facility
Interest on the AAdvantage Notes is payable in cash, quarterly in arrears on the 20th day of each January, April, July and October (each, an AAdvantage Payment Date), which began on July 20, 2021. The 2026 Notes will mature on April 20, 2026, and the 2029 Notes will mature on April 20, 2029. The outstanding principal on the 2026 Notes will be repaid in quarterly installments of $292 million on each AAdvantage Payment Date, beginning on July 20, 2023. The outstanding principal on the 2029 Notes will be repaid in quarterly installments of $250 million on each AAdvantage Payment Date, beginning on July 20, 2026.
The AAdvantage Issuers may redeem the AAdvantage Notes, at their option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the AAdvantage Notes redeemed plus a “make-whole” premium, together with accrued and unpaid interest to the date of redemption.
The scheduled maturity date of the AAdvantage Loans under the AAdvantage Term Loan Facility is April 20, 2028. The AAdvantage Loans bear interest at a variable rate equal to LIBOR (but not less than 0.75% per annum), plus a margin of 4.75% per annum, payable on each AAdvantage Payment Date. The outstanding principal on the AAdvantage Loans will be repaid in quarterly installments of $175 million, on each AAdvantage Payment Date beginning with the AAdvantage Payment Date in July 2023. These amortization payments (as well as those for the AAdvantage Notes) will be subject to the occurrence of certain early amortization events, including the failure to satisfy a minimum debt service coverage ratio at specified determination dates.
Prepayment of some or all of the AAdvantage Loans outstanding under the AAdvantage Term Loan Facility is permitted, although payment of an applicable premium is required as specified in the AAdvantage Term Loan Facility.
The AAdvantage Indenture and the AAdvantage Term Loan Facility contain mandatory prepayment provisions triggered upon (i) the issuance or incurrence by Loyalty Issuer or the SPV Guarantors of certain indebtedness or (ii) the receipt by American or its subsidiaries of net proceeds from pre-paid frequent flyer (i.e., AAdvantage) mile sales exceeding $505 million. Each of these prepayments would also require payment of an applicable premium. Certain other events, including the occurrence of a change of control with respect to AAG and certain AAdvantage Collateral sales exceeding a specified threshold, will also trigger mandatory repurchase or mandatory prepayment provisions under the AAdvantage Indenture and the AAdvantage Term Loan Facility, respectively.
(d) EETCs
2021-1 Aircraft EETCs
In November 2021, American created two pass-through trusts which issued $960 million aggregate face amount of Series 2021-1 Class A and Class B EETCs (the 2021-1 Aircraft EETCs) in connection with the financing of 26 aircraft previously delivered or originally scheduled to be delivered to American through September 2022 (the 2021-1 Aircraft). In 2021, $94 million of the proceeds had been used to purchase equipment notes issued by American in connection with the financing of five aircraft under the 2021-1 Aircraft EETCs, all of which was used to repay existing indebtedness. During 2022, $866 million of proceeds had been used to purchase equipment notes issued by American in connection with the financing of 21 aircraft under the 2021-1 Aircraft EETCs. As of December 31, 2022, there are no remaining proceeds held in escrow, and all proceeds have been used to purchase equipment notes issued by American. Interest and principal payments on equipment notes issued in connection with the 2021-1 Aircraft EETCs are payable semi-annually in January and July of each year. Interest payments began in July 2022 and principal payments began in January 2023.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Certain information regarding the 2021-1 Aircraft EETC equipment notes, as of December 31, 2022, is set forth in the table below:
| | | | | | | | | | | |
| 2021-1 Aircraft EETCs |
| Series A | | Series B |
Aggregate principal issued | $758 million | | $202 million |
Fixed interest rate per annum | 2.875% | | 3.95% |
Maturity date | July 2034 | | July 2030 |
(e) Equipment Loans and Other Notes Payable Issued in 2022
In 2022, American entered into agreements under which it borrowed $205 million in connection with the financing of certain aircraft. Debt incurred under these agreements mature in 2034 and bear interest at variable rates (comprised of the Secured Overnight Financing Rate (SOFR) plus an applicable margin) averaging 6.77% as of December 31, 2022.
(f) Special Facility Revenue Bonds
In January 2020, American and British Airways announced the start of construction projects to upgrade New York's JFK Terminal 8. The construction project is expected to be fully completed in early 2023 and is estimated to cost $439 million, of which $298 million was funded with proceeds of the special facility revenue bonds issued by the New York Transportation Development Corporation (NYTDC) on behalf of American in June 2020 (the 2020 JFK Bonds) and approximately $84 million of which was funded with proceeds of the approximately $150 million of special facility revenue bonds NYTDC issued in June 2021 (the 2021 JFK Bonds).
American is required to pay debt service on the 2021 JFK Bonds through payments under a loan agreement with NYTDC (as amended), and American and AAG guarantee the 2021 JFK Bonds. American continues to pay debt service on the outstanding bonds issued by NYTDC on behalf of American in 2016 and 2020 (the 2016 and 2020 JFK Bonds) and American and AAG continue to guarantee the 2016 and 2020 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a leasehold mortgage on American’s lease of Terminal 8 and related property from the Port Authority of New York and New Jersey.
The 2021 JFK Bonds, in aggregate, were priced at par value. The gross proceeds from the issuance of the 2021 JFK Bonds were approximately $150 million. Of this amount, $4 million was used to fund the costs of issuance of the 2021 JFK Bonds, $62 million was used to fund the redemption of the 2016 and 2020 JFK Bonds due August 2021, with the remaining amount of proceeds received held in restricted cash and short-term investments on the consolidated balance sheet and to be used to finance a portion of the cost of the renovation and expansion of Terminal 8. The 2021 JFK Bonds are comprised of term bonds, $70 million of which bear interest at 2.25% per annum and mature on August 1, 2026, and $80 million of which bear interest at 3.00% per annum and mature on August 1, 2031. As of December 31, 2022, $72 million of proceeds funded by the issuance of the 2020 and 2021 JFK Bonds are included in restricted cash and short-term investments on the accompanying consolidated balance sheet.
(g) PSP Promissory Notes
As partial compensation to the U.S. Government for the provision of financial assistance under the PSP Agreements, AAG issued promissory notes to Treasury (PSP1 Promissory Note, PSP2 Promissory Note and PSP3 Promissory Note, collectively the PSP Promissory Notes), in the aggregate principal sum of $3.7 billion which provides for the guarantee of our obligations under the PSP Promissory Notes by the Subsidiaries.
The PSP Promissory Notes bear interest on the outstanding principal amount at a rate equal to 1.00% per annum until the fifth anniversary of the applicable PSP closing date and 2.00% plus an interest rate based on SOFR per annum or other benchmark replacement rate consistent with customary market conventions (but not to be less than 0.00%) thereafter until the tenth anniversary of the applicable PSP closing date, and interest accrued thereon will be payable in arrears on the last business day of March and September of each year. The aggregate principal amount outstanding under the PSP Promissory Notes, together with all accrued and unpaid interest thereon and all other amounts payable under the PSP Promissory Notes, will be due and payable on the maturity date.
The PSP Promissory Notes are our senior unsecured obligation and each guarantee of the PSP Promissory Notes is the senior unsecured obligation of each of the Subsidiaries, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
We may, at any time and from time to time, voluntarily prepay amounts outstanding under the PSP Promissory Notes, in whole or in part, without penalty or premium. Within 30 days of the occurrence of certain change of control triggering events, we are required to prepay the aggregate outstanding principal amount of the PSP Promissory Notes at such time, together with any accrued interest or other amounts owing under the PSP Promissory Notes at such time.
(h) 6.50% Convertible Senior Notes
In June 2020, AAG completed the public offering of $1.0 billion aggregate principal amount of AAG’s 6.50% convertible senior notes due 2025 (the Convertible Notes). The Convertible Notes are fully and unconditionally guaranteed by American on a senior unsecured basis (the Convertible Notes Guarantee). The net proceeds from the Convertible Notes were approximately $970 million, after deducting the underwriters’ discounts and commissions and our estimated offering expenses.
The Convertible Notes bear interest at a rate of 6.50% per annum. Interest on the Convertible Notes is payable semiannually in arrears on January 1 and July 1 of each year, which began on January 1, 2021. The Convertible Notes will mature on July 1, 2025, unless earlier converted, redeemed or repurchased by us.
Upon conversion, AAG will pay or deliver, as the case may be, cash, shares of AAG common stock or a combination of cash and shares of AAG common stock, at AAG’s election. The initial conversion rate is 61.7284 shares of AAG common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $16.20 per share of AAG common stock). The conversion rate is subject to adjustment in some events as described in the Convertible Notes Indenture.
Holders may convert their Convertible Notes at their option only in the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on September 30, 2020, if the last reported sale price per share of AAG common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the measurement period) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of AAG common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on AAG common stock; (4) if AAG calls such Convertible Notes for redemption; and (5) at any time from, and including, April 1, 2025 until the close of business on the scheduled trading day immediately before the maturity date of the Convertible Notes.
In addition, following certain corporate events that occur prior to the maturity date or upon AAG’s issuance of a notice of redemption, AAG will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or during the related redemption period in certain circumstances by a specified number of shares of AAG common stock as described in the Convertible Notes Indenture.
AAG will not have the right to redeem the Convertible Notes prior to July 5, 2023. On or after July 5, 2023 and on or before the 20th scheduled trading day immediately before the maturity date, AAG may redeem the Convertible Notes, in whole or in part, if the last reported sale price of AAG common stock has been at least 130% of the conversion price then in effect on (1) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately before the date AAG sends the related redemption notice; and (2) the trading day immediately before the date AAG sends such notice. In the case of any optional redemption, AAG will redeem the Convertible Notes at a redemption price equal to 100% of the principal amount of such Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The following table provides information relating to the Convertible Notes as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Principal amount | $ | 1,000 | | | $ | 1,000 | |
Unamortized debt discount | (16) | | | (22) | |
Net carrying amount | $ | 984 | | | $ | 978 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
The effective interest rate for the Convertible Notes was 7% for each of the years ended December 31, 2022 and 2021, and 20% for the year ended December 31, 2020. As of January 1, 2021, we early adopted ASU 2020-06 related to convertible instruments. Accordingly, our unamortized debt discount as of January 1, 2021 was reduced by $389 million, increasing the liability and decreasing the effective interest rate on the Convertible Notes from approximately 20% at December 31, 2020 to approximately 7% at December 31, 2021. Interest recognized for the Convertible Notes is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Contractual coupon interest | $ | 65 | | | $ | 65 | | | $ | 33 | |
Non-cash amortization of debt discount | 6 | | | 5 | | | 28 | |
Total interest expense | $ | 71 | | | $ | 70 | | | $ | 61 | |
At December 31, 2022, the if-converted value of the Convertible Notes did not exceed the principal amount. The last reported sale price per share of our common stock (as defined in the Convertible Notes Indenture) did not exceed 130% of the conversion price of the Convertible Notes for at least 20 of the 30 consecutive trading days ending on December 31, 2022. Accordingly, pursuant to the terms of the Convertible Notes Indenture, the holders of the Convertible Notes cannot convert at their option at any time during the quarter ending March 31, 2023. Each $1,000 principal amount of Convertible Notes is convertible at a rate of 61.7284 shares of our common stock, subject to adjustment as provided in the Convertible Notes Indenture. We may settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.
(i) Unsecured Senior Notes
3.75% Senior Notes
In February 2020, AAG issued $500 million aggregate principal amount of 3.75% senior notes due 2025 (the 3.75% Senior Notes). The 3.75% Senior Notes bear interest at a rate of 3.75% per annum, payable semiannually in arrears in March and September of each year, which began in September 2020. The 3.75% Senior Notes mature in March 2025.
The 3.75% Senior Notes are senior unsecured obligations of AAG. These Senior Notes are fully and unconditionally guaranteed by American. The indentures for these Senior Notes contain covenants and events of default generally customary for similar financings.
Other Financing Activities
During the year ended December 31, 2022, we repurchased $349 million of unsecured notes in the open market.
Guarantees
As of December 31, 2022, AAG had issued guarantees covering approximately $18.3 billion of American’s secured debt (and interest thereon), including the Credit Facilities, the AAdvantage Financing, certain EETC financings and $1.1 billion of American’s special facility revenue bonds (and interest thereon).
Certain Covenants
Our debt agreements contain customary terms and conditions as well as various affirmative, negative and financial covenants that, among other things, may restrict the ability of us and our subsidiaries to incur additional indebtedness, pay dividends or repurchase stock. Our debt agreements also contain customary change of control provisions, which may require us to repay or redeem such indebtedness upon certain events constituting a change of control under the relevant agreement, in certain cases at a premium. Certain of our debt financing agreements (including our secured notes, term loans, revolving credit facilities and spare engine EETCs) contain loan to value (LTV), collateral coverage or peak debt service coverage ratio covenants and certain agreements require us to appraise the related collateral annually or semiannually. Pursuant to such agreements, if the applicable LTV, collateral coverage or peak debt service coverage ratio exceeds or falls below a specified threshold, as the case may be, we will be required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash or investment securities), withhold additional cash in certain accounts, or pay down such financing, in whole or in part, or the interest rate for the relevant financing will be increased. Additionally, a significant portion of our debt financing agreements contain covenants requiring us to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
revolving credit facilities, and our AAdvantage Financing contains a peak debt service coverage ratio, pursuant to which failure to comply with a certain threshold may result in early repayment, in whole or in part, of the AAdvantage Financing.
Specifically, we are required to meet certain collateral coverage tests for our Credit Facilities, April 2016 Revolving Facility, 10.75% Senior Secured Notes and 11.75% Senior Secured Notes, as described below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2013 Credit Facilities | | 2014 Credit Facilities | | April 2016 Revolving Facility | | | | 10.75% Senior Secured Notes | | 11.75% Senior Secured Notes |
Frequency of Appraisals of Appraised Collateral | Annual | | Annual | | Annual | | | | Annual | | Semi-Annual |
LTV Requirement | 1.6x Collateral valuation to amount of debt outstanding (62.5% LTV) |
LTV as of Last Measurement Date | 34.4% | | 17.8% | | Not Applicable | | | | 7.2% | | 32.5% |
Collateral Description | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate all services between the U.S. and South America | | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S. and European Union (including London Heathrow) | | Generally, certain spare parts | | | | Generally, certain DCA slots, certain LGA slots, certain simulators and certain leasehold rights and, in the case of the IP Notes, certain intellectual property of American | | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S. and the Caribbean, Central America and various other countries |
At December 31, 2022, we were in compliance with the applicable collateral coverage tests as of the most recent measurement dates.
5. Leases
We lease certain aircraft and engines, including aircraft under capacity purchase agreements. As of December 31, 2022, we operated 722 leased aircraft, with remaining terms ranging from less than one year to 11 years.
At each airport where we conduct flight operations, we have agreements, generally with a governmental unit or authority, for the use of passenger, operations and baggage handling space as well as runways and taxiways. These agreements, particularly in the U.S., often contain provisions for periodic adjustments to rates and charges applicable under such agreements. These rates and charges also vary with our level of operations and the operations of the airport. Because of the variable nature of these rates, these leases are not recorded on our consolidated balance sheets as a ROU asset or a lease liability. Additionally, at our hub locations and in certain other cities we serve, we lease administrative offices, catering, cargo, training, maintenance and other facilities.
The components of lease expense were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Operating lease cost | $ | 2,007 | | | $ | 2,012 | | | $ | 1,957 | |
Finance lease cost: | | | | | |
Amortization of assets | 143 | | | 107 | | | 92 | |
Interest on lease liabilities | 47 | | | 44 | | | 38 | |
Variable lease cost | 2,580 | | | 2,471 | | | 1,801 | |
Total net lease cost | $ | 4,777 | | | $ | 4,634 | | | $ | 3,888 | |
Included in the table above is $242 million, $190 million and $172 million of operating lease cost under our capacity purchase agreement with Republic for the years ended December 31, 2022, 2021 and 2020, respectively. We hold a 25% equity interest in Republic Holdings, the parent company of Republic.
Additionally, not included in the table above, we recognized $109 million in cash special charges in 2020 related to the impairment of ROU assets and lease return costs resulting from our decision to retire certain leased aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Operating leases: | | | |
Operating lease ROU assets | $ | 8,094 | | | $ | 7,850 | |
| | | |
Current operating lease liabilities | $ | 1,465 | | | $ | 1,507 | |
Noncurrent operating lease liabilities | 6,559 | | | 6,610 | |
Total operating lease liabilities | $ | 8,024 | | | $ | 8,117 | |
| | | |
Finance leases: | | | |
Property and equipment, at cost | $ | 1,364 | | | $ | 1,201 | |
Accumulated amortization | (779) | | | (653) | |
Property and equipment, net | $ | 585 | | | $ | 548 | |
| | | |
Current finance lease liabilities | $ | 216 | | | $ | 174 | |
Noncurrent finance lease liabilities | 545 | | | 563 | |
Total finance lease liabilities | $ | 761 | | | $ | 737 | |
| | | |
Weighted average remaining lease term (in years): | | | |
Operating leases | 8.3 | | 7.6 |
Finance leases | 5.1 | | 4.6 |
| | | |
Weighted average discount rate: | | | |
Operating leases | 7.4 | % | | 6.3 | % |
Finance leases | 7.2 | % | | 6.1 | % |
Supplemental cash flow and other information related to leases was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 1,990 | | | $ | 2,053 | | | $ | 2,028 | |
Operating cash flows from finance leases | 47 | | | 37 | | | 39 | |
Financing cash flows from finance leases | 190 | | | 126 | | | 114 | |
| | | | | |
Non-cash transactions: | | | | | |
ROU assets acquired through operating leases | 1,483 | | | 1,386 | | | 917 | |
Property and equipment acquired through finance leases | 46 | | | 180 | | | 11 | |
Operating lease conversion to finance lease | 107 | | | 102 | | | 5 | |
Finance lease conversion to operating lease | 3 | | | — | | | — | |
| | | | | |
Gain on sale leaseback transactions, net | 2 | | | 25 | | | 107 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Maturities of lease liabilities were as follows (in millions):
| | | | | | | | | | | |
| December 31, 2022 |
| Operating Leases | | Finance Leases |
2023 | $ | 1,954 | | | $ | 265 | |
2024 | 1,663 | | | 215 | |
2025 | 1,324 | | | 141 | |
2026 | 1,054 | | | 115 | |
2027 | 862 | | | 69 | |
2028 and thereafter | 3,918 | | | 87 | |
Total lease payments | 10,775 | | | 892 | |
Less: Imputed interest | (2,751) | | | (131) | |
Total lease obligations | 8,024 | | | 761 | |
Less: Current obligations | (1,465) | | | (216) | |
Long-term lease obligations | $ | 6,559 | | | $ | 545 | |
As of December 31, 2022, we had additional operating lease commitments that have not yet commenced of approximately $1.1 billion for nine Boeing 787 Family aircraft scheduled to be delivered in 2023 through 2024 with lease terms of 10 years.
6. Income Taxes
The significant components of the income tax provision (benefit) were (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Current income tax benefit: | | | | | |
State, local and foreign | $ | (6) | | | $ | — | | | $ | — | |
| | | | | |
| | | | | |
Deferred income tax provision (benefit): | | | | | |
Federal | 59 | | | (508) | | | (2,335) | |
State and local | 6 | | | (47) | | | (233) | |
Deferred income tax provision (benefit) | 65 | | | (555) | | | (2,568) | |
Total income tax provision (benefit) | $ | 59 | | | $ | (555) | | | $ | (2,568) | |
The income tax provision (benefit) differed from amounts computed at the statutory federal income tax rate as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Statutory income tax provision (benefit) | $ | 39 | | | $ | (535) | | | $ | (2,405) | |
State, local and foreign income tax benefit, net of federal tax effect | — | | | (37) | | | (183) | |
Book expenses not deductible for tax purposes | 22 | | | 23 | | | 22 | |
| | | | | |
| | | | | |
Other, net | (2) | | | (6) | | | (2) | |
Income tax provision (benefit) | $ | 59 | | | $ | (555) | | | $ | (2,568) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
The components of our deferred tax assets and liabilities were (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Deferred tax assets: | | | |
Operating loss and other carryforwards | $ | 4,679 | | | $ | 4,612 | |
Loyalty program liability | 1,809 | | | 1,903 | |
Leases | 1,819 | | | 1,833 | |
Pensions | 474 | | | 941 | |
Postretirement benefits other than pensions | 179 | | | 214 | |
Rent expense | 130 | | | 92 | |
| | | |
| | | |
Other | 742 | | | 784 | |
Total deferred tax assets | 9,832 | | | 10,379 | |
Valuation allowance | (19) | | | (34) | |
Net deferred tax assets | 9,813 | | | 10,345 | |
Deferred tax liabilities: | | | |
Accelerated depreciation and amortization | (4,630) | | | (4,747) | |
Leases | (1,832) | | | (1,767) | |
Other | (262) | | | (284) | |
Total deferred tax liabilities | (6,724) | | | (6,798) | |
Net deferred tax asset | $ | 3,089 | | | $ | 3,547 | |
At December 31, 2022, we had approximately $16.2 billion of gross federal net operating losses (NOLs) and $4.3 billion of other carryforwards available to reduce future federal taxable income, of which $5.9 billion will expire beginning in 2024 if unused and $14.6 billion can be carried forward indefinitely. We also had approximately $6.0 billion of NOL carryforwards to reduce future state taxable income at December 31, 2022, which will expire in taxable years 2022 through 2042 if unused.
Our ability to use our NOLs and other carryforwards depends on the amount of taxable income generated in future periods. We provide a valuation allowance for our deferred tax assets, which include our NOLs, when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand. We have determined that positive factors outweigh negative factors in the determination of the realizability of our deferred tax assets. There can be no assurance that an additional valuation allowance on our net deferred tax assets will not be required. Such valuation allowance could be material.
Our ability to deduct our NOL carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. Substantially all of our remaining federal NOL carryforwards attributable to US Airways Group are subject to limitation under Section 382; however, our ability to utilize such NOL carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. Our ability to utilize any new NOL carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit our future use of NOLs and tax credits.
In 2022, we recorded an income tax provision of $59 million, with an effective rate of approximately 32%, which was substantially non-cash. Substantially all of our income before income taxes is attributable to the United States.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
The Inflation Reduction Act (IRA) was enacted on August 16, 2022, which among other provisions, introduced a corporate minimum tax on certain corporations with average adjusted financial statement income over a three-tax year period in excess of $1.0 billion, an excise tax on certain stock repurchases by certain covered corporations for taxable years beginning after December 31, 2022, and several tax incentives to promote clean energy. Based on our current analysis and pending future guidance to be issued by the U.S. Department of Treasury, we do not believe these provisions will have a material impact on our consolidated financial statements.
We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate. Our 2019 through 2021 tax years are still subject to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and we are under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. We believe that the effect of any assessments will not be material to our consolidated financial statements.
