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MarketScreener Homepage  >  Equities  >  Nasdaq  >  American Airlines Group Inc.    AAL

AMERICAN AIRLINES GROUP INC.

(AAL)
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AMERICAN AIRLINES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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02/19/2020 | 08:44am EDT

Background

Together with our wholly-owned regional airline subsidiaries and third-party
regional carriers operating as American Eagle, our airline operates an average
of 6,800 flights per day to more than 365 destinations in 61 countries through
our hubs and gateways in Charlotte, Chicago, Dallas/Fort Worth, London Heathrow,
Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. In
2019, approximately 215 million passengers boarded our flights.
2019 Financial Overview
AAG's 2019 Results
The selected financial data presented below is derived from AAG's audited
consolidated financial statements included in Part II, Item 8A of this report
and should be read in conjunction with those financial statements and the
related notes thereto.

                                                 Year Ended                              Percent
                                                December 31,             Increase       Increase
                                            2019            2018        (Decrease)     (Decrease)
                                                 (In millions, except percentage changes)
Passenger revenue                       $    42,010$   40,676$     1,334           3.3
Cargo revenue                                   863          1,013            (150 )       (14.8 )
Other operating revenue                       2,895          2,852              43           1.5
Total operating revenues                     45,768         44,541           1,227           2.8
Mainline and regional aircraft fuel and
related taxes                                 9,395          9,896            (501 )        (5.1 )
Salaries, wages and benefits                 12,609         12,251             358           2.9
Total operating expenses                     42,703         41,885             818           2.0
Operating income                              3,065          2,656             409          15.4
Pre-tax income                                2,256          1,884             372          19.7
Income tax provision                            570            472              98          20.7
Net income                                    1,686          1,412             274          19.4

Pre-tax income - GAAP                   $     2,256$    1,884$       372          19.7
Adjusted for: Pre-tax net special items
(1)                                             644            906            (262 )       (28.9 )
Pre-tax income excluding net special
items                                   $     2,900$    2,790$       110           3.9




(1) See Part II, Item 6. Selected Consolidated Financial Data - "Reconciliation

of GAAP to Non-GAAP Financial Measures" and Note 2 to AAG's Consolidated

     Financial Statements in Part II, Item 8A for details on the components of
     net special items.


Pre-Tax Income and Net Income
Pre-tax income and net income were $2.3 billion and $1.7 billion in 2019,
respectively. This compares to 2018 pre-tax income and net income of $1.9
billion and $1.4 billion, respectively. Excluding the effects of pre-tax net
special items, pre-tax income was $2.9 billion and $2.8 billion in 2019 and
2018, respectively. The year-over-year increase in our pre-tax income on both a
GAAP basis and excluding pre-tax net special items was principally driven by
higher revenues and lower fuel costs, offset in part by increases in salaries,
wages and benefits, maintenance expenses and costs associated with increased
regional capacity.