The amount of, and changes to, our uncertain tax positions were not material in any of the years presented. We accrue interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively.
7. Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i.e. an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. Accounting standards include disclosure requirements around fair values used for certain financial instruments and establish a fair value hierarchy. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels:
•Level 1 – Observable inputs such as quoted prices in active markets;
•Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
When available, we use quoted market prices to determine the fair value of our financial assets. If quoted market prices are not available, we measure fair value using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and currency rates.
We utilize the market approach to measure the fair value of our financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Our short-term investments, restricted cash and restricted short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the year ended December 31, 2022.
Assets measured at fair value on a recurring basis are summarized below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of December 31, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Short-term investments (1), (2): | | | | | | | |
Money market funds | $ | 732 | | | $ | 732 | | | $ | — | | | $ | — | |
Corporate obligations | 3,688 | | | — | | | 3,688 | | | — | |
Bank notes/certificates of deposit/time deposits | 3,655 | | | — | | | 3,655 | | | — | |
Repurchase agreements | 450 | | | — | | | 450 | | | — | |
| 8,525 | | | 732 | | | 7,793 | | | — | |
Restricted cash and short-term investments (1), (3) | 995 | | | 535 | | | 460 | | | — | |
Long-term investments (4) | 245 | | | 245 | | | — | | | — | |
Total | $ | 9,765 | | | $ | 1,512 | | | $ | 8,253 | | | $ | — | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of December 31, 2021 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Short-term investments (1): | | | | | | | |
Money market funds | $ | 108 | | | $ | 108 | | | $ | — | | | $ | — | |
Corporate obligations | 8,665 | | | — | | | 8,665 | | | — | |
Bank notes/certificates of deposit/time deposits | 2,195 | | | — | | | 2,195 | | | — | |
Repurchase agreements | 1,190 | | | — | | | 1,190 | | | — | |
| 12,158 | | | 108 | | | 12,050 | | | — | |
Restricted cash and short-term investments (1), (3) | 990 | | | 654 | | | 336 | | | — | |
Long-term investments (4) | 239 | | | 239 | | | — | | | — | |
Total | $ | 13,387 | | | $ | 1,001 | | | $ | 12,386 | | | $ | — | |
(1)All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive loss at each reporting period. There were no credit losses.
(2)Our short-term investments as of December 31, 2022 mature in one year or less.
(3)Restricted cash and short-term investments primarily include collateral held to support workers' compensation obligations, collateral associated with the payment of interest for the AAdvantage Financing and money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at JFK.
(4)Long-term investments include our equity investments in China Southern Airlines Company Limited (China Southern Airlines) and Vertical Aerospace Ltd. (Vertical) and as of December 31, 2022, our long-term investments also include GOL. See Note 8 for further information on our equity investments.
Fair Value of Debt
The fair value of our long-term debt was estimated using quoted market prices or discounted cash flow analyses based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. If our long-term debt was measured at fair value, it would have been classified as Level 2 except for $3.7 billion as of December 31, 2022 and December 31, 2021, which would have been classified as Level 3 in the fair value hierarchy. The fair value of the Convertible Notes, which would have been classified as Level 2, was $1.1 billion and $1.4 billion as of December 31, 2022 and December 31, 2021, respectively.
The carrying value and estimated fair value of our long-term debt, including current maturities, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Long-term debt, including current maturities | $ | 34,903 | | | $ | 32,569 | | | $ | 37,323 | | | $ | 38,567 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
8. Investments
To help expand our network and as part of our ongoing commitment to sustainability, we enter into various commercial relationships or other strategic partnerships, including equity investments, with other airlines and companies. Our equity investments are reflected in other assets on our consolidated balance sheets. Our share of equity method investees’ financial results and changes in fair value are recorded in nonoperating other income, net on the consolidated statements of operations.
Our equity investments ownership interest and carrying value were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Ownership Interest | | Carrying Value (in millions) |
| | | December 31, | | December 31, |
| Accounting Treatment | | 2022 | | 2021 | | 2022 | | 2021 |
Republic Holdings | Equity Method | | 25.0 | % | | 25.0 | % | | $ | 222 | | | $ | 202 | |
China Southern Airlines | Fair Value | | 1.5 | % | | 1.8 | % | | 176 | | | 163 | |
Other investments (a) | Various | | | | | | 212 | | | 83 | |
Total | | | | | | | $ | 610 | | | $ | 448 | |
(a) Other investments
Other investments primarily include our investment in Vertical, which is accounted for at fair value, and in 2022, our investments in JetSmart Airlines SpA (JetSMART) and GOL.
In April 2022, we completed an investment agreement with GOL, a Brazilian low-cost airline, and invested $200 million in 22.2 million of newly issued preferred shares. The total consideration of $200 million was allocated on our consolidated balance sheet as follows based on relative fair values: $81 million to the preferred shares, which is reflected within other assets, and $119 million to the indefinite-lived intangible asset derived from the related commercial agreements. The ownership interest is accounted for at fair value based on GOL’s stock price and mark-to-market adjustments are recorded to nonoperating other income, net on the consolidated statement of operations.
In December 2022, we completed an investment agreement with JetSMART, an ultra-low-cost carrier operating in South America, representing a 35.4% ownership. This ownership interest is accounted for under the equity method and our portion of JetSMART’s financial results is recognized within nonoperating other income, net on the consolidated statement of operations.
9. Employee Benefit Plans
We sponsor defined benefit and defined contribution pension plans for eligible employees. The defined benefit pension plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement. Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen and we began providing enhanced benefits under our defined contribution pension plans for certain employee groups. We use a December 31 measurement date for all of our defined benefit pension plans. We also provide certain retiree medical and other postretirement benefits, including health care and life insurance benefits, to retired employees.
Effective January 1, 2021, health coverage under our retiree medical benefit program that is currently provided to certain retirees age 65 and over who retired prior to November 1, 2012, transitioned from a self-insured plan to a fully-insured Medicare Advantage plan. Benefits coverage has not been reduced and cost shared has not changed as a result of this transition. Due to this transition, as of December 31, 2020, we recognized a negative plan amendment to reduce our benefit obligation, which was included as a component of prior service benefit in accumulated other comprehensive income (loss) (AOCI) and will be amortized over the average remaining life expectancy of all retirees. As of December 31, 2022, $179 million of prior service benefit remains to be amortized over a remaining period of approximately 11 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Benefit Obligations, Fair Value of Plan Assets and Funded Status
The following tables provide a reconciliation of the changes in the pension and retiree medical and other postretirement benefits obligations, fair value of plan assets and a statement of funded status as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In millions) |
Benefit obligation at beginning of period | $ | 18,910 | | | $ | 19,812 | | | $ | 1,098 | | | $ | 1,046 | |
Service cost | 3 | | | 4 | | | 16 | | | 12 | |
Interest cost | 556 | | | 526 | | | 30 | | | 30 | |
Actuarial gain (1), (2) | (4,563) | | | (609) | | | (167) | | | (57) | |
Special termination benefits (3) | — | | | — | | | — | | | 139 | |
Other | — | | | (1) | | | 3 | | | — | |
Benefit payments | (869) | | | (822) | | | (74) | | | (72) | |
| | | | | | | |
Benefit obligation at end of period | $ | 14,037 | | | $ | 18,910 | | | $ | 906 | | | $ | 1,098 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | |
| | | | | | | |
| |
Fair value of plan assets at beginning of period | $ | 14,691 | | | $ | 13,557 | | | $ | 167 | | | $ | 170 | |
Actual return (loss) on plan assets | (1,943) | | | 1,710 | | | (18) | | | 21 | |
Employer contributions (4) | 5 | | | 247 | | | 58 | | | 48 | |
Settlements | — | | | (1) | | | — | | | — | |
Benefit payments | (869) | | | (822) | | | (74) | | | (72) | |
Fair value of plan assets at end of period | $ | 11,884 | | | $ | 14,691 | | | $ | 133 | | | $ | 167 | |
Funded status at end of period | $ | (2,153) | | | $ | (4,219) | | | $ | (773) | | | $ | (931) | |
(1)The 2022 and 2021 pension actuarial gain primarily relates to the change in our weighted average discount rate assumption.
(2)The 2022 and 2021 retiree medical and other postretirement benefits actuarial gain primarily relates to the change in our weighted average discount rate assumption and, in 2021, plan experience adjustments.
(3)During the first quarter of 2021, we remeasured our retiree medical and other postretirement benefits to account for enhanced healthcare benefits provided to eligible team members who opted into voluntary early retirement programs offered as a result of reductions to our operation due to the COVID-19 pandemic. As a result, during 2021, we recognized a $139 million special charge for these enhanced healthcare benefits and increased our postretirement benefits obligation by $139 million.
(4)In January 2021, we made $241 million in contributions to our pension plans, including a contribution of $130 million for the 2020 calendar year that was permitted to be deferred to January 4, 2021 as provided under the CARES Act.
Balance Sheet Position
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In millions) |
As of December 31, | | | | | | | |
Current liability | $ | 4 | | | $ | 7 | | | $ | 85 | | | $ | 90 | |
Noncurrent liability | 2,149 | | | 4,212 | | | 688 | | | 841 | |
Total liabilities | $ | 2,153 | | | $ | 4,219 | | | $ | 773 | | | $ | 931 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In millions) |
Net actuarial loss (gain) | $ | 3,613 | | | $ | 5,252 | | | $ | (505) | | | $ | (396) | |
Prior service cost (benefit) | 18 | | | 47 | | | (148) | | | (167) | |
Total accumulated other comprehensive loss (income), pre-tax | $ | 3,631 | | | $ | 5,299 | | | $ | (653) | | | $ | (563) | |
Plans with Projected Benefit Obligations Exceeding Fair Value of Plan Assets
| | | | | | | | | | | |
| Pension Benefits |
| 2022 | | 2021 |
| | | |
| (In millions) |
Projected benefit obligation | $ | 14,037 | | | $ | 18,910 | |
Fair value of plan assets | 11,884 | | | 14,691 | |
Plans with Accumulated Benefit Obligations Exceeding Fair Value of Plan Assets
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In millions) |
Accumulated benefit obligation | $ | 14,030 | | | $ | 18,899 | | | $ | — | | | $ | — | |
Accumulated postretirement benefit obligation | — | | | — | | | 906 | | | 1,098 | |
Fair value of plan assets | 11,884 | | | 14,691 | | | 133 | | | 167 | |
Net Periodic Benefit Cost (Income)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| (In millions) |
Defined benefit plans: | | | | | | | | | | | |
Service cost | $ | 3 | | | $ | 4 | | | $ | 2 | | | $ | 16 | | | $ | 12 | | | $ | 8 | |
Interest cost | 556 | | | 526 | | | 615 | | | 30 | | | 30 | | | 30 | |
Expected return on assets | (1,138) | | | (1,084) | | | (1,010) | | | (12) | | | (12) | | | (11) | |
Special termination benefits | — | | | — | | | — | | | — | | | 139 | | | 410 | |
Settlements | — | | | — | | | 12 | | | — | | | — | | | — | |
Amortization of: | | | | | | | | | | | |
Prior service cost (benefit) | 28 | | | 28 | | | 30 | | | (14) | | | (13) | | | (135) | |
Unrecognized net loss (gain) | 156 | | | 212 | | | 164 | | | (30) | | | (24) | | | (24) | |
Net periodic benefit cost (income) | $ | (395) | | | $ | (314) | | | $ | (187) | | | $ | (10) | | | $ | 132 | | | $ | 278 | |
The service cost component of net periodic benefit cost (income) is included in operating expenses, the cost for the special termination benefits is included in special items, net and the other components of net periodic benefit cost (income) are included in nonoperating other income, net on our consolidated statements of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Assumptions
The following actuarial assumptions were used to determine our benefit obligations and net periodic benefit cost (income) for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
Benefit obligations: | | | | | | | |
Weighted average discount rate | 5.6% | | 3.0% | | 5.7% | | 2.8% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Net periodic benefit cost (income): | | | | | | | | | | | |
Weighted average discount rate | 3.0% | | 2.7% | | 3.4% | | 2.8% | | 2.4% | | 3.2% |
Weighted average expected rate of return on plan assets | 8.0% | | 8.0% | | 8.0% | | 8.0% | | 8.0% | | 8.0% |
Weighted average health care cost trend rate assumed for next year (1) | N/A | | N/A | | N/A | | 5.8% | | 4.8% | | 4.0% |
(1)The weighted average health care cost trend rate at December 31, 2022 is assumed to decline gradually to 4.4% by 2029 and remain level thereafter.
As of December 31, 2022, our estimate of the long-term rate of return on plan assets was 8.0% based on the target asset allocation. Expected returns on long duration bonds are based on yields to maturity of the bonds held at year-end. Expected returns on other assets are based on a combination of long-term historical returns, actual returns on plan assets achieved over the last 10 years, current and expected market conditions, and expected value to be generated through active management and securities lending programs.
Minimum Contributions
We are required to make minimum contributions to our defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and various other laws for U.S. based plans as well as underfunding rules specific to countries where we maintain defined benefit plans. Based on current funding assumptions, we have minimum required contributions of $69 million for 2023 including contributions to defined benefit plans for our wholly-owned subsidiaries. Our funding obligations will depend on the performance of our investments held in a trust by the pension plans, interest rates for determining liabilities, the amount of and timing of any supplemental contributions and our actuarial experience.
Benefit Payments
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (approximately, in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028-2032 |
Pension benefits | $ | 920 | | | $ | 949 | | | $ | 978 | | | $ | 1,003 | | | $ | 1,024 | | | $ | 5,264 | |
Retiree medical and other postretirement benefits | 102 | | | 100 | | | 98 | | | 97 | | | 95 | | | 428 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Plan Assets
The objectives of our investment policies are to: maintain sufficient income and liquidity to pay retirement benefits; produce a long-term rate of return that meets or exceeds the assumed rate of return for plan assets; limit the volatility of asset performance and funded status; and diversify assets among asset classes and investment managers.
Based on these investment objectives, a long-term strategic asset allocation has been established. This strategic allocation seeks to balance the potential benefit of improving the funded position with the potential risk that the funded position would decline. The current strategic target asset allocation is as follows:
| | | | | |
Asset Class/Sub-Class | Allowed Range |
Equity | 45% - 80% |
Public: | |
U.S. Large | 10% - 40% |
U.S. Small/Mid | 2% - 10% |
International | 10% - 25% |
International Small/Mid | 0% - 10% |
Emerging Markets | 2% - 15% |
Private Equity | 5% - 30% |
Fixed Income | 20% - 55% |
Public: | |
U.S. Long Duration | 15% - 45% |
High Yield and Emerging Markets | 0% - 10% |
Private Income | 0% - 15% |
Other | 0% - 5% |
Cash Equivalents | 0% - 20% |
Public equity investments are intended to provide a real return over a full market cycle and, therefore, to contribute to the pension plan’s long-term objective. Public fixed income investments are intended to provide income to the plan and offer the potential for long term capital appreciation. Private investments, such as private equity and private income, are used to provide higher expected returns than public markets over the long-term by assuming reduced levels of liquidity and higher levels of risk. The pension plan’s master trust participates in securities lending programs to generate additional income by loaning plan assets to borrowers on a fully collateralized basis. The pension plan’s master trust will also engage in derivative instruments to equitize residual levels of cash as well as hedge the pension plan’s exposure to interest rates. Such programs are subject to market risk and counterparty risk.
Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year. Securities traded in the over-the-counter market are valued at the last bid price. Investments in limited partnerships are carried at estimated net asset value (NAV) as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships. Mutual funds are valued once daily through a NAV calculation provided at the end of each trade day. Common/collective trusts are valued at NAV based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts. No changes in valuation techniques or inputs occurred during the year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Benefit Plan Assets Measured at Fair Value on a Recurring Basis
The fair value of our pension plan assets at December 31, 2022 and 2021, by asset category, were as follows (in millions) (1):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Equity (2) | $ | 3,097 | | | $ | — | | | $ | — | | | $ | 3,097 | | | $ | 4,639 | | | $ | 2 | | | $ | 4 | | | $ | 4,645 | |
Fixed income (3) | 227 | | | 2,917 | | | — | | | 3,144 | | | 183 | | | 3,994 | | | — | | | 4,177 | |
Other (4) | 74 | | | 278 | | | 75 | | | 427 | | | 134 | | | 340 | | | 54 | | | 528 | |
Measured at NAV (5): | | | | | | | | | | | | | | | |
Common collective trusts (6) | — | | | — | | | — | | | 1,694 | | | — | | | — | | | — | | | 2,514 | |
Private investments (7) | — | | | — | | | — | | | 3,522 | | | — | | | — | | | — | | | 2,827 | |
Total plan assets | $ | 3,398 | | | $ | 3,195 | | | $ | 75 | | | $ | 11,884 | | | $ | 4,956 | | | $ | 4,336 | | | $ | 58 | | | $ | 14,691 | |
(1)See Note 7 for a description of the levels within the fair value hierarchy.
(2)Equity investments include domestic and international common stock, preferred stock, mutual funds and exchange traded funds invested in equity securities.
(3)Fixed income investments include corporate, government and U.S. municipal bonds, as well as mutual funds invested in fixed income securities.
(4)Other primarily includes a short-term investment fund, cash and cash equivalents, and net receivables and payables of the master trust for dividends, interest and amounts due to or from the sale and purchase of securities.
(5)Includes investments that were measured at NAV per share (or its equivalent) as a practical expedient that have not been classified in the fair value hierarchy.
(6)Common collective trusts include commingled funds primarily invested in equity securities. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred.
(7)Private investments include limited partnerships that invest primarily in domestic private equity and private income opportunities. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its NAV, but rather receives distributions as the underlying assets are liquidated. It is estimated that the underlying assets of these funds will be gradually liquidated over the next 10 years. As of December 31, 2022, the pension plan’s master trust has future funding commitments to these limited partnerships of approximately $1.5 billion over the next five years.
Changes in fair value measurements of Level 3 investments during the years ended December 31, 2022 and 2021, were as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
Balance at beginning of year | $ | 58 | | | $ | 17 | |
Actual gain on plan assets: | | | |
Relating to assets still held at the reporting date | 1 | | | 10 | |
Purchases | 29 | | | 32 | |
Sales | (9) | | | (1) | |
Transfers out | (4) | | | — | |
Balance at end of year | $ | 75 | | | $ | 58 | |
Plan assets in the retiree medical and other postretirement benefits plans’ are primarily Level 2 mutual funds valued by quoted prices on the active market, which is fair value, and represents the NAV of the shares of such funds as of the close of business at the end of the period. NAV is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Defined Contribution and Multiemployer Plans
The costs associated with our defined contribution plans were $949 million, $920 million and $860 million for the years ended December 31, 2022, 2021 and 2020, respectively.
We participate in the International Association of Machinists & Aerospace Workers (IAM) National Pension Fund, Employer Identification No. 51-6031295 and Plan No. 002 (the IAM Pension Fund). Our contributions to the IAM Pension Fund were $46 million, $43 million and $40 million for the years ended December 31, 2022, 2021 and 2020, respectively. The IAM Pension Fund reported $507 million in employers’ contributions for the year ended December 31, 2021, which is the most recent year for which such information is available. For 2021, our contributions represented more than 5% of total contributions to the IAM Pension Fund.
On March 29, 2019, the actuary for the IAM Pension Fund certified that the fund was in “endangered” status despite reporting a funded status of over 80%. Additionally, the IAM Pension Fund’s Board voluntarily elected to enter into “critical” status on April 17, 2019. Upon entry into critical status, the IAM Pension Fund was required by law to adopt a rehabilitation plan aimed at restoring the financial health of the pension plan and did so on April 17, 2019 (the Rehabilitation Plan). Under the Rehabilitation Plan, we were subject to an immaterial contribution surcharge, which ceased to apply June 14, 2019 upon our mandatory adoption of a contribution schedule under the Rehabilitation Plan. The contribution schedule requires 2.5% annual increases to our contribution rate. This contribution schedule will remain in effect through the earlier of December 31, 2031 or the date the IAM Pension Fund emerges from critical status.
10. Accumulated Other Comprehensive Loss
The components of AOCI are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension, Retiree Medical and Other Postretirement Benefits | | Unrealized Loss on Investments | | Income Tax Provision (1) | | Total |
Balance at December 31, 2020 | $ | (6,236) | | | $ | (2) | | | $ | (865) | | | $ | (7,103) | |
Other comprehensive income (loss) before reclassifications | 1,297 | | | — | | | (293) | | | 1,004 | |
Amounts reclassified from AOCI | 203 | | | — | | | (46) | | (2) | 157 | |
Net current-period other comprehensive income (loss) | 1,500 | | | — | | | (339) | | | 1,161 | |
Balance at December 31, 2021 | (4,736) | | | (2) | | | (1,204) | | | (5,942) | |
Other comprehensive income (loss) before reclassifications | 1,618 | | | (4) | | | (365) | | | 1,249 | |
Amounts reclassified from AOCI | 140 | | | — | | | (32) | | (2) | 108 | |
Net current-period other comprehensive income (loss) | 1,758 | | | (4) | | | (397) | | | 1,357 | |
Balance at December 31, 2022 | $ | (2,978) | | | $ | (6) | | | $ | (1,601) | | | $ | (4,585) | |
(1)Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income (loss) until the obligations are fully extinguished.
(2)Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision (benefit) on our consolidated statements of operations.
Reclassifications out of AOCI for the years ended December 31, 2022 and 2021 are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Amounts reclassified from AOCI | | Affected line items on the consolidated statements of operations |
| Year Ended December 31, | |
AOCI Components | 2022 | | 2021 | |
Amortization of pension, retiree medical and other postretirement benefits: | | | | | |
Prior service cost | $ | 11 | | | $ | 11 | | | Nonoperating other income, net |
Actuarial loss | 97 | | | 146 | | | Nonoperating other income, net |
Total reclassifications for the period, net of tax | $ | 108 | | | $ | 157 | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Amounts allocated to other comprehensive income (loss) for income taxes will remain in AOCI until we cease all related activities, such as termination of the pension plan.
11. Commitments, Contingencies and Guarantees
(a) Aircraft, Engine and Other Purchase Commitments
Under all of our aircraft and engine purchase agreements, our total future commitments as of December 31, 2022 are expected to be as follows (approximately, in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 and Thereafter | | Total |
Payments for aircraft and engine commitments (1) | $ | 1,485 | | | $ | 2,678 | | | $ | 3,896 | | | $ | 3,214 | | | $ | 988 | | | $ | 65 | | | $ | 12,326 | |
(1)These amounts are net of purchase deposits currently held by the manufacturers. Our purchase deposits held by all manufacturers totaled $613 million and $517 million as of December 31, 2022 and 2021, respectively.
Due to the uncertainty surrounding the timing of delivery of certain aircraft, the amounts in the table represent our most current estimate based on contractual delivery schedules adjusted for updates and revisions to such schedules communicated to management by the applicable equipment manufacturer. However, the actual delivery schedule may differ, potentially materially, based on various potential factors including production delays by the manufacturer and regulatory concerns.
Additionally, the amounts in the table exclude four Boeing 787-8 aircraft scheduled to be delivered in 2023 and five Boeing 787-9 aircraft scheduled to be delivered in 2024, for which we have obtained committed lease financing. See Note 5 for information regarding this operating lease commitment.
Additionally, we have purchase commitments related to aircraft fuel, flight equipment maintenance, information technology support and construction projects as follows (approximately): $5.7 billion in 2023, $3.0 billion in 2024, $1.7 billion in 2025, $231 million in 2026, $126 million in 2027 and $941 million in 2028 and thereafter. These amounts exclude obligations under certain fuel offtake agreements or other agreements for which the timing of the related expenditure is uncertain, or which are subject to material contingencies, such as the construction of a production facility.
(b) Capacity Purchase Agreements with Third-Party Regional Carriers
American has capacity purchase agreements with third-party regional carriers. The capacity purchase agreements provide that all revenues, including passenger, in-flight, ancillary, mail and freight revenues, go to American. American controls marketing, scheduling, ticketing, pricing and seat inventories. In return, American agrees to pay predetermined fees to these airlines for operating an agreed-upon number of aircraft, without regard to the number of passengers on board. In addition, these agreements provide that American either reimburses or pays 100% of certain variable costs, such as airport landing fees, fuel and passenger liability insurance.
As of December 31, 2022, American’s capacity purchase agreements with third-party regional carriers had expiration dates ranging from 2023 to 2033, with rights of American to extend the respective terms of certain agreements.
As of December 31, 2022, American’s minimum obligations under its capacity purchase agreements with third-party regional carriers are as follows (approximately, in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 and Thereafter | | Total |
Minimum obligations under capacity purchase agreements with third-party regional carriers (1) | $ | 1,791 | | | $ | 1,950 | | | $ | 1,866 | | | $ | 1,298 | | | $ | 944 | | | $ | 1,399 | | | $ | 9,248 | |
(1)Represents minimum payments under capacity purchase agreements with third-party regional carriers. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and American’s actual payments could differ materially. Excludes rental payments under operating leases for certain aircraft flown under these capacity purchase agreements, which are reflected in the operating lease obligations in Note 5.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(c) Airport Redevelopment
Los Angeles International Airport (LAX)
From time to time, airports where we have operations engage in construction projects, often substantial, that result in new or improved facilities that are ultimately funded through increases in the rent and other occupancy costs payable by airlines using the airport. Unlike this construction and funding model, we are managing a project at LAX where we have legal title to the assets during construction. In 2018, we executed a lease agreement with Los Angeles World Airports (LAWA), which owns and operates LAX, in connection with a $1.6 billion modernization project related to LAX Terminals 4 and 5. Construction, which started in October 2018 and is expected to be completed in 2028, will occur in a phased approach. The modernization project will include a unified departure hall to the entranceway of Terminals 4 and 5, reconfigured ticket counter and check-in areas with seamless access to security screening areas, 10 new security screening lanes with automated technology in addition to the existing Terminal 5 lanes, and a new Terminal 4 South concourse with more open and upgraded amenities at gate areas. The project will also include renovated break rooms, multi-use meeting rooms and team gathering spaces throughout the terminals to support our team members at LAX. In 2022, American completed construction of the Terminal 4 and 5 core, which provides a central location between the terminals and allows direct access to the check-in lobby and baggage claim in Terminal 5.
As each phase is completed and ready for use, the assets will be sold and transferred to LAWA, including the site improvements and non-proprietary improvements. As we control the assets during construction, they are recognized on our balance sheet until the assets are sold and transferred to LAWA. As of December 31, 2022, we have incurred approximately $579 million in costs relating to the LAX modernization project, of which $241 million were incurred in 2022 and have been included within operating property and equipment on our consolidated balance sheets and included within airport construction projects, net of reimbursements on our consolidated statements of cash flows. As of December 31, 2022, we have sold and transferred $176 million of non-proprietary improvements to LAWA, of which $44 million occurred during 2022. For non-proprietary improvements which are not yet ready for use, any cash payments received from LAWA will be reflected as a financial liability. As of December 31, 2022, we have received $141 million in cash proceeds for non-proprietary improvements which are not yet ready for use, and therefore have not been sold and transferred back to LAWA. These proceeds are currently included in other accrued liabilities and noncurrent other liabilities on our consolidated balance sheet and are reflected as financing activities on our consolidated statement of cash flows.
JFK
In January 2020, American and British Airways announced the start of construction projects to upgrade New York's JFK Terminal 8. The renovation projects at Terminal 8 include: (i) the reconfiguration or elimination of certain existing gates and the construction of widebody gates, (ii) the construction of approximately 51,000 square feet of new terminal building space and the refurbishment of 73,300 square feet of existing terminal space, (iii) the expansion of the baggage system capacity of Terminal 8, (iv) improvements to the premium passenger lounges, check-in and, potentially, security access areas, and (v) bathroom refreshment, new signage, and other upgrades. The construction project is substantially complete and remaining construction on the baggage handling system expansion and bathroom refurbishments are expected to be fully completed in early 2023. As of December 31, 2022, we have incurred $348 million in construction costs to upgrade Terminal 8, of which $172 million was incurred in 2022. These costs have been included in airport construction projects, net of reimbursements on our consolidated statements of cash flows.
(d) Off-Balance Sheet Arrangements
Pass-Through Trusts
American currently has 352 owned aircraft and 60 owned spare aircraft engines, which in each case were financed with EETCs issued by pass-through trusts. These trusts are off-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment or to permit issuance of debt backed by existing flight equipment. In the case of aircraft EETCs, rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allow American to raise the financing for a number of aircraft at one time and, if applicable, place such funds in escrow pending a future purchase, delivery or refinancing of the relevant aircraft. Similarly, in the case of the spare engine EETCs, the trusts allow American to use its existing pool of spare engines to raise financing under a single facility. The trusts have also been structured to provide for certain credit enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to American.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Each trust covers a set number of aircraft or spare engines scheduled to be delivered, financed or refinanced upon the issuance of the EETC or within a specific period of time thereafter. At the time of each covered aircraft or spare engine financing, the relevant trust used the proceeds of the issuance of the EETC (which may have been available at the time of issuance thereof or held in escrow until financing of the applicable aircraft following its delivery) to purchase equipment notes relating to the financed aircraft or engines. The equipment notes are issued, at American’s election, in connection with a mortgage financing of the aircraft or spare engines. The equipment notes are secured by a security interest in the aircraft or engines, as applicable. The pass-through trust certificates are not direct obligations of, nor are they guaranteed by, AAG or American. However, the equipment notes issued to the trusts are direct obligations of American and, in certain instances, have been guaranteed by AAG. As of December 31, 2022, $9.2 billion associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet.
Letters of Credit and Other
We provide financial assurance, such as letters of credit and surety bonds, primarily to support airport commitments. As of December 31, 2022, we had $218 million of letters of credit and surety bonds securing various obligations, of which $100 million is collateralized with our restricted cash. The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2026.
(e) Legal Proceedings
Private Party Antitrust Action Related to Passenger Capacity. We, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, were named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits were consolidated in the Federal District Court for the District of Columbia (the DC Court). On June 15, 2018, we reached a settlement agreement with the plaintiffs in the amount of $45 million to resolve all class claims in the U.S. lawsuits. That settlement was approved by the DC Court on May 13, 2019, however three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia. We believe these appeals are without merit and intend to vigorously defend against them.
Private Party Antitrust Action Related to the Merger. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al., v. AMR Corporation, et al., was filed in the United States Bankruptcy Court for the Southern District of New York (Bankruptcy Court). The complaint named as defendants US Airways Group, US Airways, Inc., AMR Corporation and American, alleged that the effect of the merger of US Airways Group and AMR Corporation (the Merger) may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross-motion for summary judgment. The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019 and the parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019. On January 29, 2021, the Bankruptcy Court published its decision finding in our favor. On March 25, 2022, the U.S. District Court for the Southern District of New York entered judgment affirming the Bankruptcy Court's decision. On April 21, 2022, plaintiffs appealed that decision to the United States Court of Appeals for the Second Circuit. The appeal is fully briefed and scheduled for oral argument on March 13, 2023. We believe this lawsuit is without merit and intend to continue to vigorously defend against it, including against any further appeals by the plaintiffs.
Government Antitrust Action Related to the Northeast Alliance. On September 21, 2021, the United States Department of Justice (the DOJ), joined by Attorneys General from six states and the District of Columbia, filed an antitrust complaint against American and JetBlue Airways Corporation (JetBlue) in the District of Massachusetts alleging that American and JetBlue violated U.S. antitrust law in connection with the previously disclosed Northeast Alliance arrangement (NEA). The parties presented their respective cases in a bench trial that commenced on September 27, 2022. Closing arguments from both parties were presented on November 18, 2022. A decision is expected in the first quarter of 2023.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Also on September 21, 2021, the United States Department of Transportation (DOT) published a Clarification Notice relating to the agreement that had been reached between the DOT, American, and JetBlue in January 2021, at the conclusion of the DOT’s review of the NEA (DOT Agreement). The DOT Clarification Notice stated, among other things, that the DOT Agreement remains in force during the pendency of the DOJ action against the NEA and, while the DOT retains independent statutory authority to prohibit unfair methods of competition in air transportation, the DOT intends to defer to the DOJ to resolve the antitrust concerns that the DOJ has identified with respect to the NEA. The DOT simultaneously published a Notice Staying Proceeding in relation to a complaint by Spirit Airlines, Inc. regarding the NEA, pending resolution of the DOJ action described above. On September 30, 2022, the DOT issued a further statement referencing the prior Clarification Notice and, among other things, indicating its intention to continue working with the DOJ in its efforts to resolve the ongoing proceedings regarding the NEA.
Private Party Antitrust Actions Related to the Northeast Alliance. On December 5, 2022 and December 7, 2022, two private party plaintiffs filed putative class action antitrust complaints against American and JetBlue in the Eastern District of New York alleging that American and JetBlue violated U.S. antitrust law in connection with the previously disclosed NEA. These actions were consolidated on January 10, 2023. The private party plaintiffs filed an amended consolidated complaint on February 3, 2023. In February 2023, private party plaintiffs filed two additional putative class action antitrust complaints against American and JetBlue in the District of Massachusetts and the Eastern District of New York, respectively. We believe these lawsuits are without merit and are defending against them vigorously.
General. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material.
(f) Guarantees and Indemnifications
We are party to many routine contracts in which we provide general indemnities in the normal course of business to third parties for various risks. We are not able to estimate the potential amount of any liability resulting from the indemnities. These indemnities are discussed in the following paragraphs.
In our aircraft financing agreements, we generally indemnify the financing parties, trustees acting on their behalf and other relevant parties against liabilities (including certain taxes) resulting from the financing, manufacture, design, ownership, operation and maintenance of the aircraft regardless of whether these liabilities (including certain taxes) relate to the negligence of the indemnified parties.
Our loan agreements and certain other financing transactions may obligate us to reimburse the applicable lender for incremental costs due to a change in law that imposes (i) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (ii) any tax, duty or other charge with respect to the loan (except standard income tax) or (iii) capital adequacy requirements. In addition, our loan agreements and other financing arrangements typically contain a withholding tax provision that requires us to pay additional amounts to the applicable lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law.
In certain transactions, including certain aircraft financing leases and loans, the lessors, lenders and/or other parties have rights to terminate the transaction based on changes in foreign tax law, illegality or certain other events or circumstances. In such a case, we may be required to make a lump sum payment to terminate the relevant transaction.
We have general indemnity clauses in many of our airport and other real estate leases where we as lessee indemnify the lessor (and related parties) against liabilities related to our use of the leased property. Generally, these indemnifications cover liabilities resulting from the negligence of the indemnified parties, but not liabilities resulting from the gross negligence or willful misconduct of the indemnified parties. In addition, we provide environmental indemnities in many of these leases for contamination related to our use of the leased property.
Under certain contracts with third parties, we indemnify the third-party against legal liability arising out of an action by the third-party, or certain other parties. The terms of these contracts vary and the potential exposure under these indemnities cannot be determined. We have liability insurance protecting us for some of the obligations we have undertaken under these indemnities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
American is required to make principal and interest payments for certain special facility revenue bonds issued by municipalities primarily to build or improve airport facilities and purchase equipment, which are leased to American. The payment of principal and interest of certain special facility revenue bonds is guaranteed by AAG. As of December 31, 2022, the remaining lease payments through 2035 guaranteeing the principal and interest on these bonds are $538 million and the current carrying amount of the associated operating lease liability in the accompanying consolidated balance sheet is $321 million.
As of December 31, 2022, AAG had issued guarantees covering approximately $18.3 billion of American’s secured debt (and interest thereon), including the Credit Facilities, the AAdvantage Financing, certain EETC financings and $1.1 billion of American’s special facility revenue bonds (and interest thereon).
(g) Credit Card Processing Agreements
We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. Our agreements allow these credit card processing companies, under certain conditions, to hold an amount of our cash (referred to as a holdback) equal to all or a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. These holdback requirements can be implemented at the discretion of the credit card processing companies upon the occurrence of specific events, including material adverse changes in our financial condition or the triggering of a liquidity covenant. These credit card processing companies are not currently entitled to maintain any holdbacks. The imposition of holdback requirements would reduce our liquidity.
(h) Labor Negotiations
As of December 31, 2022, we employed approximately 129,700 active full-time equivalent (FTE) employees, of which 27,700 were employed by our wholly-owned regional subsidiaries. Of the total active FTE employees, 87% are covered by collective bargaining agreements (CBAs) with various labor unions and 48% are covered by CBAs that are currently amendable or that will become amendable within one year. CBAs covering our mainline pilots, flight attendants and passenger service are now amendable. The CBAs covering certain employee groups at our wholly-owned regional subsidiaries are also amendable.
12. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information and non-cash investing and financing activities are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Non-cash investing and financing activities: | | | | | |
Equity investments | $ | 12 | | | $ | 88 | | | $ | — | |
Settlement of bankruptcy obligations | — | | | (1) | | | 56 | |
Deferred financing costs paid through issuance of debt | — | | | — | | | 17 | |
Supplemental information: | | | | | |
Interest paid, net | 1,852 | | | 1,632 | | | 944 | |
Income taxes paid | 2 | | | 3 | | | 6 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
13. Operating Segments and Related Disclosures
We are managed as a single business unit that provides air transportation for passengers and cargo. This allows us to benefit from an integrated revenue pricing and route network that includes American and our wholly-owned and third-party regional carriers that fly under capacity purchase agreements operating as American Eagle. The flight equipment of all these carriers is combined to form one fleet that is deployed through a single route scheduling system. Financial information and annual operational plans and forecasts are prepared and reviewed by the chief operating decision maker at the consolidated level. When making operational decisions, the chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but is indifferent to the results of the individual regional carriers. The objective in making operational decisions is to maximize consolidated financial results, not the individual results of American or American Eagle.
See Note 1(m) for our passenger revenue by geographic region. Our tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated.
14. Share-based Compensation
The 2013 AAG Incentive Award Plan (the 2013 Plan) provides that awards may be in the form of an option, restricted stock award, restricted stock unit award, performance award, dividend equivalent award, deferred stock award, deferred stock unit award, stock payment award or stock appreciation right. The 2013 Plan initially authorized the grant of awards for the issuance of up to 40 million shares. Any shares underlying awards granted under the 2013 Plan that are forfeited, terminate or are settled in cash (in whole or in part) without the delivery of shares will again be available for grant.
For the years ended December 31, 2022, 2021 and 2020, we recorded $78 million, $98 million and $91 million, respectively, of share-based compensation costs principally in salaries, wages and benefits expense on our consolidated statements of operations.
During 2022, 2021 and 2020, we withheld approximately 1.2 million, 1.0 million and 0.7 million shares of AAG common stock, respectively, and paid approximately $21 million, $18 million and $15 million, respectively, in satisfaction of certain tax withholding obligations associated with employee equity awards.
Restricted Stock Unit Awards (RSUs)
The majority of our RSUs have service conditions (time vested primarily over three years). The grant-date fair value of these RSUs is equal to the market price of the underlying shares of AAG common stock on the date of grant. The expense for these RSUs is recognized on a straight-line basis over the vesting period for the entire award. RSUs are classified as equity awards as the vesting results in the issuance of shares of AAG common stock.
RSU award activity for all plans for the years ended December 31, 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
| (In thousands) | | |
Outstanding at December 31, 2019 | 5,187 | | | $ | 37.01 | |
Granted | 5,883 | | | 22.07 | |
Vested and released | (2,268) | | | 39.46 | |
Forfeited | (920) | | | 29.78 | |
Outstanding at December 31, 2020 | 7,882 | | | $ | 23.66 | |
Granted | 5,525 | | | 18.34 | |
Vested and released | (3,314) | | | 25.58 | |
Forfeited | (692) | | | 18.78 | |
Outstanding at December 31, 2021 | 9,401 | | | $ | 20.17 | |
Granted | 5,882 | | | 15.93 | |
Vested and released | (4,131) | | | 21.04 | |
Forfeited | (889) | | | 18.04 | |
Outstanding at December 31, 2022 | 10,263 | | | $ | 17.51 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
As of December 31, 2022, there was $99 million of unrecognized compensation cost related to RSUs. These costs are expected to be recognized over a weighted average period of one year. The total fair value of RSUs vested during the years ended December 31, 2022, 2021 and 2020 was $70 million, $62 million and $51 million, respectively.
15. Valuation and Qualifying Accounts (in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Year | | Additions Charged to Statement of Operations Accounts | | Deductions | | Balance at End of Year |
Allowance for obsolescence of spare parts | | | | | | | |
Year ended December 31, 2022 | $ | 634 | | | $ | 96 | | | $ | (114) | | | $ | 616 | |
Year ended December 31, 2021 | 490 | | | 177 | | | (33) | | | 634 | |
Year ended December 31, 2020 | 784 | | | 100 | | | (394) | | | 490 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
16. Subsequent Events
2013 Term Loan Facility Refinancing
In February 2023, American and AAG entered into the Seventh Amendment to Amended and Restated Credit and Guaranty Agreement (the Seventh Amendment) to the 2013 Credit Agreement, pursuant to which American extended the maturity date of all remaining term loans outstanding under the 2013 Term Loan Facility to February 2028 from June 2025. The Seventh Amendment also amended certain other terms of the 2013 Credit Agreement, including the interest rate for the 2013 Term Loan Facility, amortization schedule, the requirements for delivery of appraisals and certain covenants relating to dispositions of collateral. Additionally, the Seventh Amendment transitioned the benchmark interest rate from LIBOR to SOFR. As a result, the 2013 Term Loan Facility bears interest at a base rate (subject to a floor of 1.00%) plus an applicable margin of 1.75% or, at American’s option, the SOFR rate for a tenor of one, three or six months, depending on the interest period selected by American (subject to a floor of 0.00%), plus the SOFR adjustment applicable to such interest period and an applicable margin of 2.75%. After giving effect to the issuance of the 7.25% Senior Secured Notes (as discussed below) and the application of the proceeds therefrom, there was $1.0 billion aggregate principal outstanding under the 2013 Term Loan Facility.
7.25% Senior Secured Notes
In February 2023, American issued $750 million aggregate principal amount of 7.25% senior secured notes due 2028 (the 7.25% Senior Secured Notes). The 7.25% Senior Secured Notes bear interest at a rate of 7.25% per annum (subject to increase if the collateral coverage ratio described below is not met). Interest on the 7.25% Senior Secured Notes is payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2023. The 7.25% Senior Secured Notes will mature on February 15, 2028. The obligations of American under the 7.25% Senior Secured Notes are fully and unconditionally guaranteed on a senior unsecured basis by AAG. American used the proceeds from the offering of the 7.25% Senior Secured Notes, together with cash on hand, to repay a portion of the term loans outstanding under the 2013 Term Loan Facility and to pay related fees and expenses.
The 7.25% Senior Secured Notes were issued pursuant to an indenture, dated as of February 15, 2023 (the 7.25% Senior Secured Notes Indenture), by and among American, AAG and Wilmington Trust, National Association, as trustee and collateral agent (the 7.25% Senior Secured Notes Trustee). The 7.25% Senior Secured Notes are American’s senior secured obligations and are secured on a first lien basis by security interests in certain assets, rights and properties that American uses to provide non-stop scheduled air carrier services between certain airports in the United States and airports in countries in South America and New Zealand (the 7.25% Senior Secured Notes Collateral). The 7.25% Senior Secured Notes Collateral presently secures (and will continue to secure), on a first lien, pari passu basis with the 7.25% Senior Secured Notes, the 2013 Credit Facilities under the 2013 Credit Agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
American may redeem the 7.25% Senior Secured Notes, in whole at any time or in part from time to time prior to February 15, 2025, at a redemption price equal to 100% of the principal amount of the 7.25% Senior Secured Notes to be redeemed, plus a “make-whole” premium, plus any accrued and unpaid interest thereon to but excluding the date of redemption. At any time on or after February 15, 2025, American may redeem all or any of the 7.25% Senior Secured Notes in whole at any time, or in part from time to time, at the redemption prices described under the 7.25% Senior Secured Notes Indenture, plus any accrued and unpaid interest thereon to but excluding the date of redemption. In addition, at any time prior to February 15, 2025, American may redeem up to 40% of the original aggregate principal amount of the 7.25% Senior Secured Notes (calculated after giving effect to any issuance of additional notes) with the net cash proceeds of certain equity offerings, at a redemption price equal to 107.250% of the aggregate principal amount of the 7.25% Senior Secured Notes to be redeemed, plus any accrued and unpaid interest thereon to but excluding the date of redemption.
Further, if certain change of control transactions occur, each holder of 7.25% Senior Secured Notes may require American to repurchase the 7.25% Senior Secured Notes in whole or in part at a repurchase price of 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to but not including the repurchase date.
American is required to deliver an appraisal of the 7.25% Senior Secured Notes Collateral and officer’s certificate twice a year demonstrating the calculation of a collateral coverage ratio in relation to the 7.25% Senior Secured Notes Collateral (the 7.25% Senior Secured Notes Collateral Coverage Ratio) as of the date of delivery of the appraisal for the applicable period. If the 7.25% Senior Secured Notes Collateral Coverage Ratio is less than 1.6 to 1.0 as of the date of delivery of the appraisal for the applicable period, then, subject to a cure period in which additional collateral can be provided or debt repaid such that American meets the required 7.25% Senior Secured Notes Collateral Coverage Ratio, American will be required to pay special interest in an additional amount equal to 2.0% per annum of the principal amount of the 7.25% Senior Secured Notes until the 7.25% Senior Secured Notes Collateral Coverage Ratio is established to be at least 1.6 to 1.0.
ITEM 8B. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES, INC.
Report of Independent Registered Public Accounting Firm
To the Stockholder and Board of Directors
American Airlines, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of American Airlines, Inc. and subsidiaries (American) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholder’s equity, for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of American as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), American’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2023 expressed an unqualified opinion on the effectiveness of American’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of American’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to American in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence over realizability of tax operating loss and other carryforwards
As discussed in Notes 1(j) and 5 to the consolidated financial statements, American had $4.5 billion of tax operating loss and other carryforwards, which are recorded as deferred tax assets at December 31, 2022. Deferred tax assets are recognized related to tax operating loss and other carryforwards that will reduce future taxable income. American provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of the deferred tax assets, will not be realized. In evaluating the need for a valuation allowance, management considers all available positive and negative evidence.
We identified the evaluation of the sufficiency of audit evidence over the realizability of tax operating loss and other carryforwards as a critical audit matter. Evaluating the sufficiency of audit evidence required subjective auditor judgment in order to assess the extent of procedures performed in assessing the realizability of the tax operating loss and other carryforwards.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to American’s deferred tax asset valuation allowance process, including controls related to the realizability of tax operating loss and other carryforwards. We evaluated positive and negative evidence used in assessing whether the tax operating loss and other carryforwards were more likely than not to be realized in the future. We evaluated the reasonableness of management’s projections of future profitability considering historical profitability of American, and consistency with industry data. We involved tax professionals with specialized skills and knowledge, who assisted in evaluating the application of tax law. We assessed the sufficiency of audit evidence obtained over the realizability of the tax operating loss and other carryforwards by evaluating the cumulative results of the audit procedures.
/s/ KPMG LLP
We have served as American’s auditor since 2014.
Dallas, Texas
February 22, 2023
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Operating revenues: | | | | | |
Passenger | $ | 44,568 | | | $ | 26,063 | | | $ | 14,518 | |
Cargo | 1,233 | | | 1,314 | | | 769 | |
Other | 3,164 | | | 2,503 | | | 2,048 | |
Total operating revenues | 48,965 | | | 29,880 | | | 17,335 | |
Operating expenses: | | | | | |
Aircraft fuel and related taxes | 13,791 | | | 6,792 | | | 3,402 | |
Salaries, wages and benefits | 12,965 | | | 11,811 | | | 11,224 | |
Regional expenses | 4,345 | | | 3,111 | | | 2,746 | |
Maintenance, materials and repairs | 2,684 | | | 1,979 | | | 1,585 | |
Other rent and landing fees | 2,730 | | | 2,619 | | | 2,004 | |
Aircraft rent | 1,395 | | | 1,425 | | | 1,341 | |
Selling expenses | 1,815 | | | 1,098 | | | 666 | |
Depreciation and amortization | 1,969 | | | 2,019 | | | 2,040 | |
Special items, net | 193 | | | (4,006) | | | (657) | |
Other | 5,425 | | | 3,993 | | | 3,208 | |
Total operating expenses | 47,312 | | | 30,841 | | | 27,559 | |
Operating income (loss) | 1,653 | | | (961) | | | (10,224) | |
Nonoperating income (expense): | | | | | |
Interest income | 349 | | | 34 | | | 337 | |
Interest expense, net | (1,872) | | | (1,642) | | | (1,171) | |
Other income, net | 324 | | | 292 | | | 155 | |
Total nonoperating expense, net | (1,199) | | | (1,316) | | | (679) | |
Income (loss) before income taxes | 454 | | | (2,277) | | | (10,903) | |
Income tax provision (benefit) | 116 | | | (500) | | | (2,453) | |
Net income (loss) | $ | 338 | | | $ | (1,777) | | | $ | (8,450) | |
See accompanying notes to consolidated financial statements.
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net income (loss) | $ | 338 | | | $ | (1,777) | | | $ | (8,450) | |
Other comprehensive income (loss), net of tax: | | | | | |
Pension, retiree medical and other postretirement benefits | 1,354 | | | 1,153 | | | (771) | |
| | | | | |
| | | | | |
Investments | (3) | | | — | | | — | |
Total other comprehensive income (loss), net of tax | 1,351 | | | 1,153 | | | (771) | |
Total comprehensive income (loss) | $ | 1,689 | | | $ | (624) | | | $ | (9,221) | |
See accompanying notes to consolidated financial statements.
AMERICAN AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value amounts)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
ASSETS | | | |
Current assets | | | |
Cash | $ | 429 | | | $ | 265 | |
Short-term investments | 8,523 | | | 12,155 | |
Restricted cash and short-term investments | 995 | | | 990 | |
Accounts receivable, net | 2,117 | | | 1,484 | |
Receivables from related parties, net | 6,588 | | | 5,547 | |
Aircraft fuel, spare parts and supplies, net | 2,157 | | | 1,692 | |
Prepaid expenses and other | 798 | | | 579 | |
Total current assets | 21,607 | | | 22,712 | |
Operating property and equipment | | | |
Flight equipment | 39,359 | | | 37,520 | |
Ground property and equipment | 9,479 | | | 8,966 | |
Equipment purchase deposits | 613 | | | 517 | |
Total property and equipment, at cost | 49,451 | | | 47,003 | |
Less accumulated depreciation and amortization | (19,569) | | | (17,770) | |
Total property and equipment, net | 29,882 | | | 29,233 | |
Operating lease right-of-use assets | 8,033 | | | 7,810 | |
Other assets | | | |
Goodwill | 4,091 | | | 4,091 | |
Intangibles, net of accumulated amortization of $827 and $786, respectively | 2,059 | | | 1,988 | |
Deferred tax asset | 2,893 | | | 3,408 | |
Other assets | 1,759 | | | 1,903 | |
Total other assets | 10,802 | | | 11,390 | |
Total assets | $ | 70,324 | | | $ | 71,145 | |
LIABILITIES AND STOCKHOLDER’S EQUITY | | | |
Current liabilities | | | |
Current maturities of long-term debt and finance leases | $ | 3,267 | | | $ | 1,742 | |
Accounts payable | 2,071 | | | 1,630 | |
Accrued salaries and wages | 1,529 | | | 1,385 | |
Air traffic liability | 6,745 | | | 6,087 | |
Loyalty program liability | 3,169 | | | 2,896 | |
Operating lease liabilities | 1,449 | | | 1,496 | |
Other accrued liabilities | 2,852 | | | 2,628 | |
Total current liabilities | 21,082 | | | 17,864 | |
Noncurrent liabilities | | | |
Long-term debt and finance leases, net of current maturities | 27,155 | | | 30,352 | |
Pension and postretirement benefits | 2,811 | | | 5,020 | |
Loyalty program liability | 5,976 | | | 6,239 | |
Operating lease liabilities | 6,512 | | | 6,578 | |
Other liabilities | 1,195 | | | 1,266 | |
Total noncurrent liabilities | 43,649 | | | 49,455 | |
Commitments and contingencies (Note 10) | | | |
Stockholder’s equity | | | |
Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding | — | | | — | |
Additional paid-in capital | 17,230 | | | 17,152 | |
Accumulated other comprehensive loss | (4,690) | | | (6,041) | |
Retained deficit | (6,947) | | | (7,285) | |
Total stockholder’s equity | 5,593 | | | 3,826 | |
Total liabilities and stockholder’s equity | $ | 70,324 | | | $ | 71,145 | |
See accompanying notes to consolidated financial statements.
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income (loss) | $ | 338 | | | $ | (1,777) | | | $ | (8,450) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
Depreciation and amortization | 2,238 | | | 2,282 | | | 2,313 | |
Special items, net non-cash | 227 | | | 83 | | | 1,588 | |
Pension and postretirement | (404) | | | (320) | | | (319) | |
Deferred income tax provision (benefit) | 122 | | | (500) | | | (2,453) | |
Share-based compensation | 75 | | | 95 | | | 91 | |
Net gains from sale of property and equipment and sale-leaseback transactions | (3) | | | (26) | | | (98) | |
Other, net | (45) | | | 24 | | | 14 | |
Changes in operating assets and liabilities: | | | | | |
Decrease (increase) in accounts receivable | (636) | | | (290) | | | 595 | |
Decrease (increase) in other assets | (744) | | | (370) | | | 42 | |
Increase (decrease) in accounts payable and accrued liabilities | 549 | | | 335 | | | (619) | |
Increase (decrease) in air traffic liability | 658 | | | 1,454 | | | (51) | |
Decrease (increase) in receivables from related parties, net | (1,044) | | | 1,857 | | | 4,134 | |
Increase (decrease) in loyalty program liability | 10 | | | (60) | | | 580 | |
Contributions to pension plans | (4) | | | (247) | | | (6) | |
Increase (decrease) in other liabilities | (8) | | | 650 | | | 1,210 | |
Net cash provided by (used in) operating activities | 1,329 | | | 3,190 | | | (1,429) | |
Cash flows from investing activities: | | | | | |
Capital expenditures, net of aircraft purchase deposit returns | (2,489) | | | (169) | | | (1,922) | |
Airport construction projects, net of reimbursements | (360) | | | (204) | | | (173) | |
Proceeds from sale-leaseback transactions | 86 | | | 181 | | | 665 | |
Proceeds from sale of property and equipment | 61 | | | 192 | | | 351 | |
Sales of short-term investments | 14,972 | | | 13,923 | | | 2,803 | |
Purchases of short-term investments | (11,257) | | | (19,454) | | | (5,874) | |
Decrease (increase) in restricted short-term investments | 1 | | | (401) | | | (308) | |
Purchase of equity investments | (321) | | | (28) | | | — | |
Other investing activities | — | | | 15 | | | 150 | |
Net cash provided by (used in) investing activities | 693 | | | (5,945) | | | (4,308) | |
Cash flows from financing activities: | | | | | |
Payments on long-term debt and finance leases | (2,991) | | | (7,320) | | | (3,029) | |
Proceeds from issuance of long-term debt | 1,069 | | | 10,209 | | | 8,959 | |
Deferred financing costs | (2) | | | (207) | | | (85) | |
Other financing activities | 77 | | | 88 | | | — | |
Net cash provided by (used in) financing activities | (1,847) | | | 2,770 | | | 5,845 | |
Net increase in cash and restricted cash | 175 | | | 15 | | | 108 | |
Cash and restricted cash at beginning of year | 400 | | | 385 | | | 277 | |
Cash and restricted cash at end of year (a) | $ | 575 | | | $ | 400 | | | $ | 385 | |
(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the consolidated balance sheets:
| | | | | | | | | | | | | | | | | |
Cash | $ | 429 | | | $ | 265 | | | $ | 231 | |
Restricted cash included in restricted cash and short-term investments | 146 | | | 135 | | | 154 | |
Total cash and restricted cash | $ | 575 | | | $ | 400 | | | $ | 385 | |
See accompanying notes to consolidated financial statements.
AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings (Deficit) | | Total |
Balance at December 31, 2019 | $ | — | | | $ | 16,903 | | | $ | (6,423) | | | $ | 2,942 | | | $ | 13,422 | |
Net loss | — | | | — | | | — | | | (8,450) | | | (8,450) | |
Other comprehensive loss, net | — | | | — | | | (771) | | | — | | | (771) | |
Share-based compensation expense | — | | | 91 | | | — | | | — | | | 91 | |
Intercompany equity transfer | — | | | 56 | | | — | | | — | | | 56 | |
Balance at December 31, 2020 | — | | | 17,050 | | | (7,194) | | | (5,508) | | | 4,348 | |
Net loss | — | | | — | | | — | | | (1,777) | | | (1,777) | |
Other comprehensive income, net | — | | | — | | | 1,153 | | | — | | | 1,153 | |
Share-based compensation expense | — | | | 95 | | | — | | | — | | | 95 | |
Intercompany equity transfer | — | | | 7 | | | — | | | — | | | 7 | |
Balance at December 31, 2021 | — | | | 17,152 | | | (6,041) | | | (7,285) | | | 3,826 | |
Net income | — | | | — | | | — | | | 338 | | | 338 | |
Other comprehensive income, net | — | | | — | | | 1,351 | | | — | | | 1,351 | |
Share-based compensation expense | — | | | 75 | | | — | | | — | | | 75 | |
Intercompany equity transfer | — | | | 3 | | | — | | | — | | | 3 | |
Balance at December 31, 2022 | $ | — | | | $ | 17,230 | | | $ | (4,690) | | | $ | (6,947) | | | $ | 5,593 | |
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
1. Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
American Airlines, Inc. (American) is a Delaware corporation whose primary business activity is the operation of a major network air carrier, providing scheduled air transportation for passengers and cargo. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG), which owns all of American’s outstanding common stock, par value $1.00 per share. All significant intercompany transactions have been eliminated.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, the loyalty program, deferred tax assets, as well as pension and retiree medical and other postretirement benefits.
(b) Government Assistance
Payroll Support Programs
During 2020 and 2021, American, Envoy Air Inc. (Envoy), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA and together with American, Envoy and Piedmont, the Subsidiaries) entered into payroll support program agreements (PSP Agreements) with the U.S. Department of Treasury (Treasury) pursuant to the payroll support program established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (PSP1), the payroll support program established under the Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) (PSP2) and the payroll support program established under the American Rescue Plan Act of 2021 (ARP) (PSP3). The aggregate amount of financial assistance received was approximately $12.8 billion, and as partial compensation to the U.S. Government for the provision of financial assistance provided under each of these programs, AAG issued promissory notes and warrants to Treasury.
The table below provides a summary of the financial assistance received and the promissory notes and the warrants issued under each program (in millions, except exercise price amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Program | | Closing Date | | PSP Financial Assistance | | Promissory Notes (1) | | PSP Warrants | | Total | | Warrants Issued (Shares) (2) | | Exercise Price of Warrants |
PSP1 | | April 20, 2020 | | $ | 4,138 | | | $ | 1,757 | | | $ | 63 | | | $ | 5,958 | | | 14.0 | | $ | 12.51 | |
PSP2 | | January 15, 2021 | | 2,427 | | | 1,030 | | | 76 | | | 3,533 | | | 6.6 | | 15.66 | |
PSP3 | | April 23, 2021 | | 2,290 | | | 959 | | | 46 | | | 3,295 | | | 4.4 | | 21.75 | |
Total | | | | $ | 8,855 | | | $ | 3,746 | | | $ | 185 | | | $ | 12,786 | | | 25.0 | | |
(1)See Note 3 for further information on the promissory notes issued.
(2)The payroll support program warrants (PSP Warrants) are subject to certain anti-dilution provisions, do not have any voting rights and are freely transferable, with registration rights. Each warrant expires on the fifth anniversary of the date of issuance, with expiration dates ranging from April 2025 to June 2026, and will be exercisable either through net share settlement or cash, at AAG’s option. The warrants were issued solely as compensation to the U.S. Government related to entry into the PSP Agreements. No separate proceeds (apart from the financial assistance described below) were received upon issuance of the warrants or will be received upon exercise thereof.
In connection with the PSP Agreements entered into with Treasury, AAG and the Subsidiaries were required to comply with the relevant provisions of the CARES Act, the PSP Extension Law, and the ARP, which included the requirement that funds provided pursuant to these programs be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the prohibition against involuntary furloughs and reductions in employee pay rates and benefits, the requirement that certain levels of commercial air service be maintained, provisions that prohibited the repurchase of AAG common stock and the payment of common stock dividends as well as provisions that restrict the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
payment of certain executive compensation. As of December 31, 2022, all of these provisions have expired except for those related to the payment of certain executive compensation, which expire on April 1, 2023.
For accounting purposes, the $12.8 billion of aggregate financial assistance received pursuant to the PSP Agreements was allocated to the promissory notes, warrants and other financial assistance (PSP Financial Assistance). The aggregate principal amount of the promissory notes was recorded as unsecured long-term debt and the total fair value of the warrants, estimated using a Black-Scholes option pricing model, was recorded in stockholders’ deficit in AAG’s consolidated balance sheets. The remaining amounts were recognized in 2020 and 2021 as a credit to special items, net in the consolidated statements of operations over the period which the continuation of payment of eligible employee wages, salaries and benefits was required.
Treasury Loan Agreement
On September 25, 2020 (the Treasury Loan Closing Date), AAG and American entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which provided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $5.5 billion. Subsequently, on October 21, 2020, AAG and American entered into an amendment to the Treasury Loan Agreement which increased the borrowing amount to up to $7.5 billion. In connection with AAG’s entry into the Treasury Loan Agreement, on the Treasury Loan Closing Date, AAG also entered into a warrant agreement (the Treasury Loan Warrant Agreement) with Treasury.
In September 2020, American borrowed $550 million under the Treasury Term Loan Facility and on March 24, 2021, used a portion of the proceeds from the AAdvantage Financing to prepay in full the $550 million of outstanding loans under the Treasury Term Loan Facility and terminated the Treasury Loan Agreement. Pursuant to the Treasury Loan Agreement, AAG issued to Treasury warrants (Treasury Loan Warrants) to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock (the Treasury Loan Warrant Shares), which expire in September 2025. The exercise price of the Treasury Loan Warrant Shares is $12.51 per share, subject to certain anti-dilution provisions provided for in the Treasury Loan Warrant Agreement. For accounting purposes, the fair value for the Treasury Loan Warrant Shares, estimated using a Black-Scholes option pricing model, was recorded in stockholders' deficit in AAG’s consolidated balance sheet with an offsetting debt discount to the Treasury Term Loan Facility in American’s consolidated balance sheet. The provisions of the Treasury Loan Warrants are substantially similar to the PSP Warrants.
(c) Recent Accounting Pronouncements
Accounting Standards Update (ASU) 2020-04: Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2022-06: Deferral of the Sunset Date of Topic 848
ASU 2020-04 provides optional temporary guidance for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. Topic 848 is effective as of March 12, 2020 through December 31, 2022; however, because the intended cessation date of LIBOR was deferred to June 30, 2023, ASU 2022-06 was issued in December 2022 to extend the current relief in Topic 848 through December 31, 2024. American will adopt Topic 848 when its relevant contracts are modified upon transition to alternative reference rates and American does not expect the application of Topic 848 to have a material impact on its consolidated financial statements.
(d) Investments
Short-term investments primarily include debt securities and are classified as available-for-sale and stated at fair value. Realized gains and losses are recorded in nonoperating other income, net on American’s consolidated statements of operations. Unrealized gains and losses are recorded as a component of accumulated other comprehensive loss on American’s consolidated balance sheets. For investments in an unrealized loss position, American determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. There have been no credit losses.
Equity investments are accounted for under the equity method if American is able to exercise significant influence over an investee. Equity investments for which American does not have significant influence are recorded at fair value or at cost, if fair value is not readily determinable, with adjustments for observable changes in price or impairments (referred to as the measurement alternative). American’s share of equity method investees’ financial results and changes in fair value are recorded in nonoperating other income, net on the consolidated statements of operations. See Note 7 for additional information related to American’s equity investments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(e) Restricted Cash and Short-term Investments
American has restricted cash and short-term investments related primarily to collateral held to support workers’ compensation obligations, collateral associated with the AAdvantage Financing and money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at John F. Kennedy International Airport (JFK).
(f) Accounts Receivable, Net
Accounts receivable primarily consist of amounts due from credit card processing companies for tickets sold to individual passengers, amounts due from airline and non-airline business partners, including American’s co-branded credit card partners and cargo customers. Receivables from ticket sales are short-term, mostly settled within seven days after sale. Receivables from American’s business partners are typically settled within 30 days. All accounts receivable are reported net of an allowance for credit losses, which was not material as of December 31, 2022 and 2021. American considers past and future financial and qualitative factors, including aging, payment history and other credit monitoring indicators, when establishing the allowance for credit losses.
(g) Aircraft Fuel, Spare Parts and Supplies, Net
Aircraft fuel is recorded on a first-in, first-out basis. Spare parts and supplies are recorded at average costs less an allowance for obsolescence, which is recognized over the weighted average remaining useful life of the related fleet. American also provides an allowance for spare parts and supplies identified as excess or obsolete to reduce the carrying cost to the lower of cost or net realizable value. Aircraft fuel, spare parts and supplies are expensed when used.
(h) Operating Property and Equipment
Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or the lease term, whichever is less, using the straight-line method. Residual values for aircraft, engines and related rotable parts are generally 5% to 10% of original cost. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated or amortized over the estimated useful life of the asset or the lease term, whichever is less. The estimated useful lives for the principal property and equipment classifications are as follows:
| | | | | |
Principal Property and Equipment Classification | Estimated Useful Life |
Aircraft, engines and related rotable parts | 20 – 30 years |
Buildings and improvements | 5 – 30 years |
Furniture, fixtures and other equipment | 3 – 10 years |
Capitalized software | 5 – 10 years |
Total depreciation and amortization expense was $2.2 billion for the year ended December 31, 2022 and $2.3 billion for each of the years ended December 31, 2021 and 2020.
American assesses impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired. An impairment of an asset or group of assets exists only when the sum of the estimated undiscounted cash flows expected to be generated directly by the assets are less than the carrying value of the assets. American groups assets principally by fleet-type when estimating future cash flows, which is generally the lowest level for which identifiable cash flows exist. Estimates of future cash flows are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions, including American’s current fleet plan. If such assets are impaired, the impairment charge recognized is the amount by which the carrying value of the assets exceed their fair value. Fair value reflects management’s best estimate including inputs from published pricing guides and bids from third parties as well as contracted sales agreements when applicable. In 2022, American recorded $149 million in non-cash special impairment charges to write down the carrying value of its retired Airbus A330 fleet to the estimated fair value due to the market conditions for certain used aircraft.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(i) Leases
American determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, current operating lease liabilities and noncurrent operating lease liabilities on American’s consolidated balance sheets. Finance leases are included in property and equipment, current maturities of long-term debt and finance leases and long-term debt and finance leases, net of current maturities, on American’s consolidated balance sheets.
ROU assets represent American’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
American uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. American gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates.
American’s lease term includes options to extend the lease when it is reasonably certain that it will exercise that option. Leases with a term of 12 months or less are not recorded on its consolidated balance sheets.
Under certain of American’s capacity purchase agreements with third-party regional carriers, American does not own the underlying aircraft. However, since American controls the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to be leased for accounting purposes. For these capacity purchase agreements, American accounts for the lease and non-lease components separately. The lease component consists of the aircraft and the non-lease components consist of services, such as the crew and maintenance. American allocates the consideration in the capacity purchase agreements to the lease and non-lease components using their estimated relative standalone prices. See Note 10(b) for additional information on its capacity purchase agreements.
For real estate, American accounts for the lease and non-lease components as a single lease component.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes.
American provides a valuation allowance for its deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond American’s control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand. American has determined that positive factors outweigh negative factors in the determination of the realizability of its deferred tax assets.
(k) Goodwill
Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the 2013 merger with US Airways Group, Inc. (US Airways Group). American has one reporting unit. American assesses goodwill for impairment annually or more frequently if events or circumstances indicate that the fair value of goodwill may be lower than the carrying value. American’s annual assessment date is October 1.
Goodwill is assessed for impairment by initially performing a qualitative assessment. If American determines that it is more likely than not that its goodwill may be impaired, it uses a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any. Based upon American’s annual assessment, there was no goodwill impairment in 2022. The carrying value of American’s goodwill on its consolidated balance sheets was $4.1 billion as of December 31, 2022 and 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(l) Other Intangibles, Net
Intangible assets consist primarily of certain domestic airport slots and gate leasehold rights, customer relationships, marketing agreements, commercial agreements, international slots and route authorities and tradenames.
Definite-Lived Intangible Assets
Definite-lived intangible assets are originally recorded at their acquired fair values, subsequently amortized over their respective estimated useful lives and are assessed for impairment whenever events and circumstances indicate that the assets may be impaired.
The following table provides information relating to American’s amortizable intangible assets as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Domestic airport slots | $ | 365 | | | $ | 365 | |
Customer relationships | 300 | | | 300 | |
Marketing agreements | 105 | | | 105 | |
Tradenames | 35 | | | 35 | |
Airport gate leasehold rights | 137 | | | 137 | |
Accumulated amortization | (827) | | | (786) | |
Total | $ | 115 | | | $ | 156 | |
Certain domestic airport slots and airport gate leasehold rights are amortized on a straight-line basis over 25 years. Certain marketing agreements were identified as intangible assets subject to amortization and are amortized on a straight-line basis over approximately 30 years. Customer relationships and tradenames are fully amortized.
American recorded amortization expense related to these intangible assets of $41 million for each of the years ended December 31, 2022, 2021 and 2020. American expects to record annual amortization expense for these intangible assets as follows (in millions):
| | | | | |
2023 | $ | 7 | |
2024 | 7 | |
2025 | 7 | |
2026 | 6 | |
2027 | 6 | |
2028 and thereafter | 82 | |
Total | $ | 115 | |
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets include certain domestic airport slots, international slots and route authorities and in 2022, American’s commercial agreement with GOL Linhas Aéreas Inteligentes S.A. (GOL). American assesses indefinite-lived intangible assets for impairment annually or more frequently if events or circumstances indicate that the fair values of indefinite-lived intangible assets may be lower than their carrying values. American’s annual assessment date is October 1.
Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment. If American determines that it is more likely than not that its indefinite-lived intangible assets may be impaired, American uses a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any. Based upon American’s annual assessment, there were no material indefinite-lived intangible asset impairments in 2022. American had $1.9 billion and $1.8 billion of indefinite-lived intangible assets on its consolidated balance sheets as of December 31, 2022 and 2021, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(m) Revenue Recognition
Revenue
The following are the significant categories comprising American’s operating revenues (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Passenger revenue: | | | | | |
Passenger travel | $ | 41,425 | | | $ | 23,896 | | | $ | 13,456 | |
Loyalty revenue - travel (1) | 3,143 | | | 2,167 | | | 1,062 | |
Total passenger revenue | 44,568 | | | 26,063 | | | 14,518 | |
Cargo | 1,233 | | | 1,314 | | | 769 | |
Other: | | | | | |
Loyalty revenue - marketing services | 2,657 | | | 2,166 | | | 1,825 | |
Other revenue | 507 | | | 337 | | | 223 | |
Total other revenue | 3,164 | | | 2,503 | | | 2,048 | |
Total operating revenues | $ | 48,965 | | | $ | 29,880 | | | $ | 17,335 | |
(1)Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions, which were earned from travel or co-branded credit card and other partners. See “Loyalty Revenue” below for further discussion on these mileage credits.
The following is American’s total passenger revenue by geographic region (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Domestic | $ | 32,911 | | | $ | 21,453 | | | $ | 11,765 | |
Latin America | 6,150 | | | 3,506 | | | 1,852 | |
Atlantic | 5,070 | | | 965 | | | 654 | |
Pacific | 437 | | | 139 | | | 247 | |
Total passenger revenue | $ | 44,568 | | | $ | 26,063 | | | $ | 14,518 | |
American attributes passenger revenue by geographic region based upon the origin and destination of each flight segment.
Passenger Revenue
American recognizes all revenues generated from transportation on American and its regional flights operated under the brand name American Eagle, including associated baggage fees and other inflight services, as passenger revenue when transportation is provided. Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on American’s consolidated balance sheets. The air traffic liability principally represents tickets sold for future travel on American and partner airlines.
The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. The estimate for tickets expected to expire unused is generally based on an analysis of American’s historical data. American has consistently applied this accounting method to estimate and recognize revenue from unused tickets at the date of travel. This estimate is periodically evaluated based on subsequent activity to validate its accuracy. Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed.
Various taxes and fees assessed on the sale of tickets to end customers are collected by American as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Loyalty Revenue
American currently operates the loyalty program, AAdvantage. This program awards mileage credits to passengers who fly on American, any oneworld airline or other partner airlines, or by using the services of other program participants, such as American’s co-branded credit cards, and certain hotels and car rental companies. Mileage credits can be redeemed for travel on American and other participating partner airlines, as well as other non-air travel awards such as hotels and rental cars. For mileage credits earned by AAdvantage loyalty program members, American applies the deferred revenue method.
Mileage credits earned through travel
For mileage credits earned through travel, American applies a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned. The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided. The estimated selling price of mileage credits is determined using an equivalent ticket value approach, which uses historical data, including award redemption patterns by geographic region and class of service, as well as similar fares as those used to settle award redemptions. The estimated selling price of mileage credits is adjusted for an estimate of mileage credits that will not be redeemed using a statistical model based on historical redemption patterns to develop an estimate of the likelihood of future redemption.
Mileage credits sold to co-branded credit cards and other partners
American sells mileage credits to participating airline partners and non-airline business partners, including American’s co-branded credit card partners, under contracts with remaining terms generally from one to seven years as of December 31, 2022. Consideration received from the sale of mileage credits is variable and payment terms typically are within 30 days subsequent to the month of mileage sale. Sales of mileage credits to non-airline business partners are comprised of two components, transportation and marketing. American allocates the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered.
American’s most significant mileage credit partner agreements are its co-branded credit card agreements with Citi and Barclaycard US. American identified two revenue elements in these co-branded credit card agreements: the transportation component and the marketing component.
The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided.
The marketing component includes the use of intellectual property, including the American brand and access to loyalty program member lists, which is the predominant element in these agreements, as well as advertising. American recognizes the marketing component in other revenue in the period of the mileage credit sale following the sales-based royalty method.
For the portion of American’s outstanding mileage credits that it estimates will not be redeemed, American recognizes the associated value proportionally as the remaining mileage credits are redeemed. American’s estimates use a statistical model based on historical redemption patterns to develop an estimate of the likelihood of future redemption.
Cargo Revenue
Cargo revenue is recognized when American provides the transportation.
Other Revenue
Other revenue includes revenue associated with American’s loyalty program, which is comprised principally of the marketing component of mileage credit sales to co-branded credit card and other partners and other marketing related payments. The accounting and recognition for the loyalty program marketing services are discussed above in “Loyalty Revenue.” The remaining amounts included within other revenue relate to airport clubs, other commission revenue, advertising and vacation-related services.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Contract Balances
American’s significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on American’s consolidated balance sheets and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on American’s consolidated balance sheets.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (in millions) |
Loyalty program liability | $ | 9,145 | | | $ | 9,135 | |
Air traffic liability | 6,745 | | | 6,087 | |
Total | $ | 15,890 | | | $ | 15,222 | |
The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue). Changes in loyalty program liability are as follows (in millions):
| | | | | |
Balance at December 31, 2021 | $ | 9,135 | |
Deferral of revenue | 3,221 | |
Recognition of revenue (1) | (3,211) | |
Balance at December 31, 2022 (2) | $ | 9,145 | |
(1)Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of mileage credits that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as mileage credits that were issued during the period.
(2)Mileage credits can be redeemed at any time and generally do not expire as long as that AAdvantage member has any type of qualifying activity at least every 24 months or if the AAdvantage member is the primary holder of a co-branded credit card. As of December 31, 2022, American’s current loyalty program liability was $3.2 billion and represents American’s current estimate of revenue expected to be recognized in the next 12 months based on historical as well as projected trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.
The air traffic liability principally represents tickets sold for future travel on American and partner airlines. The balance in American’s air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is generally one year. Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months. In response to the COVID-19 pandemic, American extended the contract duration for certain tickets to September 30, 2022, principally those tickets which were issued in 2020 and 2021. Additionally, American extended the contract duration to December 31, 2022 for tickets to certain international destinations. For 2022, $4.8 billion of revenue was recognized in passenger revenue that was included in American’s air traffic liability at December 31, 2021. Tickets issued in 2022 and thereafter are no longer subject to change fees which provides more flexibility for customers to change travel plans. Given this new flexibility offered to its customers, American’s estimate of revenue that will be recognized from the air traffic liability for future flown or unused tickets may be subject to variability and differ from historical experience.
(n) Maintenance, Materials and Repairs
Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under certain flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists.
(o) Selling Expenses
Selling expenses include credit card fees, commissions, third party distribution channel fees and advertising. Selling expenses associated with passenger revenue are expensed when the transportation or service is provided. Advertising costs are expensed as incurred. Advertising expense was $105 million for each of the years ended December 31, 2022 and 2021 and $57 million for the year ended December 31, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(p) Share-based Compensation
American accounts for its share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award. The majority of American’s stock awards are time vested restricted stock units, and the fair value of such awards is based on the market price of the underlying shares of AAG common stock on the date of grant. See Note 13 for further discussion of share-based compensation.
(q) Foreign Currency Gains and Losses
Foreign currency gains and losses are recorded as part of other income, net within total nonoperating expense, net on American’s consolidated statements of operations. For the years ended December 31, 2022, 2021 and 2020, respectively, foreign currency losses were $38 million, $4 million and $24 million.
(r) Other Operating Expenses
Other operating expenses includes costs associated with aircraft food and catering, crew travel, ground and cargo handling, passenger accommodation, international navigation fees, aircraft cleaning and certain general and administrative expenses.
(s) Regional Expenses
American's regional carriers provide scheduled air transportation under the brand name “American Eagle.” The American Eagle carriers include AAG's wholly-owned regional carriers as well as third-party regional carriers. American's regional carrier arrangements are in the form of capacity purchase agreements. Expenses associated with American Eagle operations are classified as regional expenses on the consolidated statements of operations.
Regional expenses for the years ended December 31, 2022, 2021, and 2020 include $269 million, $263 million and $273 million of depreciation and amortization, respectively, and $5 million, $6 million and $13 million of aircraft rent, respectively.
In 2022, 2021, and 2020, American recognized $592 million, $495 million and $438 million, respectively, of expense under its capacity purchase agreement with Republic Airways Inc. (Republic). American holds a 25% equity interest in Republic Airways Holdings Inc. (Republic Holdings), the parent company of Republic.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
2. Special Items, Net
Special items, net on American’s consolidated statements of operations consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Fleet impairment (1) | $ | 149 | | | $ | — | | | $ | 1,484 | |
Litigation reserve adjustments | 37 | | | (19) | | | — | |
PSP Financial Assistance (2) | — | | | (4,162) | | | (3,710) | |
Severance expenses (3) | — | | | 168 | | | 1,408 | |
Mark-to-market adjustments on bankruptcy obligations, net | — | | | (3) | | | (49) | |
Labor contract expenses (4) | — | | | — | | | 228 | |
Other operating special items, net | 7 | | | 10 | | | (18) | |
Mainline operating special items, net | 193 | | | (4,006) | | | (657) | |
| | | | | |
PSP Financial Assistance (2) | — | | | (539) | | | (444) | |
Fleet impairment (1) | — | | | 27 | | | 106 | |
Regional operating special items, net | — | | | (512) | | | (338) | |
Operating special items, net | 193 | | | (4,518) | | | (995) | |
| | | | | |
Mark-to-market adjustments on equity and other investments, net (5) | 71 | | | 31 | | | 135 | |
Debt refinancing, extinguishment and other, net | 1 | | | 29 | | | 35 | |
Nonoperating special items, net | 72 | | | 60 | | | 170 | |
| | | | | |
Income tax special items, net | (9) | | | — | | | — | |
(1)Fleet impairment for 2022 included a non-cash impairment charge to write down the carrying value of American’s retired Airbus A330 fleet to the estimated fair value due to the market conditions for certain used aircraft.
Fleet impairment for 2021 and 2020 included charges resulting from the retirement of certain aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic. In 2021, American retired its remaining Embraer 140 fleet resulting in a non-cash write down of these regional aircraft. In 2020, American retired its entire Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain Embraer 140 and Bombardier CRJ200 aircraft resulting in a $1.5 billion non-cash write down of mainline and regional aircraft and associated spare parts and $109 million in cash charges primarily for impairment of ROU assets and lease return costs.
(2)The PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the payroll support programs established by the U.S. Government. See Note 1(b) for further information.
(3)Severance expenses include salary and medical costs primarily associated with certain team members who opted into voluntary early retirement programs offered as a result of reductions to American’s operation due to the COVID-19 pandemic.
(4)Labor contract expenses primarily related to one-time charges due to the ratification of a new contract with the Transport Workers Union and International Association of Machinists & Aerospace Workers (TWU-IAM Association) for American’s maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.
(5)Mark-to-market adjustments on equity and other investments, net principally included net unrealized gains and losses associated with certain equity investments and certain other investments. See Note 7 for further information related to American’s equity investments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
3. Debt
Long-term debt included on American’s consolidated balance sheets consisted of (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Secured | | | |
2013 Term Loan Facility, variable interest rate of 6.14%, installments through 2025 (a) | $ | 1,752 | | | $ | 1,770 | |
2014 Term Loan Facility, variable interest rate of 6.14%, installments through 2027 (a) | 1,196 | | | 1,208 | |
December 2016 Term Loan Facility (a) | — | | | 1,188 | |
11.75% senior secured notes, interest only payments until due in July 2025 (b) | 2,500 | | | 2,500 | |
10.75% senior secured IP notes, interest only payments until due in February 2026 (b) | 1,000 | | | 1,000 | |
10.75% senior secured LGA/DCA notes, interest only payments until due in February 2026 (b) | 200 | | | 200 | |
5.50% senior secured notes, installments beginning in July 2023 until due in April 2026 (c) | 3,500 | | | 3,500 | |
5.75% senior secured notes, installments beginning in July 2026 until due in April 2029 (c) | 3,000 | | | 3,000 | |
AAdvantage Term Loan Facility, variable interest rate of 8.99%, installments beginning in July 2023 through April 2028 (c) | 3,500 | | | 3,500 | |
Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 2.88% to 7.13%, averaging 3.74%, maturing from 2023 to 2034 (d) | 9,175 | | | 9,357 | |
Equipment loans and other notes payable, fixed and variable interest rates ranging from 3.33% to 8.01%, averaging 5.95%, maturing from 2023 to 2034 (e) | 3,170 | | | 3,433 | |
Special facility revenue bonds, fixed interest rates ranging from 2.25% to 5.38%, maturing from 2026 to 2036 (f) | 1,050 | | | 1,129 | |
| | | |
Total long-term debt | 30,043 | | | 31,785 | |
Less: Total unamortized debt discount, premium and issuance costs | 364 | | | 428 | |
Less: Current maturities | 3,059 | | | 1,568 | |
Long-term debt, net of current maturities | $ | 26,620 | | | $ | 29,789 | |
As of December 31, 2022, the maximum availability under American’s revolving credit and other facilities is as follows (in millions):
| | | | | |
2013 Revolving Facility | $ | 736 | |
2014 Revolving Facility | 1,631 | |
April 2016 Revolving Facility | 446 | |
Short-term Revolving and Other Facilities | 220 | |
Total | $ | 3,033 | |
As of December 31, 2022, American had an undrawn $150 million short-term revolving credit facility which expired in January 2023. American also had $70 million of available borrowing base under cargo receivables facility that was set to expire in December 2022, but which has been extended through December 2023.
Secured financings, including revolving credit and other facilities, are collateralized by assets, consisting primarily of aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots, certain receivables, certain intellectual property and certain loyalty program assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
At December 31, 2022, the maturities of long-term debt are as follows (in millions):
| | | | | |
2023 | $ | 3,059 | |
2024 | 3,535 | |
2025 | 7,817 | |
2026 | 4,480 | |
2027 | 4,515 | |
2028 and thereafter | 6,637 | |
Total | $ | 30,043 | |
(a) 2013 and 2014 Credit Facilities, April 2016 Revolving Facility and December 2016 Credit Facilities
2013 Credit Facilities
In November 2019, American and AAG entered into the Sixth Amendment to Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of May 21, 2015 (as previously amended, the 2013 Credit Agreement; the revolving credit facility established thereunder, the 2013 Revolving Facility; the term loan facility established thereunder, the 2013 Term Loan Facility; and the 2013 Revolving Facility together with the 2013 Term Loan Facility, the 2013 Credit Facilities), which reduced the total aggregate commitments under the 2013 Revolving Facility to $750 million from $1.0 billion. In addition, certain lenders party to the 2013 Credit Agreement extended the maturity date of a substantial portion of their commitments under the 2013 Revolving Facility to October 2024 from October 2023. As of December 31, 2022, there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility.
2014 Credit Facilities
In November 2019, American and AAG entered into the Seventh Amendment to Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of April 20, 2015 (as previously amended, the 2014 Credit Agreement; the revolving credit facility established thereunder, the 2014 Revolving Facility; the term loan facility established thereunder, the 2014 Term Loan Facility; and the 2014 Revolving Facility together with the 2014 Term Loan Facility, the 2014 Credit Facilities), which increased the total aggregate commitments under the 2014 Revolving Facility to $1.6 billion from $1.5 billion. In addition, certain lenders party to the 2014 Credit Agreement extended the maturity date of a substantial portion of their commitments under the 2014 Revolving Facility to October 2024 from October 2023.
In January 2020, American and AAG entered into the Eighth Amendment to the 2014 Credit Agreement, pursuant to which American refinanced the 2014 Term Loan Facility, increasing the total aggregate principal amount outstanding to $1.2 billion, reducing the LIBOR margin from 2.00% to 1.75%, with a LIBOR floor of 0%, and reducing the base rate margin from 1.00% to 0.75%. In addition, the maturity date for the 2014 Term Loan Facility was extended to January 2027 from October 2021. As of December 31, 2022, there were no borrowings or letters of credit outstanding under the 2014 Revolving Facility.
April 2016 Revolving Facility
In November 2019, American and AAG entered into the Fifth Amendment to Credit and Guaranty Agreement, amending the Credit and Guaranty Agreement dated as of April 29, 2016 (as previously amended, the April 2016 Credit Agreement; the revolving credit facility established thereunder, the April 2016 Revolving Facility), which increased the total aggregate commitments under the April 2016 Revolving Facility to $450 million from $300 million. In addition, certain lenders party to the April 2016 Credit Agreement extended the maturity date of a substantial portion of their commitments under the April 2016 Revolving Facility to October 2024 from October 2023. As of December 31, 2022, there were no borrowings outstanding under the April 2016 Revolving Facility.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
December 2016 Credit Facilities
In December 2016, American and AAG entered into the Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016 (as amended, the December 2016 Credit Agreement; the term loan facility established thereunder, the December 2016 Term Loan Facility; and together with the revolving credit facility contemplated but never established thereunder, the December 2016 Credit Facilities). In December 2022, American repaid in full the $1.2 billion aggregate principal amount of outstanding term loans under the December 2016 Term Loan Facility which was due to mature in December 2023 and terminated the December 2016 Credit Facilities.
Certain details of American’s 2013 and 2014 Credit Facilities (collectively referred to as the Credit Facilities) and April 2016 Revolving Facility are shown in the table below as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2013 Credit Facilities | | 2014 Credit Facilities | | | | |
| 2013 Term Loan | | 2013 Revolving Facility | | 2014 Term Loan | | 2014 Revolving Facility | | April 2016 Revolving Facility | | |
Aggregate principal issued or credit facility availability (in millions) | $1,919 | | $736 | | $1,280 | | $1,631 | | $446 | | |
Principal outstanding or drawn (in millions) | $1,752 | | $— | | $1,196 | | $— | | $— | | |
Maturity date | June 2025 | | October 2024 | | January 2027 | | October 2024 | | October 2024 | | |
LIBOR margin | 1.75% | | 2.00% | | 1.75% | | 2.00% | | 2.00% | | |
The term loans under each of the Credit Facilities are repayable in annual installments in an amount equal to 1.00% of the aggregate principal amount issued, with any unpaid balance due on the respective maturity dates. Voluntary prepayments may be made by American at any time.
The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility provide that American may from time to time borrow, repay and reborrow loans thereunder. The 2013 Revolving Facility and 2014 Revolving Facility have the ability to issue letters of credit thereunder in an aggregate amount outstanding at any time up to $100 million and $200 million, respectively. The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility are each subject to an undrawn annual fee of 0.63%.
Subject to certain limitations and exceptions, the Credit Facilities and April 2016 Revolving Facility are secured by collateral, including certain spare parts, slots, route authorities, simulators and leasehold rights. American has the ability to make future modifications to the collateral pledged, subject to certain restrictions. American’s obligations under the Credit Facilities and April 2016 Revolving Facility are guaranteed by AAG. The Credit Facilities and April 2016 Revolving Facility contain events of default customary for similar financings, including cross default and cross-acceleration to other material indebtedness.
(b) Senior Secured Notes
11.75% Senior Secured Notes
In June 2020, American issued $2.5 billion aggregate principal amount of 11.75% senior secured notes due 2025 (the 11.75% Senior Secured Notes) at a price equal to 99% of their aggregate principal amount. The 11.75% Senior Secured Notes bear interest at a rate of 11.75% per annum (subject to increase if the collateral coverage ratio described below is not met). Interest on the 11.75% Senior Secured Notes is payable semiannually in arrears on January 15 and July 15 of each year, which began on January 15, 2021. The 11.75% Senior Secured Notes will mature on July 15, 2025. The obligations of American under the 11.75% Senior Secured Notes are fully and unconditionally guaranteed on a senior unsecured basis by AAG.
The 11.75% Senior Secured Notes are American’s senior secured obligations. Subject to certain limitations and exceptions, the 11.75% Senior Secured Notes are secured on a first-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in Australia, Canada, the Caribbean, Central America, China, Hong Kong, Japan, Mexico, South Korea, and Switzerland (collectively, the First Lien 11.75% Senior Secured Notes Collateral). American’s obligations with respect to the 11.75% Senior Secured Notes are also secured on a second-lien basis by security interests
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in the European Union and the United Kingdom (collectively, the Second Lien 11.75% Senior Secured Notes Collateral and together with the First Lien 11.75% Senior Secured Notes Collateral, the 11.75% Senior Secured Notes Collateral). The Second Lien 11.75% Senior Secured Notes Collateral also secures the 2014 Credit Facilities on a first-lien basis.
American may redeem the 11.75% Senior Secured Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the 11.75% Senior Secured Notes being redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any, to (but not including) the redemption date.
10.75% Senior Secured Notes
On September 25, 2020 (the 10.75% Senior Secured Notes Closing Date), American issued $1.0 billion in initial principal amount of senior secured IP notes (the IP Notes) and $200 million in initial principal amount of senior secured LGA/DCA notes (the LGA/DCA Notes and together with the IP Notes, the 10.75% Senior Secured Notes). The obligations of American under the 10.75% Senior Secured Notes are fully and unconditionally guaranteed (the 10.75% Senior Secured Notes Guarantees) on a senior unsecured basis by AAG. The 10.75% Senior Secured Notes bear interest at a rate of 10.75% per annum in cash. Interest on the 10.75% Senior Secured Notes is payable semiannually in arrears on September 1 and March 1 of each year, which began on March 1, 2021. The 10.75% Senior Secured Notes will mature on February 15, 2026.
The IP Notes are secured by a first lien security interest on certain intellectual property of American, including the “American Airlines” trademark and the “aa.com” domain name in the United States and certain foreign jurisdictions (the IP Collateral), and a second lien on certain slots related to American’s operations at New York LaGuardia and Ronald Reagan Washington National airports and certain other assets (the LGA/DCA Collateral and together with the IP Collateral, the 10.75% Senior Secured Notes Collateral). Subject to certain conditions, American will be permitted to incur up to $4.0 billion of additional pari passu debt and unlimited second lien debt secured by the IP Collateral securing the IP Notes. The LGA/DCA Notes are secured by a first lien security interest in the LGA/DCA Collateral.
On or prior to the fourth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at a redemption price equal to 100% of the principal amount of the 10.75% Senior Secured Notes redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any. After the fourth anniversary of the 10.75% Senior Secured Notes Closing Date and on or prior to the fifth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at a redemption price equal to 105.375% of the principal amount of the 10.75% Senior Secured Notes redeemed, together with accrued and unpaid interest thereon, if any. After the fifth anniversary of the 10.75% Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75% Senior Secured Notes, at its option, at par, together with accrued and unpaid interest thereon, if any.
(c) AAdvantage Financing
On March 24, 2021 (the AAdvantage Financing Closing Date), American and AAdvantage Loyalty IP Ltd., a Cayman Islands exempted company incorporated with limited liability and an indirect wholly-owned subsidiary of American (Loyalty Issuer and, together with American, the AAdvantage Issuers), completed the offering of $3.5 billion aggregate principal amount of 5.50% Senior Secured Notes due 2026 (the 2026 Notes) and $3.0 billion aggregate principal amount of 5.75% Senior Secured Notes due 2029 (the 2029 Notes, and together with the 2026 Notes, the AAdvantage Notes). The AAdvantage Notes are fully and unconditionally guaranteed on a senior unsecured basis by the SPV Guarantors and AAG.
Concurrent with the issuance of the AAdvantage Notes, the AAdvantage Issuers, as co-borrowers, entered into a term loan credit and guaranty agreement, dated March 24, 2021, providing for a $3.5 billion term loan facility (the AAdvantage Term Loan Facility and collectively with the AAdvantage Notes, the AAdvantage Financing) and pursuant to which the full $3.5 billion of term loans (the AAdvantage Loans) were drawn on the AAdvantage Financing Closing Date. The AAdvantage Loans are fully and unconditionally guaranteed (together with the AAdvantage Note Guarantees, the AAdvantage Guarantees) by the SPV Guarantors and AAG.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Subject to certain permitted liens and other exceptions, the AAdvantage Notes, AAdvantage Loans and AAdvantage Guarantees provided by the SPV Guarantors are secured by a first-priority security interest in, and pledge of, various agreements with respect to the AAdvantage program (the AAdvantage Agreements) (including all payments thereunder) and certain IP Licenses, certain deposit accounts that will receive cash under the AAdvantage Agreements, certain reserve accounts, the equity of each of Loyalty Issuer and the SPV Guarantors and substantially all other assets of Loyalty Issuer and the SPV Guarantors including American’s rights to certain data and other intellectual property used in the AAdvantage program (subject to certain exceptions) (collectively, the AAdvantage Collateral).
Payment Terms of the AAdvantage Notes and AAdvantage Loans under the AAdvantage Term Loan Facility
Interest on the AAdvantage Notes is payable in cash, quarterly in arrears on the 20th day of each January, April, July and October (each, an AAdvantage Payment Date), which began on July 20, 2021. The 2026 Notes will mature on April 20, 2026, and the 2029 Notes will mature on April 20, 2029. The outstanding principal on the 2026 Notes will be repaid in quarterly installments of $292 million on each AAdvantage Payment Date, beginning on July 20, 2023. The outstanding principal on the 2029 Notes will be repaid in quarterly installments of $250 million on each AAdvantage Payment Date, beginning on July 20, 2026.
The AAdvantage Issuers may redeem the AAdvantage Notes, at their option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the AAdvantage Notes redeemed plus a “make-whole” premium, together with accrued and unpaid interest to the date of redemption.
The scheduled maturity date of the AAdvantage Loans under the AAdvantage Term Loan Facility is April 20, 2028. The AAdvantage Loans bear interest at a variable rate equal to LIBOR (but not less than 0.75% per annum), plus a margin of 4.75% per annum, payable on each AAdvantage Payment Date. The outstanding principal on the AAdvantage Loans will be repaid in quarterly installments of $175 million, on each AAdvantage Payment Date beginning with the AAdvantage Payment Date in July 2023. These amortization payments (as well as those for the AAdvantage Notes) will be subject to the occurrence of certain early amortization events, including the failure to satisfy a minimum debt service coverage ratio at specified determination dates.
Prepayment of some or all of the AAdvantage Loans outstanding under the AAdvantage Term Loan Facility is permitted, although payment of an applicable premium is required as specified in the AAdvantage Term Loan Facility.
The AAdvantage Indenture and the AAdvantage Term Loan Facility contain mandatory prepayment provisions triggered upon (i) the issuance or incurrence by Loyalty Issuer or the SPV Guarantors of certain indebtedness or (ii) the receipt by American or its subsidiaries of net proceeds from pre-paid frequent flyer (i.e., AAdvantage) mile sales exceeding $505 million. Each of these prepayments would also require payment of an applicable premium. Certain other events, including the occurrence of a change of control with respect to AAG and certain AAdvantage Collateral sales exceeding a specified threshold, will also trigger mandatory repurchase or mandatory prepayment provisions under the AAdvantage Indenture and the AAdvantage Term Loan Facility, respectively.
(d) EETCs
2021-1 Aircraft EETCs
In November 2021, American created two pass-through trusts which issued $960 million aggregate face amount of Series 2021-1 Class A and Class B EETCs (the 2021-1 Aircraft EETCs) in connection with the financing of 26 aircraft previously delivered or originally scheduled to be delivered to American through September 2022 (the 2021-1 Aircraft). In 2021, $94 million of the proceeds had been used to purchase equipment notes issued by American in connection with the financing of five aircraft under the 2021-1 Aircraft EETCs, all of which was used to repay existing indebtedness. During 2022, $866 million of proceeds had been used to purchase equipment notes issued by American in connection with the financing of 21 aircraft under the 2021-1 Aircraft EETCs. As of December 31, 2022, there are no remaining proceeds held in escrow, and all proceeds have been used to purchase equipment notes issued by American. Interest and principal payments on equipment notes issued in connection with the 2021-1 Aircraft EETCs are payable semi-annually in January and July of each year. Interest payments began in July 2022 and principal payments began in January 2023.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Certain information regarding the 2021-1 Aircraft EETC equipment notes, as of December 31, 2022, is set forth in the table below:
| | | | | | | | | | | |
| 2021-1 Aircraft EETCs |
| Series A | | Series B |
Aggregate principal issued | $758 million | | $202 million |
Fixed interest rate per annum | 2.875% | | 3.95% |
Maturity date | July 2034 | | July 2030 |
(e) Equipment Loans and Other Notes Payable Issued in 2022
In 2022, American entered into agreements under which it borrowed $205 million in connection with the financing of certain aircraft. Debt incurred under these agreements mature in 2034 and bear interest at variable rates (comprised of the Secured Overnight Financing Rate plus an applicable margin) averaging 6.77% as of December 31, 2022.
(f) Special Facility Revenue Bonds
In January 2020, American and British Airways announced the start of construction projects to upgrade New York's JFK Terminal 8. The construction project is expected to be fully completed in early 2023 and is estimated to cost $439 million, of which $298 million was funded with proceeds of the special facility revenue bonds issued by the New York Transportation Development Corporation (NYTDC) on behalf of American in June 2020 (the 2020 JFK Bonds) and approximately $84 million of which was funded with proceeds of the approximately $150 million of special facility revenue bonds NYTDC issued in June 2021 (the 2021 JFK Bonds).
American is required to pay debt service on the 2021 JFK Bonds through payments under a loan agreement with NYTDC (as amended), and American and AAG guarantee the 2021 JFK Bonds. American continues to pay debt service on the outstanding bonds issued by NYTDC on behalf of American in 2016 and 2020 (the 2016 and 2020 JFK Bonds) and American and AAG continue to guarantee the 2016 and 2020 JFK Bonds. American’s and AAG’s obligations under these guarantees are secured by a leasehold mortgage on American’s lease of Terminal 8 and related property from the Port Authority of New York and New Jersey.
The 2021 JFK Bonds, in aggregate, were priced at par value. The gross proceeds from the issuance of the 2021 JFK Bonds were approximately $150 million. Of this amount, $4 million was used to fund the costs of issuance of the 2021 JFK Bonds, $62 million was used to fund the redemption of the 2016 and 2020 JFK Bonds due August 2021, with the remaining amount of proceeds received held in restricted cash and short-term investments on the consolidated balance sheet and to be used to finance a portion of the cost of the renovation and expansion of Terminal 8. The 2021 JFK Bonds are comprised of term bonds, $70 million of which bear interest at 2.25% per annum and mature on August 1, 2026, and $80 million of which bear interest at 3.00% per annum and mature on August 1, 2031. As of December 31, 2022, $72 million of proceeds funded by the issuance of the 2020 and 2021 JFK Bonds are included in restricted cash and short-term investments on the accompanying consolidated balance sheet.
Guarantees
As of December 31, 2022, American had issued guarantees covering AAG’s $1.8 billion aggregate principal amount of the PSP1 Promissory Note due April 2030, $1.0 billion aggregate principal amount of the PSP2 Promissory Note due January 2031, $959 million aggregate principal amount of the PSP3 Promissory Note due April 2031, $1.0 billion aggregate principal amount of 6.50% convertible senior notes due July 2025 and $500 million aggregate principal amount of 3.75% senior notes due March 2025.
Certain Covenants
American’s debt agreements contain customary terms and conditions as well as various affirmative, negative and financial covenants that, among other things, may restrict the ability of American to incur additional indebtedness. American’s debt agreements also contain customary change of control provisions, which may require it to repay or redeem such indebtedness upon certain events constituting a change of control under the relevant agreement, in certain cases at a premium. Certain of American’s debt financing agreements (including its secured notes, term loans, revolving credit facilities and spare engine EETCs) contain loan to value (LTV), collateral coverage or peak debt service coverage ratio covenants and certain agreements require American to appraise the related collateral annually or semiannually. Pursuant to such agreements, if the applicable LTV, collateral coverage or peak debt service coverage ratio exceeds or
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
falls below a specified threshold, as the case may be, American will be required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash or investment securities), withhold additional cash in certain accounts, or pay down such financing, in whole or in part, or the interest rate for the relevant financing will be increased. Additionally, a significant portion of American’s debt financing agreements contain covenants requiring it to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities, and its AAdvantage Financing contains a peak debt service coverage ratio, pursuant to which failure to comply with a certain threshold may result in early repayment, in whole or in part, of the AAdvantage Financing.
Specifically, American is required to meet certain collateral coverage tests for its Credit Facilities, April 2016 Revolving Facility, 10.75% Senior Secured Notes and 11.75% Senior Secured Notes, as described below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2013 Credit Facilities | | 2014 Credit Facilities | | April 2016 Revolving Facility | | | | 10.75% Senior Secured Notes | | 11.75% Senior Secured Notes |
Frequency of Appraisals of Appraised Collateral | Annual | | Annual | | Annual | | | | Annual | | Semi-Annual |
LTV Requirement | 1.6x Collateral valuation to amount of debt outstanding (62.5% LTV) |
LTV as of Last Measurement Date | 34.4% | | 17.8% | | Not Applicable | | | | 7.2% | | 32.5% |
Collateral Description | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate all services between the U.S. and South America | | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S. and European Union (including London Heathrow) | | Generally, certain spare parts | | | | Generally, certain DCA slots, certain LGA slots, certain simulators and certain leasehold rights and, in the case of the IP Notes, certain intellectual property of American | | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S. and the Caribbean, Central America and various other countries |
At December 31, 2022, American was in compliance with the applicable collateral coverage tests as of the most recent measurement dates.
4. Leases
American leases certain aircraft and engines, including aircraft under capacity purchase agreements. As of December 31, 2022, American operated 722 leased aircraft, with remaining terms ranging from less than one year to 11 years.
At each airport where American conducts flight operations, American has agreements, generally with a governmental unit or authority, for the use of passenger, operations and baggage handling space as well as runways and taxiways. These agreements, particularly in the U.S., often contain provisions for periodic adjustments to rates and charges applicable under such agreements. These rates and charges also vary with American’s level of operations and the operations of the airport. Because of the variable nature of these rates, these leases are not recorded on American’s consolidated balance sheets as a ROU asset or a lease liability. Additionally, at American’s hub locations and in certain other cities it serves, American leases administrative offices, catering, cargo, training, maintenance and other facilities.
The components of lease expense were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Operating lease cost | $ | 1,987 | | | $ | 1,998 | | | $ | 1,943 | |
Finance lease cost: | | | | | |
Amortization of assets | 135 | | | 107 | | | 92 | |
Interest on lease liabilities | 46 | | | 44 | | | 38 | |
Variable lease cost | 2,572 | | | 2,461 | | | 1,786 | |
Total net lease cost | $ | 4,740 | | | $ | 4,610 | | | $ | 3,859 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Included in the table above is $242 million, $190 million and $172 million of operating lease cost under American’s capacity purchase agreement with Republic for the years ended December 31, 2022, 2021 and 2020, respectively. American holds a 25% equity interest in Republic Holdings, the parent company of Republic.
Additionally, not included in the table above, American recognized $109 million in cash special charges in 2020 related to the impairment of ROU assets and lease return costs resulting from its decision to retire certain leased aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic.
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Operating leases: | | | |
Operating lease ROU assets | $ | 8,033 | | | $ | 7,810 | |
| | | |
Current operating lease liabilities | $ | 1,449 | | | $ | 1,496 | |
Noncurrent operating lease liabilities | 6,512 | | | 6,578 | |
Total operating lease liabilities | $ | 7,961 | | | $ | 8,074 | |
| | | |
Finance leases: | | | |
Property and equipment, at cost | $ | 1,336 | | | $ | 1,201 | |
Accumulated amortization | (767) | | | (653) | |
Property and equipment, net | $ | 569 | | | $ | 548 | |
| | | |
Current finance lease liabilities | $ | 209 | | | $ | 174 | |
Noncurrent finance lease liabilities | 535 | | | 563 | |
Total finance lease liabilities | $ | 744 | | | $ | 737 | |
| | | |
Weighted average remaining lease term (in years): | | | |
Operating leases | 8.3 | | 7.6 |
Finance leases | 5.0 | | 4.6 |
| | | |
Weighted average discount rate: | | | |
Operating leases | 7.4 | % | | 6.2 | % |
Finance leases | 7.1 | % | | 6.1 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Supplemental cash flow and other information related to leases was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 1,968 | | | $ | 2,040 | | | $ | 2,015 | |
Operating cash flows from finance leases | 46 | | | 37 | | | 39 | |
Financing cash flows from finance leases | 179 | | | 126 | | | 114 | |
| | | | | |
Non-cash transactions: | | | | | |
ROU assets acquired through operating leases | 1,448 | | | 1,381 | | | 898 | |
Property and equipment acquired through finance leases | 46 | | | 180 | | | 11 | |
Operating lease conversion to finance lease | 107 | | | 102 | | | 5 | |
Finance lease conversion to operating lease | 3 | | | — | | | — | |
| | | | | |
Gain on sale leaseback transactions, net | 2 | | | 25 | | | 107 | |
Maturities of lease liabilities were as follows (in millions):
| | | | | | | | | | | |
| December 31, 2022 |
| Operating Leases | | Finance Leases |
2023 | $ | 1,933 | | | $ | 257 | |
2024 | 1,649 | | | 204 | |
2025 | 1,313 | | | 141 | |
2026 | 1,045 | | | 115 | |
2027 | 858 | | | 69 | |
2028 and thereafter | 3,890 | | | 87 | |
Total lease payments | 10,688 | | | 873 | |
Less: Imputed interest | (2,727) | | | (129) | |
Total lease obligations | 7,961 | | | 744 | |
Less: Current obligations | (1,449) | | | (209) | |
Long-term lease obligations | $ | 6,512 | | | $ | 535 | |
As of December 31, 2022, American had additional operating lease commitments that have not yet commenced of approximately $1.1 billion for nine Boeing 787 Family aircraft scheduled to be delivered in 2023 through 2024 with lease terms of 10 years.
5. Income Taxes
The significant components of the income tax provision (benefit) were (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Current income tax benefit: | | | | | |
State, local and foreign | $ | (6) | | | $ | — | | | $ | — | |
| | | | | |
| | | | | |
Deferred income tax provision (benefit): | | | | | |
Federal | 112 | | | (453) | | | (2,224) | |
State and local | 10 | | | (47) | | | (229) | |
Deferred income tax provision (benefit) | 122 | | | (500) | | | (2,453) | |
Total income tax provision (benefit) | $ | 116 | | | $ | (500) | | | $ | (2,453) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
The income tax provision (benefit) differed from amounts computed at the statutory federal income tax rate as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Statutory income tax provision (benefit) | $ | 95 | | | $ | (478) | | | $ | (2,290) | |
State, local and foreign income tax provision (benefit), net of federal tax effect | 3 | | | (37) | | | (181) | |
Book expenses not deductible for tax purposes | 20 | | | 21 | | | 20 | |
| | | | | |
| | | | | |
Other, net | (2) | | | (6) | | | (2) | |
Income tax provision (benefit) | $ | 116 | | | $ | (500) | | | $ | (2,453) | |
The components of American’s deferred tax assets and liabilities were (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Deferred tax assets: | | | |
Operating loss and other carryforwards | $ | 4,492 | | | $ | 4,476 | |
Loyalty program liability | 1,809 | | | 1,903 | |
Leases | 1,804 | | | 1,822 | |
Pensions | 467 | | | 934 | |
Postretirement benefits other than pensions | 179 | | | 215 | |
Rent expense | 130 | | | 92 | |
| | | |
| | | |
Other | 689 | | | 734 | |
Total deferred tax assets | 9,570 | | | 10,176 | |
Valuation allowance | (9) | | | (24) | |
Net deferred tax assets | 9,561 | | | 10,152 | |
Deferred tax liabilities: | | | |
Accelerated depreciation and amortization | (4,603) | | | (4,715) | |
Leases | (1,817) | | | (1,758) | |
Other | (256) | | | (279) | |
Total deferred tax liabilities | (6,676) | | | (6,752) | |
Net deferred tax asset | $ | 2,885 | | | $ | 3,400 | |
At December 31, 2022, American had approximately $16.1 billion of gross federal net operating losses (NOLs) and $3.5 billion of other carryforwards available to reduce future federal taxable income, of which $6.2 billion will expire beginning in 2024 if unused and $13.4 billion can be carried forward indefinitely. American is a member of AAG’s consolidated federal and certain state income tax returns. American also had approximately $5.9 billion of NOL carryforwards to reduce future state taxable income at December 31, 2022, which will expire in taxable years 2022 through 2042 if unused.
American’s ability to use its NOLs and other carryforwards depends on the amount of taxable income generated in future periods. American provides a valuation allowance for its deferred tax assets, which include the NOLs, when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond its control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand. American has determined that positive factors outweigh negative factors in the determination of the realizability of its deferred tax assets. There can be no assurance that an additional valuation allowance on American’s net deferred tax assets will not be required. Such valuation allowance could be material.
American’s ability to deduct its NOL carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
occurred. Substantially all of American’s remaining federal NOL carryforwards attributable to US Airways Group are subject to limitation under Section 382; however, American’s ability to utilize such NOL carryforwards is not anticipated to be effectively constrained as a result of such limitation. Similar limitations may apply for state income tax purposes. American’s ability to utilize any new NOL carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit American’s future use of NOLs and tax credits.
In 2022, American recorded an income tax provision of $116 million, with an effective rate of approximately 26%, which was substantially non-cash. Substantially all of American’s income before income taxes is attributable to the United States.
The Inflation Reduction Act (IRA) was enacted on August 16, 2022, which among other provisions, introduced a corporate minimum tax on certain corporations with average adjusted financial statement income over a three-tax year period in excess of $1.0 billion, an excise tax on certain stock repurchases by certain covered corporations for taxable years beginning after December 31, 2022, and several tax incentives to promote clean energy. Based on American’s current analysis and pending future guidance to be issued by the U.S. Department of Treasury, American does not believe these provisions will have a material impact on its consolidated financial statements.
American files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. American’s 2019 through 2021 tax years are still subject to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and American is under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. American believes that the effect of any assessments will not be material to its consolidated financial statements.
The amount of, and changes to, American’s uncertain tax positions were not material in any of the years presented. American accrues interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively.
6. Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i.e. an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. Accounting standards include disclosure requirements around fair values used for certain financial instruments and establish a fair value hierarchy. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels:
•Level 1 – Observable inputs such as quoted prices in active markets;
•Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
When available, American uses quoted market prices to determine the fair value of its financial assets. If quoted market prices are not available, American measures fair value using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and currency rates.
American utilizes the market approach to measure the fair value of its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. American’s short-term investments, restricted cash and restricted short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the year ended December 31, 2022.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Assets measured at fair value on a recurring basis are summarized below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of December 31, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Short-term investments (1), (2): | | | | | | | |
Money market funds | $ | 731 | | | $ | 731 | | | $ | — | | | $ | — | |
Corporate obligations | 3,688 | | | — | | | 3,688 | | | — | |
Bank notes/certificates of deposit/time deposits | 3,654 | | | — | | | 3,654 | | | — | |
Repurchase agreements | 450 | | | — | | | 450 | | | — | |
| 8,523 | | | 731 | | | 7,792 | | | — | |
Restricted cash and short-term investments (1), (3) | 995 | | | 535 | | | 460 | | | — | |
Long-term investments (4) | 245 | | | 245 | | | — | | | — | |
Total | $ | 9,763 | | | $ | 1,511 | | | $ | 8,252 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of December 31, 2021 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Short-term investments (1): | | | | | | | |
Money market funds | $ | 106 | | | $ | 106 | | | $ | — | | | $ | — | |
Corporate obligations | 8,665 | | | — | | | 8,665 | | | — | |
Bank notes/certificates of deposit/time deposits | 2,194 | | | — | | | 2,194 | | | — | |
Repurchase agreements | 1,190 | | | — | | | 1,190 | | | — | |
| 12,155 | | | 106 | | | 12,049 | | | — | |
Restricted cash and short-term investments (1), (3) | 990 | | | 654 | | | 336 | | | — | |
Long-term investments (4) | 239 | | | 239 | | | — | | | — | |
Total | $ | 13,384 | | | $ | 999 | | | $ | 12,385 | | | $ | — | |
(1)All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses are recorded in accumulated other comprehensive loss at each reporting period. There were no credit losses.
(2)American’s short-term investments as of December 31, 2022 mature in one year or less.
(3)Restricted cash and short-term investments primarily include collateral held to support workers' compensation obligations, collateral associated with the payment of interest for the AAdvantage Financing and money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at JFK.
(4)Long-term investments include American's equity investments in China Southern Airlines Company Limited (China Southern Airlines) and Vertical Aerospace Ltd. (Vertical) and as of December 31, 2022, American’s long-term investments also include GOL. See Note 7 for further information on American’s equity investments.
Fair Value of Debt
The fair value of American’s long-term debt was estimated using quoted market prices or discounted cash flow analyses based on American’s current estimated incremental borrowing rates for similar types of borrowing arrangements. If American’s long-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.
The carrying value and estimated fair value of American’s long-term debt, including current maturities, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Long-term debt, including current maturities | $ | 29,679 | | | $ | 28,453 | | | $ | 31,357 | | | $ | 32,999 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
7. Investments
To help expand American’s network and as part of its ongoing commitment to sustainability, American enters into various commercial relationships or other strategic partnerships, including equity investments, with other airlines and companies. American’s equity investments are reflected in other assets on its consolidated balance sheets. American’s share of equity method investees’ financial results and changes in fair value are recorded in nonoperating other income, net on the consolidated statements of operations.
American’s equity investments ownership interest and carrying value were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Ownership Interest | | Carrying Value (in millions) |
| | | December 31, | | December 31, |
| Accounting Treatment | | 2022 | | 2021 | | 2022 | | 2021 |
Republic Holdings | Equity Method | | 25.0 | % | | 25.0 | % | | $ | 222 | | | $ | 202 | |
China Southern Airlines | Fair Value | | 1.5 | % | | 1.8 | % | | 176 | | | 163 | |
Other investments (a) | Various | | | | | | 212 | | | 83 | |
Total | | | | | | | $ | 610 | | | $ | 448 | |
(a) Other investments
Other investments primarily include American’s investment in Vertical, which is accounted for at fair value, and in 2022, American’s investments in JetSmart Airlines SpA (JetSMART) and GOL.
In April 2022, American completed an investment agreement with GOL, a Brazilian low-cost airline, and invested $200 million in 22.2 million of newly issued preferred shares. The total consideration of $200 million was allocated on its consolidated balance sheet as follows based on relative fair values: $81 million to the preferred shares, which is reflected within other assets, and $119 million to the indefinite-lived intangible asset derived from the related commercial agreements. The ownership interest is accounted for at fair value based on GOL’s stock price and mark-to-market adjustments are recorded to nonoperating other income, net on the consolidated statement of operations.
In December 2022, American completed an investment agreement with JetSMART, an ultra-low-cost carrier operating in South America, representing a 35.4% ownership. This ownership interest is accounted for under the equity method and American’s portion of JetSMART’s financial results is recognized within nonoperating other income, net on the consolidated statement of operations.
8. Employee Benefit Plans
American sponsors defined benefit and defined contribution pension plans for eligible employees. The defined benefit pension plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement. Effective November 1, 2012, substantially all of American’s defined benefit pension plans were frozen and American began providing enhanced benefits under its defined contribution pension plans for certain employee groups. American uses a December 31 measurement date for all of its defined benefit pension plans. American also provides certain retiree medical and other postretirement benefits, including health care and life insurance benefits, to retired employees.
Effective January 1, 2021, health coverage under American’s retiree medical benefit program that is currently provided to certain retirees age 65 and over who retired prior to November 1, 2012, transitioned from a self-insured plan to a fully-insured Medicare Advantage plan. Benefits coverage has not been reduced and cost shared has not changed as a result of this transition. Due to this transition, as of December 31, 2020, American recognized a negative plan amendment to reduce its benefit obligation, which was included as a component of prior service benefit in accumulated other comprehensive income (loss) (AOCI) and will be amortized over the average remaining life expectancy of all retirees. As of December 31, 2022, $179 million of prior service benefit remains to be amortized over a remaining period of approximately 11 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Benefit Obligations, Fair Value of Plan Assets and Funded Status
The following tables provide a reconciliation of the changes in the pension and retiree medical and other postretirement benefits obligations, fair value of plan assets and a statement of funded status as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In millions) |
Benefit obligation at beginning of period | $ | 18,791 | | | $ | 19,690 | | | $ | 1,098 | | | $ | 1,046 | |
Service cost | 3 | | | 3 | | | 16 | | | 12 | |
Interest cost | 552 | | | 523 | | | 30 | | | 30 | |
Actuarial gain (1), (2) | (4,534) | | | (606) | | | (167) | | | (57) | |
Special termination benefits (3) | — | | | — | | | — | | | 139 | |
Other | — | | | (1) | | | 3 | | | — | |
Benefit payments | (864) | | | (818) | | | (74) | | | (72) | |
| | | | | | | |
Benefit obligation at end of period | $ | 13,948 | | | $ | 18,791 | | | $ | 906 | | | $ | 1,098 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | |
| | | | | | | |
| |
Fair value of plan assets at beginning of period | $ | 14,605 | | | $ | 13,477 | | | $ | 167 | | | $ | 170 | |
Actual return (loss) on plan assets | (1,924) | | | 1,700 | | | (18) | | | 21 | |
Employer contributions (4) | 4 | | | 247 | | | 58 | | | 48 | |
Settlements | — | | | (1) | | | — | | | — | |
Benefit payments | (864) | | | (818) | | | (74) | | | (72) | |
Fair value of plan assets at end of period | $ | 11,821 | | | $ | 14,605 | | | $ | 133 | | | $ | 167 | |
Funded status at end of period | $ | (2,127) | | | $ | (4,186) | | | $ | (773) | | | $ | (931) | |
(1)The 2022 and 2021 pension actuarial gain primarily relates to the change in American’s weighted average discount rate assumption.
(2)The 2022 and 2021 retiree medical and other postretirement benefits actuarial gain primarily relates to the change in American’s weighted average discount rate assumption and, in 2021, plan experience adjustments.
(3)During the first quarter of 2021, American remeasured its retiree medical and other postretirement benefits to account for enhanced healthcare benefits provided to eligible team members who opted into voluntary early retirement programs offered as a result of reductions to its operation due to the COVID-19 pandemic. As a result, during 2021, American recognized a $139 million special charge for these enhanced healthcare benefits and increased its postretirement benefits obligation by $139 million.
(4)In January 2021, American made $241 million in contributions to its pension plans, including a contribution of $130 million for the 2020 calendar year that was permitted to be deferred to January 4, 2021 as provided under the CARES Act.
Balance Sheet Position
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In millions) |
As of December 31, | | | | | | | |
Current liability | $ | 4 | | | $ | 7 | | | $ | 85 | | | $ | 90 | |
Noncurrent liability | 2,123 | | | 4,179 | | | 688 | | | 841 | |
Total liabilities | $ | 2,127 | | | $ | 4,186 | | | $ | 773 | | | $ | 931 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In millions) |
Net actuarial loss (gain) | $ | 3,609 | | | $ | 5,241 | | | $ | (505) | | | $ | (396) | |
Prior service cost (benefit) | 18 | | | 46 | | | (148) | | | (167) | |
Total accumulated other comprehensive loss (income), pre-tax | $ | 3,627 | | | $ | 5,287 | | | $ | (653) | | | $ | (563) | |
Plans with Projected Benefit Obligations Exceeding Fair Value of Plan Assets
| | | | | | | | | | | |
| Pension Benefits |
| 2022 | | 2021 |
| | | |
| (In millions) |
Projected benefit obligation | $ | 13,948 | | | $ | 18,791 | |
Fair value of plan assets | 11,821 | | | 14,605 | |
Plans with Accumulated Benefit Obligations Exceeding Fair Value of Plan Assets
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In millions) |
Accumulated benefit obligation | $ | 13,941 | | | $ | 18,782 | | | $ | — | | | $ | — | |
Accumulated postretirement benefit obligation | — | | | — | | | 906 | | | 1,098 | |
Fair value of plan assets | 11,821 | | | 14,605 | | | 133 | | | 167 | |
Net Periodic Benefit Cost (Income)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| (In millions) |
Defined benefit plans: | | | | | | | | | | | |
Service cost | $ | 3 | | | $ | 3 | | | $ | 2 | | | $ | 16 | | | $ | 12 | | | $ | 8 | |
Interest cost | 552 | | | 523 | | | 611 | | | 30 | | | 30 | | | 30 | |
Expected return on assets | (1,133) | | | (1,078) | | | (1,005) | | | (12) | | | (12) | | | (11) | |
Special termination benefits | — | | | — | | | — | | | — | | | 139 | | | 410 | |
Settlements | — | | | — | | | 12 | | | — | | | — | | | — | |
Amortization of: | | | | | | | | | | | |
Prior service cost (benefit) | 28 | | | 28 | | | 29 | | | (14) | | | (13) | | | (135) | |
Unrecognized net loss (gain) | 156 | | | 211 | | | 164 | | | (30) | | | (24) | | | (24) | |
Net periodic benefit cost (income) | $ | (394) | | | $ | (313) | | | $ | (187) | | | $ | (10) | | | $ | 132 | | | $ | 278 | |
The service cost component of net periodic benefit cost (income) is included in operating expenses, the cost for the special termination benefits is included in special items, net and the other components of net periodic benefit cost (income) are included in nonoperating other income, net on American’s consolidated statements of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Assumptions
The following actuarial assumptions were used to determine American’s benefit obligations and net periodic benefit cost (income) for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
Benefit obligations: | | | | | | | |
Weighted average discount rate | 5.6% | | 3.0% | | 5.7% | | 2.8% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retiree Medical and Other Postretirement Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Net periodic benefit cost (income): | | | | | | | | | | | |
Weighted average discount rate | 3.0% | | 2.7% | | 3.4% | | 2.8% | | 2.4% | | 3.2% |
Weighted average expected rate of return on plan assets | 8.0% | | 8.0% | | 8.0% | | 8.0% | | 8.0% | | 8.0% |
Weighted average health care cost trend rate assumed for next year (1) | N/A | | N/A | | N/A | | 5.8% | | 4.8% | | 4.0% |
(1)The weighted average health care cost trend rate at December 31, 2022 is assumed to decline gradually to 4.4% by 2029 and remain level thereafter.
As of December 31, 2022, American’s estimate of the long-term rate of return on plan assets was 8.0% based on the target asset allocation. Expected returns on long duration bonds are based on yields to maturity of the bonds held at year-end. Expected returns on other assets are based on a combination of long-term historical returns, actual returns on plan assets achieved over the last 10 years, current and expected market conditions, and expected value to be generated through active management and securities lending programs.
Minimum Contributions
American is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and various other laws for U.S. based plans as well as underfunding rules specific to countries where American maintains defined benefit plans. Based on current funding assumptions, American has minimum required contributions of $67 million for 2023. American’s funding obligations will depend on the performance of American’s investments held in a trust by the pension plans, interest rates for determining liabilities, the amount of and timing of any supplemental contributions and American’s actuarial experience.
Benefit Payments
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (approximately, in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028-2032 |
Pension benefits | $ | 915 | | | $ | 944 | | | $ | 973 | | | $ | 997 | | | $ | 1,018 | | | $ | 5,233 | |
Retiree medical and other postretirement benefits | 102 | | | 100 | | | 98 | | | 97 | | | 95 | | | 428 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Plan Assets
The objectives of American’s investment policies are to: maintain sufficient income and liquidity to pay retirement benefits; produce a long-term rate of return that meets or exceeds the assumed rate of return for plan assets; limit the volatility of asset performance and funded status; and diversify assets among asset classes and investment managers.
Based on these investment objectives, a long-term strategic asset allocation has been established. This strategic allocation seeks to balance the potential benefit of improving the funded position with the potential risk that the funded position would decline. The current strategic target asset allocation is as follows:
| | | | | |
Asset Class/Sub-Class | Allowed Range |
Equity | 45% - 80% |
Public: | |
U.S. Large | 10% - 40% |
U.S. Small/Mid | 2% - 10% |
International | 10% - 25% |
International Small/Mid | 0% - 10% |
Emerging Markets | 2% - 15% |
Private Equity | 5% - 30% |
Fixed Income | 20% - 55% |
Public: | |
U.S. Long Duration | 15% - 45% |
High Yield and Emerging Markets | 0% - 10% |
Private Income | 0% - 15% |
Other | 0% - 5% |
Cash Equivalents | 0% - 20% |
Public equity investments are intended to provide a real return over a full market cycle and, therefore, to contribute to the pension plan’s long-term objective. Public fixed income investments are intended to provide income to the plan and offer the potential for long term capital appreciation. Private investments, such as private equity and private income, are used to provide higher expected returns than public markets over the long-term by assuming reduced levels of liquidity and higher levels of risk. The pension plan’s master trust participates in securities lending programs to generate additional income by loaning plan assets to borrowers on a fully collateralized basis. The pension plan’s master trust will also engage in derivative instruments to equitize residual levels of cash as well as hedge the pension plan’s exposure to interest rates. Such programs are subject to market risk and counterparty risk.
Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year. Securities traded in the over-the-counter market are valued at the last bid price. Investments in limited partnerships are carried at estimated net asset value (NAV) as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships. Mutual funds are valued once daily through a NAV calculation provided at the end of each trade day. Common/collective trusts are valued at NAV based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts. No changes in valuation techniques or inputs occurred during the year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Benefit Plan Assets Measured at Fair Value on a Recurring Basis
The fair value of American’s pension plan assets at December 31, 2022 and 2021, by asset category, were as follows (in millions) (1):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Equity (2) | $ | 3,055 | | | $ | — | | | $ | — | | | $ | 3,055 | | | $ | 4,583 | | | $ | 2 | | | $ | 4 | | | $ | 4,589 | |
Fixed income (3) | 206 | | | 2,917 | | | — | | | 3,123 | | | 153 | | | 3,994 | | | — | | | 4,147 | |
Other (4) | 74 | | | 278 | | | 75 | | | 427 | | | 134 | | | 340 | | | 54 | | | 528 | |
Measured at NAV (5): | | | | | | | | | | | | | | | |
Common collective trusts (6) | — | | | — | | | — | | | 1,694 | | | — | | | — | | | — | | | 2,514 | |
Private investments (7) | — | | | — | | | — | | | 3,522 | | | — | | | — | | | — | | | 2,827 | |
Total plan assets | $ | 3,335 | | | $ | 3,195 | | | $ | 75 | | | $ | 11,821 | | | $ | 4,870 | | | $ | 4,336 | | | $ | 58 | | | $ | 14,605 | |
(1)See Note 6 for a description of the levels within the fair value hierarchy.
(2)Equity investments include domestic and international common stock, preferred stock and exchange traded funds invested in equity securities.
(3)Fixed income investments include corporate, government and U.S. municipal bonds, as well as mutual funds invested in fixed income securities.
(4)Other primarily includes a short-term investment fund, cash and cash equivalents, and net receivables and payables of the master trust for dividends, interest and amounts due to or from the sale and purchase of securities.
(5)Includes investments that were measured at NAV per share (or its equivalent) as a practical expedient that have not been classified in the fair value hierarchy.
(6)Common collective trusts include commingled funds primarily invested in equity securities. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred.
(7)Private investments include limited partnerships that invest primarily in domestic private equity and private income opportunities. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its NAV, but rather receives distributions as the underlying assets are liquidated. It is estimated that the underlying assets of these funds will be gradually liquidated over the next 10 years. As of December 31, 2022, the pension plan’s master trust has future funding commitments to these limited partnerships of approximately $1.5 billion over the next five years.
Changes in fair value measurements of Level 3 investments during the years ended December 31, 2022 and 2021, were as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
Balance at beginning of year | $ | 58 | | | $ | 17 | |
Actual gain on plan assets: | | | |
Relating to assets still held at the reporting date | 1 | | | 10 | |
Purchases | 29 | | | 32 | |
Sales | (9) | | | (1) | |
Transfers out | (4) | | | — | |
Balance at end of year | $ | 75 | | | $ | 58 | |
Plan assets in the retiree medical and other postretirement benefits plans’ are primarily Level 2 mutual funds valued by quoted prices on the active market, which is fair value, and represents the NAV of the shares of such funds as of the close of business at the end of the period. NAV is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Defined Contribution and Multiemployer Plans
The costs associated with American’s defined contribution plans were $916 million, $893 million and $835 million for the years ended December 31, 2022, 2021 and 2020, respectively.
American participates in the International Association of Machinists & Aerospace Workers (IAM) National Pension Fund, Employer Identification No. 51-6031295 and Plan No. 002 (the IAM Pension Fund). American’s contributions to the IAM Pension Fund were $46 million, $43 million and $40 million for the years ended December 31, 2022, 2021 and 2020, respectively. The IAM Pension Fund reported $507 million in employers’ contributions for the year ended December 31, 2021, which is the most recent year for which such information is available. For 2021, American’s contributions represented more than 5% of total contributions to the IAM Pension Fund.
On March 29, 2019, the actuary for the IAM Pension Fund certified that the fund was in “endangered” status despite reporting a funded status of over 80%. Additionally, the IAM Pension Fund’s Board voluntarily elected to enter into “critical” status on April 17, 2019. Upon entry into critical status, the IAM Pension Fund was required by law to adopt a rehabilitation plan aimed at restoring the financial health of the pension plan and did so on April 17, 2019 (the Rehabilitation Plan). Under the Rehabilitation Plan, American was subject to an immaterial contribution surcharge, which ceased to apply June 14, 2019 upon American’s mandatory adoption of a contribution schedule under the Rehabilitation Plan. The contribution schedule requires 2.5% annual increases to its contribution rate. This contribution schedule will remain in effect through the earlier of December 31, 2031 or the date the IAM Pension Fund emerges from critical status.
9. Accumulated Other Comprehensive Loss
The components of AOCI are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension, Retiree Medical and Other Postretirement Benefits | | Unrealized Loss on Investments | | Income Tax Provision (1) | | Total |
Balance at December 31, 2020 | $ | (6,215) | | | $ | (2) | | | $ | (977) | | | $ | (7,194) | |
Other comprehensive income (loss) before reclassifications | 1,289 | | | — | | | (292) | | | 997 | |
Amounts reclassified from AOCI | 202 | | | — | | | (46) | | (2) | 156 | |
Net current-period other comprehensive income (loss) | 1,491 | | | — | | | (338) | | | 1,153 | |
Balance at December 31, 2021 | (4,724) | | | (2) | | | (1,315) | | | (6,041) | |
Other comprehensive income (loss) before reclassifications | 1,610 | | | (4) | | | (363) | | | 1,243 | |
Amounts reclassified from AOCI | 140 | | | — | | | (32) | | (2) | 108 | |
Net current-period other comprehensive income (loss) | 1,750 | | | (4) | | | (395) | | | 1,351 | |
Balance at December 31, 2022 | $ | (2,974) | | | $ | (6) | | | $ | (1,710) | | | $ | (4,690) | |
(1)Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income (loss) until the obligations are fully extinguished.
(2)Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision (benefit) on American’s consolidated statements of operations.
Reclassifications out of AOCI for the years ended December 31, 2022 and 2021 are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Amounts reclassified from AOCI | | Affected line items on the consolidated statements of operations |
| Year Ended December 31, | |
AOCI Components | 2022 | | 2021 | |
Amortization of pension, retiree medical and other postretirement benefits: | | | | | |
Prior service cost | $ | 11 | | | $ | 11 | | | Nonoperating other income, net |
Actuarial loss | 97 | | | 145 | | | Nonoperating other income, net |
Total reclassifications for the period, net of tax | $ | 108 | | | $ | 156 | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Amounts allocated to other comprehensive income (loss) for income taxes will remain in AOCI until American ceases all related activities, such as termination of the pension plan.
10. Commitments, Contingencies and Guarantees
(a) Aircraft, Engine and Other Purchase Commitments
Under all of American’s aircraft and engine purchase agreements, its total future commitments as of December 31, 2022 are expected to be as follows (approximately, in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 and Thereafter | | Total |
Payments for aircraft and engine commitments (1) | $ | 1,485 | | | $ | 2,678 | | | $ | 3,896 | | | $ | 3,214 | | | $ | 988 | | | $ | 65 | | | $ | 12,326 | |
(1)These amounts are net of purchase deposits currently held by the manufacturers. American’s purchase deposits held by all manufacturers totaled $613 million and $517 million as of December 31, 2022 and 2021, respectively.
Due to the uncertainty surrounding the timing of delivery of certain aircraft, the amounts in the table represent American’s most current estimate based on contractual delivery schedules adjusted for updates and revisions to such schedules communicated to management by the applicable equipment manufacturer. However, the actual delivery schedule may differ, potentially materially, based on various potential factors including production delays by the manufacturer and regulatory concerns.
Additionally, the amounts in the table exclude four Boeing 787-8 aircraft scheduled to be delivered in 2023 and five Boeing 787-9 aircraft scheduled to be delivered in 2024, for which American has obtained committed lease financing. See Note 4 for information regarding this operating lease commitment.
Additionally, American has purchase commitments related to aircraft fuel, flight equipment maintenance, information technology support and construction projects as follows (approximately): $5.7 billion in 2023, $3.0 billion in 2024, $1.7 billion in 2025, $231 million in 2026, $126 million in 2027 and $941 million in 2028 and thereafter. These amounts exclude obligations under certain fuel offtake agreements or other agreements for which the timing of the related expenditure is uncertain, or which are subject to material contingencies, such as the construction of a production facility.
(b) Capacity Purchase Agreements with Third-Party Regional Carriers
American has capacity purchase agreements with third-party regional carriers. The capacity purchase agreements provide that all revenues, including passenger, in-flight, ancillary, mail and freight revenues, go to American. American controls marketing, scheduling, ticketing, pricing and seat inventories. In return, American agrees to pay predetermined fees to these airlines for operating an agreed-upon number of aircraft, without regard to the number of passengers on board. In addition, these agreements provide that American either reimburses or pays 100% of certain variable costs, such as airport landing fees, fuel and passenger liability insurance.
As of December 31, 2022, American’s capacity purchase agreements with third-party regional carriers had expiration dates ranging from 2023 to 2033, with rights of American to extend the respective terms of certain agreements.
As of December 31, 2022, American’s minimum obligations under its capacity purchase agreements with third-party regional carriers are as follows (approximately, in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 and Thereafter | | Total |
Minimum obligations under capacity purchase agreements with third-party regional carriers (1) | $ | 1,791 | | | $ | 1,950 | | | $ | 1,866 | | | $ | 1,298 | | | $ | 944 | | | $ | 1,399 | | | $ | 9,248 | |
(1)Represents minimum payments under capacity purchase agreements with third-party regional carriers. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and American’s actual payments could differ materially. Excludes rental payments under operating leases for certain aircraft flown under these capacity purchase agreements, which are reflected in the operating lease obligations in Note 4.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
(c) Airport Redevelopment
Los Angeles International Airport (LAX)
From time to time, airports where American has operations engage in construction projects, often substantial, that result in new or improved facilities that are ultimately funded through increases in the rent and other occupancy costs payable by airlines using the airport. Unlike this construction and funding model, American is managing a project at LAX where it has legal title to the assets during construction. In 2018, American executed a lease agreement with Los Angeles World Airports (LAWA), which owns and operates LAX, in connection with a $1.6 billion modernization project related to LAX Terminals 4 and 5. Construction, which started in October 2018 and is expected to be completed in 2028, will occur in a phased approach. The modernization project will include a unified departure hall to the entranceway of Terminals 4 and 5, reconfigured ticket counter and check-in areas with seamless access to security screening areas, 10 new security screening lanes with automated technology in addition to the existing Terminal 5 lanes, and a new Terminal 4 South concourse with more open and upgraded amenities at gate areas. The project will also include renovated break rooms, multi-use meeting rooms and team gathering spaces throughout the terminals to support American’s team members at LAX. In 2022, American completed construction of the Terminal 4 and 5 core, which provides a central location between the terminals and allows direct access to the check-in lobby and baggage claim in Terminal 5.
As each phase is completed and ready for use, the assets will be sold and transferred to LAWA, including the site improvements and non-proprietary improvements. As American controls the assets during construction, they are recognized on its balance sheet until the assets are sold and transferred to LAWA. As of December 31, 2022, American has incurred approximately $579 million in costs relating to the LAX modernization project, of which $241 million were incurred in 2022 and have been included within operating property and equipment on its consolidated balance sheets and included within airport construction projects, net of reimbursements on its consolidated statements of cash flows. As of December 31, 2022, American has sold and transferred $176 million of non-proprietary improvements to LAWA, of which $44 million occurred during 2022. For non-proprietary improvements which are not yet ready for use, any cash payments received from LAWA will be reflected as a financial liability. As of December 31, 2022, American has received $141 million in cash proceeds for non-proprietary improvements which are not yet ready for use, and therefore have not been sold and transferred back to LAWA. These proceeds are currently included in other accrued liabilities and noncurrent other liabilities on American’s consolidated balance sheet and are reflected as financing activities on its consolidated statement of cash flows.
JFK
In January 2020, American and British Airways announced the start of construction projects to upgrade New York's JFK Terminal 8. The renovation projects at Terminal 8 include: (i) the reconfiguration or elimination of certain existing gates and the construction of widebody gates, (ii) the construction of approximately 51,000 square feet of new terminal building space and the refurbishment of 73,300 square feet of existing terminal space, (iii) the expansion of the baggage system capacity of Terminal 8, (iv) improvements to the premium passenger lounges, check-in and, potentially, security access areas, and (v) bathroom refreshment, new signage, and other upgrades. The construction project is substantially complete and remaining construction on the baggage handling system expansion and bathroom refurbishments are expected to be fully completed in early 2023. As of December 31, 2022, American has incurred $348 million in construction costs to upgrade Terminal 8, of which $172 million was incurred in 2022. These costs have been included in airport construction projects, net of reimbursements on American’s consolidated statements of cash flows.
(d) Off-Balance Sheet Arrangements
Pass-Through Trusts
American currently has 352 owned aircraft and 60 owned spare aircraft engines, which in each case were financed with EETCs issued by pass-through trusts. These trusts are off-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment or to permit issuance of debt backed by existing flight equipment. In the case of aircraft EETCs, rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allow American to raise the financing for a number of aircraft at one time and, if applicable, place such funds in escrow pending a future purchase, delivery or refinancing of the relevant aircraft. Similarly, in the case of the spare engine EETCs, the trusts allow American to use its existing pool of spare engines to raise financing under a single facility. The trusts have also been structured to provide for certain credit enhancements, such as liquidity facilities to cover certain
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to American.
Each trust covers a set number of aircraft or spare engines scheduled to be delivered, financed or refinanced upon the issuance of the EETC or within a specific period of time thereafter. At the time of each covered aircraft or spare engine financing, the relevant trust used the proceeds of the issuance of the EETC (which may have been available at the time of issuance thereof or held in escrow until financing of the applicable aircraft following its delivery) to purchase equipment notes relating to the financed aircraft or engines. The equipment notes are issued, at American’s election, in connection with a mortgage financing of the aircraft or spare engines. The equipment notes are secured by a security interest in the aircraft or engines, as applicable. The pass-through trust certificates are not direct obligations of, nor are they guaranteed by, AAG or American. However, the equipment notes issued to the trusts are direct obligations of American and, in certain instances, have been guaranteed by AAG. As of December 31, 2022, $9.2 billion associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet.
Letters of Credit and Other
American provides financial assurance, such as letters of credit and surety bonds, primarily to support airport commitments. As of December 31, 2022, American had $218 million of letters of credit and surety bonds securing various obligations, of which $100 million is collateralized with American’s restricted cash. The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2026.
(e) Legal Proceedings
Private Party Antitrust Action Related to Passenger Capacity. American, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, were named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits were consolidated in the Federal District Court for the District of Columbia (the DC Court). On June 15, 2018, American reached a settlement agreement with the plaintiffs in the amount of $45 million to resolve all class claims in the U.S. lawsuits. That settlement was approved by the DC Court on May 13, 2019, however three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia. American believes these appeals are without merit and intends to vigorously defend against them.
Private Party Antitrust Action Related to the Merger. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al., v. AMR Corporation, et al., was filed in the United States Bankruptcy Court for the Southern District of New York (Bankruptcy Court). The complaint named as defendants US Airways Group, US Airways, Inc., AMR Corporation and American, alleged that the effect of the merger of US Airways Group and AMR Corporation (the Merger) may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross-motion for summary judgment. The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019 and the parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019. On January 29, 2021, the Bankruptcy Court published its decision finding in American’s favor. On March 25, 2022, the U.S. District Court for the Southern District of New York entered judgment affirming the Bankruptcy Court's decision. On April 21, 2022, plaintiffs appealed that decision to the United States Court of Appeals for the Second Circuit. The appeal is fully briefed and scheduled for oral argument on March 13, 2023. American believes this lawsuit is without merit and intends to continue to vigorously defend against it, including against any further appeals by the plaintiffs.
Government Antitrust Action Related to the Northeast Alliance. On September 21, 2021, the United States Department of Justice (the DOJ), joined by Attorneys General from six states and the District of Columbia, filed an antitrust complaint against American and JetBlue Airways Corporation (JetBlue) in the District of Massachusetts alleging that American and JetBlue violated U.S. antitrust law in connection with the previously disclosed Northeast Alliance arrangement (NEA). The parties presented their respective cases in a bench trial that commenced on September 27, 2022. Closing arguments from both parties were presented on November 18, 2022. A decision is expected in the first quarter of 2023.
Also on September 21, 2021, the United States Department of Transportation (DOT) published a Clarification Notice relating to the agreement that had been reached between the DOT, American, and JetBlue in January 2021, at the conclusion of the DOT’s review of the NEA (DOT Agreement). The DOT Clarification Notice stated, among other things, that the DOT Agreement remains in force during the pendency of the DOJ action against the NEA and, while the DOT retains independent statutory authority to prohibit unfair methods of competition in air transportation, the DOT intends to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
defer to the DOJ to resolve the antitrust concerns that the DOJ has identified with respect to the NEA. The DOT simultaneously published a Notice Staying Proceeding in relation to a complaint by Spirit Airlines, Inc. regarding the NEA, pending resolution of the DOJ action described above. On September 30, 2022, the DOT issued a further statement referencing the prior Clarification Notice and, among other things, indicating its intention to continue working with the DOJ in its efforts to resolve the ongoing proceedings regarding the NEA.
Private Party Antitrust Actions Related to the Northeast Alliance. On December 5, 2022 and December 7, 2022, two private party plaintiffs filed putative class action antitrust complaints against American and JetBlue in the Eastern District of New York alleging that American and JetBlue violated U.S. antitrust law in connection with the previously disclosed NEA. These actions were consolidated on January 10, 2023. The private party plaintiffs filed an amended consolidated complaint on February 3, 2023. In February 2023, private party plaintiffs filed two additional putative class action antitrust complaints against American and JetBlue in the District of Massachusetts and the Eastern District of New York, respectively. American believes these lawsuits are without merit and is defending against them vigorously.
General. In addition to the specifically identified legal proceedings, American and its subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within American’s control. Therefore, although American will vigorously defend itself in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on American are uncertain but could be material.
(f) Guarantees and Indemnifications
American is a party to many routine contracts in which it provides general indemnities in the normal course of business to third parties for various risks. American is not able to estimate the potential amount of any liability resulting from the indemnities. These indemnities are discussed in the following paragraphs.
In its aircraft financing agreements, American generally indemnifies the financing parties, trustees acting on their behalf and other relevant parties against liabilities (including certain taxes) resulting from the financing, manufacture, design, ownership, operation and maintenance of the aircraft regardless of whether these liabilities (including certain taxes) relate to the negligence of the indemnified parties.
American’s loan agreements and certain other financing transactions may obligate American to reimburse the applicable lender for incremental costs due to a change in law that imposes (i) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (ii) any tax, duty or other charge with respect to the loan (except standard income tax) or (iii) capital adequacy requirements. In addition, American’s loan agreements and other financing arrangements typically contain a withholding tax provision that requires American to pay additional amounts to the applicable lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law.
In certain transactions, including certain aircraft financing leases and loans, the lessors, lenders and/or other parties have rights to terminate the transaction based on changes in foreign tax law, illegality or certain other events or circumstances. In such a case, American may be required to make a lump sum payment to terminate the relevant transaction.
American has general indemnity clauses in many of its airport and other real estate leases where American as lessee indemnifies the lessor (and related parties) against liabilities related to American’s use of the leased property. Generally, these indemnifications cover liabilities resulting from the negligence of the indemnified parties, but not liabilities resulting from the gross negligence or willful misconduct of the indemnified parties. In addition, American provides environmental indemnities in many of these leases for contamination related to American’s use of the leased property.
Under certain contracts with third parties, American indemnifies the third-party against legal liability arising out of an action by the third-party, or certain other parties. The terms of these contracts vary and the potential exposure under these indemnities cannot be determined. American has liability insurance protecting American for some of the obligations it has undertaken under these indemnities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
American is required to make principal and interest payments for certain special facility revenue bonds issued by municipalities primarily to build or improve airport facilities and purchase equipment, which are leased to American. The payment of principal and interest of certain special facility revenue bonds is guaranteed by American. As of December 31, 2022, the remaining lease payments through 2035 guaranteeing the principal and interest on these bonds are $538 million and the current carrying amount of the associated operating lease liability in the accompanying consolidated balance sheet is $321 million.
As of December 31, 2022, American had issued guarantees covering AAG’s $1.8 billion aggregate principal amount of the PSP1 Promissory Note due April 2030, $1.0 billion aggregate principal amount of the PSP2 Promissory Note due January 2031, $959 million aggregate principal amount of the PSP3 Promissory Note due April 2031, $1.0 billion aggregate principal amount of 6.50% convertible senior notes due July 2025 and $500 million aggregate principal amount of 3.75% senior notes due March 2025.
(g) Credit Card Processing Agreements
American has agreements with companies that process customer credit card transactions for the sale of air travel and other services. American’s agreements allow these credit card processing companies, under certain conditions, to hold an amount of its cash (referred to as a holdback) equal to all or a portion of advance ticket sales that have been processed by that company, but for which American has not yet provided the air transportation. These holdback requirements can be implemented at the discretion of the credit card processing companies upon the occurrence of specific events, including material adverse changes in American’s financial condition or the triggering of a liquidity covenant. These credit card processing companies are not currently entitled to maintain any holdbacks. The imposition of holdback requirements would reduce American’s liquidity.
(h) Labor Negotiations
As of December 31, 2022, American employed approximately 102,000 active full-time equivalent (FTE) employees. Of the total active FTE employees, 87% are covered by collective bargaining agreements (CBAs) with various labor unions and 53% are covered by CBAs that are currently amendable or that will become amendable within one year. CBAs covering American’s mainline pilots, flight attendants and passenger service are now amendable.
11. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information and non-cash investing and financing activities are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Non-cash investing and financing activities: | | | | | |
Equity investments | $ | 12 | | | $ | 88 | | | $ | — | |
Settlement of bankruptcy obligations | — | | | 4 | | | 56 | |
Deferred financing costs paid through issuance of debt | — | | | — | | | 17 | |
Supplemental information: | | | | | |
Interest paid, net | 1,716 | | | 1,481 | | | 877 | |
Income taxes paid | 2 | | | 2 | | | 6 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
12. Operating Segments and Related Disclosures
American is managed as a single business unit that provides air transportation for passengers and cargo. This allows it to benefit from an integrated revenue pricing and route network that includes American and AAG’s wholly-owned and third-party regional carriers that fly under capacity purchase agreements operating as American Eagle. The flight equipment of all these carriers is combined to form one fleet that is deployed through a single route scheduling system. Financial information and annual operational plans and forecasts are prepared and reviewed by the chief operating decision maker at the consolidated level. When making operational decisions, the chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but is indifferent to the results of the individual regional carriers. The objective in making operational decisions is to maximize consolidated financial results, not the individual results of American or American Eagle.
See Note 1(m) for American’s passenger revenue by geographic region. American’s tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated.
13. Share-based Compensation
The 2013 AAG Incentive Award Plan (the 2013 Plan) provides that awards may be in the form of an option, restricted stock award, restricted stock unit award, performance award, dividend equivalent award, deferred stock award, deferred stock unit award, stock payment award or stock appreciation right. The 2013 Plan initially authorized the grant of awards for the issuance of up to 40 million shares. Any shares underlying awards granted under the 2013 Plan that are forfeited, terminate or are settled in cash (in whole or in part) without the delivery of shares will again be available for grant.
For the years ended December 31, 2022, 2021 and 2020, American recorded $75 million, $95 million and $91 million, respectively, of share-based compensation costs principally in salaries, wages and benefits expense on its consolidated statements of operations.
During 2022, 2021 and 2020, AAG withheld approximately 1.2 million, 1.0 million and 0.7 million shares of AAG common stock, respectively, and paid approximately $21 million, $18 million and $15 million, respectively, in satisfaction of certain tax withholding obligations associated with employee equity awards.
Restricted Stock Unit Awards (RSUs)
The majority of American’s RSUs have service conditions (time vested primarily over three years). The grant-date fair value of these RSUs is equal to the market price of the underlying shares of AAG common stock on the date of grant. The expense for these RSUs is recognized on a straight-line basis over the vesting period for the entire award. RSUs are classified as equity awards as the vesting results in the issuance of shares of AAG common stock.
RSU award activity for all plans for the years ended December 31, 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
| (In thousands) | | |
Outstanding at December 31, 2019 | 5,187 | | | $ | 37.01 | |
Granted | 5,883 | | | 22.07 | |
Vested and released | (2,268) | | | 39.46 | |
Forfeited | (920) | | | 29.78 | |
Outstanding at December 31, 2020 | 7,882 | | | $ | 23.66 | |
Granted | 5,525 | | | 18.34 | |
Vested and released | (3,314) | | | 25.58 | |
Forfeited | (692) | | | 18.78 | |
Outstanding at December 31, 2021 | 9,401 | | | $ | 20.17 | |
Granted | 5,882 | | | 15.93 | |
Vested and released | (4,131) | | | 21.04 | |
Forfeited | (889) | | | 18.04 | |
Outstanding at December 31, 2022 | 10,263 | | | $ | 17.51 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
As of December 31, 2022, there was $93 million of unrecognized compensation cost related to RSUs. These costs are expected to be recognized over a weighted average period of one year. The total fair value of RSUs vested during the years ended December 31, 2022, 2021 and 2020 was $70 million, $62 million and $51 million, respectively.
14. Valuation and Qualifying Accounts (in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Year | | Additions Charged to Statement of Operations Accounts | | Deductions | | Balance at End of Year |
Allowance for obsolescence of spare parts | | | | | | | |
Year ended December 31, 2022 | $ | 588 | | | $ | 82 | | | $ | (104) | | | $ | 566 | |
Year ended December 31, 2021 | 442 | | | 165 | | | (19) | | | 588 | |
Year ended December 31, 2020 | 729 | | | 81 | | | (368) | | | 442 | |
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15. Transactions with Related Parties
The following represents the net receivables (payables) from or to related parties (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
AAG (1) | $ | 8,692 | | | $ | 7,613 | |
AAG’s wholly-owned subsidiaries (2) | (2,104) | | | (2,066) | |
Total | $ | 6,588 | | | $ | 5,547 | |
(1)The increase in American’s net related party receivable from AAG is primarily due to American providing the cash funding for AAG’s financing transactions.
(2)The net payable to AAG’s wholly-owned subsidiaries consists primarily of amounts due under regional capacity purchase agreements with AAG’s wholly-owned regional airlines operating under the brand name of American Eagle.
Pursuant to a capacity purchase agreement between American and AAG’s wholly-owned regional airlines operating as American Eagle, American purchases all of the capacity from these carriers and recognizes passenger revenue from flights operated by American Eagle. In 2022, 2021 and 2020, American recognized expense of approximately $2.5 billion, $2.1 billion and $1.8 billion, respectively, related to wholly-owned regional airline capacity purchase agreements.
16. Subsequent Events
2013 Term Loan Facility Refinancing
In February 2023, American and AAG entered into the Seventh Amendment to Amended and Restated Credit and Guaranty Agreement (the Seventh Amendment) to the 2013 Credit Agreement, pursuant to which American extended the maturity date of all remaining term loans outstanding under the 2013 Term Loan Facility to February 2028 from June 2025. The Seventh Amendment also amended certain other terms of the 2013 Credit Agreement, including the interest rate for the 2013 Term Loan Facility, amortization schedule, the requirements for delivery of appraisals and certain covenants relating to dispositions of collateral. Additionally, the Seventh Amendment transitioned the benchmark interest rate from LIBOR to SOFR. As a result, the 2013 Term Loan Facility bears interest at a base rate (subject to a floor of 1.00%) plus an applicable margin of 1.75% or, at American’s option, the SOFR rate for a tenor of one, three or six months, depending on the interest period selected by American (subject to a floor of 0.00%), plus the SOFR adjustment applicable to such interest period and an applicable margin of 2.75%. After giving effect to the issuance of the 7.25% Senior Secured Notes (as discussed below) and the application of the proceeds therefrom, there was $1.0 billion aggregate principal outstanding under the 2013 Term Loan Facility.
7.25% Senior Secured Notes
In February 2023, American issued $750 million aggregate principal amount of 7.25% senior secured notes due 2028 (the 7.25% Senior Secured Notes). The 7.25% Senior Secured Notes bear interest at a rate of 7.25% per annum (subject to increase if the collateral coverage ratio described below is not met). Interest on the 7.25% Senior Secured Notes is payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2023. The 7.25%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
Senior Secured Notes will mature on February 15, 2028. The obligations of American under the 7.25% Senior Secured Notes are fully and unconditionally guaranteed on a senior unsecured basis by AAG. American used the proceeds from the offering of the 7.25% Senior Secured Notes, together with cash on hand, to repay a portion of the term loans outstanding under the 2013 Term Loan Facility and to pay related fees and expenses.
The 7.25% Senior Secured Notes were issued pursuant to an indenture, dated as of February 15, 2023 (the 7.25% Senior Secured Notes Indenture), by and among American, AAG and Wilmington Trust, National Association, as trustee and collateral agent (the 7.25% Senior Secured Notes Trustee). The 7.25% Senior Secured Notes are American’s senior secured obligations and are secured on a first lien basis by security interests in certain assets, rights and properties that American uses to provide non-stop scheduled air carrier services between certain airports in the United States and airports in countries in South America and New Zealand (the 7.25% Senior Secured Notes Collateral). The 7.25% Senior Secured Notes Collateral presently secures (and will continue to secure), on a first lien, pari passu basis with the 7.25% Senior Secured Notes, the 2013 Credit Facilities under the 2013 Credit Agreement.
American may redeem the 7.25% Senior Secured Notes, in whole at any time or in part from time to time prior to February 15, 2025, at a redemption price equal to 100% of the principal amount of the 7.25% Senior Secured Notes to be redeemed, plus a “make-whole” premium, plus any accrued and unpaid interest thereon to but excluding the date of redemption. At any time on or after February 15, 2025, American may redeem all or any of the 7.25% Senior Secured Notes in whole at any time, or in part from time to time, at the redemption prices described under the 7.25% Senior Secured Notes Indenture, plus any accrued and unpaid interest thereon to but excluding the date of redemption. In addition, at any time prior to February 15, 2025, American may redeem up to 40% of the original aggregate principal amount of the 7.25% Senior Secured Notes (calculated after giving effect to any issuance of additional notes) with the net cash proceeds of certain equity offerings, at a redemption price equal to 107.250% of the aggregate principal amount of the 7.25% Senior Secured Notes to be redeemed, plus any accrued and unpaid interest thereon to but excluding the date of redemption.
Further, if certain change of control transactions occur, each holder of 7.25% Senior Secured Notes may require American to repurchase the 7.25% Senior Secured Notes in whole or in part at a repurchase price of 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to but not including the repurchase date.
American is required to deliver an appraisal of the 7.25% Senior Secured Notes Collateral and officer’s certificate twice a year demonstrating the calculation of a collateral coverage ratio in relation to the 7.25% Senior Secured Notes Collateral (the 7.25% Senior Secured Notes Collateral Coverage Ratio) as of the date of delivery of the appraisal for the applicable period. If the 7.25% Senior Secured Notes Collateral Coverage Ratio is less than 1.6 to 1.0 as of the date of delivery of the appraisal for the applicable period, then, subject to a cure period in which additional collateral can be provided or debt repaid such that American meets the required 7.25% Senior Secured Notes Collateral Coverage Ratio, American will be required to pay special interest in an additional amount equal to 2.0% per annum of the principal amount of the 7.25% Senior Secured Notes until the 7.25% Senior Secured Notes Collateral Coverage Ratio is established to be at least 1.6 to 1.0.