                                       49
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Fleet and Operation
Boeing 737 MAX
On March 13, 2019, a directive from the FAA grounded all U.S.-registered Boeing
737 MAX aircraft. Our fleet currently includes 24 Boeing 737 MAX aircraft with
an additional 76 aircraft on order. As a result of this directive, we canceled
approximately 27,600 flights in 2019. We have removed all Boeing 737 MAX flying
from our flight schedule through August 17, 2020 and continue to assess this
timeline.
Our estimate of the financial damages incurred in 2019 due to the Boeing 737 MAX
grounding and related cancellations was approximately $540 million.
As previously announced in January 2020, we reached a confidential agreement
with Boeing on compensation related to financial damages incurred in 2019 due to
the grounding of the Boeing 737 MAX aircraft. The settlement did not have a
material impact on 2019 earnings because we are accounting for substantially all
of the compensation as a reduction in cost basis of grounded Boeing 737 MAX
aircraft and certain future Boeing 737 MAX aircraft deliveries. Our future
aircraft purchase commitments in Note 12 to AAG's Consolidated Financial
Statements in Part II, Item 8A reflect the portion of the compensation we expect
to receive in the future as Boeing 737 MAX aircraft are delivered. These amounts
reflect our best estimate in light of the uncertainty surrounding the timing of
future Boeing 737 MAX aircraft deliveries.
Due to the impact of the Boeing 737 MAX grounding on our 2019 financial results,
our Board of Directors authorized a discretionary portion of the settlement to
be returned to team members through our 2019 profit-sharing program. The
profit-sharing award was based on our estimate of full-year 2019 financial
damages for the Boeing 737 MAX grounding. As a result, an additional accrual of
approximately $30 million was made to our 2019 profit-sharing program.
We are pleased with the settlement agreement we reached for 2019, which was
intended to address our financial damages incurred in 2019 due to the grounding
of the Boeing 737 MAX aircraft. However, the aircraft remain grounded and
therefore we continue to incur financial damages in 2020. We expect discussions
to continue with Boeing for further compensation for these damages.
Operational Slowdown
In 2019, the TWU-IAM Association engaged in an illegal work slowdown in an
effort to influence contract negotiations. This slowdown significantly impacted
our operation and caused a significant number of flight cancellations and delays
in the second and third quarters of 2019. Agreements in principle were reached
on January 30, 2020 for JCBAs covering all of the workgroups represented by the
TWU-IAM Association. Those agreements are subject to membership ratification
vote.
Revenue
In 2019, we reported total operating revenues of $45.8 billion, an increase of
$1.2 billion, or 2.8%, as compared to 2018. Passenger revenue was $42.0 billion,
an increase of $1.3 billion, or 3.3%, as compared to 2018. The increase in
passenger revenue in 2019 was due to continued strength in passenger demand
resulting in a 4.4% increase in revenue passenger miles (RPMs) and a 2.6 point
increase in passenger load factor. Domestic passenger revenue per available seat
mile (PRASM) increased 2.0% as compared to 2018. Latin America was the best
performing international region in 2019, with PRASM increasing 3.4% followed by
Pacific with PRASM increasing 3.1%, while Atlantic PRASM declined 1.5%
principally due to lower transfer payments related to our joint business
arrangement and foreign currency effects.
In 2019, cargo revenue was $863 million, a decrease of $150 million, or 14.8%,
as compared to 2018, primarily due to a 14.4% decrease in cargo ton miles
reflecting declines in freight volumes, principally as a result of international
schedule reductions. Other operating revenue increased $43 million, or 1.5%, in
2019 as compared to 2018, principally driven by higher revenue associated with
our airport clubs and loyalty program.
Our total revenue per available seat mile (TRASM) was 16.05 cents in 2019, a
1.7% increase as compared to 15.79 cents in 2018.
Fuel
Our mainline and regional fuel expense totaled $9.4 billion in 2019, which was
$501 million, or 5.1%, lower compared to 2018. This decrease was primarily
driven by a 6.9% decrease in the average price per gallon of fuel including
related taxes to $2.07 in 2019 from $2.23 in 2018, offset in part by a 2.0%
increase in gallons of fuel consumed.

                                       50
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As of December 31, 2019, 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.
Other Costs
We remain committed to actively managing our cost structure, which we believe is
necessary in an industry whose economic prospects are heavily dependent upon two
variables we cannot control: the health of the economy and the price of fuel.
Our 2019 total cost per available seat mile (CASM) was 14.98 cents, an increase
of 0.9%, from 14.85 cents in 2018.
Our 2019 CASM excluding net special items and fuel was 11.46 cents, an increase
of 3.6%, from 11.06 cents in 2018. The increase was primarily driven by higher
maintenance expenses, costs associated with increased regional capacity and
lower than planned capacity in 2019 due to the Boeing 737 MAX grounding.
For a reconciliation of CASM excluding net special items and fuel, see Part II,
Item 6. Selected Consolidated Financial Data - "Reconciliation of GAAP to
Non-GAAP Financial Measures."
Liquidity
As of December 31, 2019, we had approximately $7.0 billion in total available
liquidity, consisting of $3.8 billion in unrestricted cash and short-term
investments and $3.2 billion in undrawn capacity under our revolving credit
facilities. We also had restricted cash and short-term investments of $158
million.
During 2019, we completed the following significant financing transactions:
•            raised $3.2 billion from enhanced equipment trust 

certificates

             (EETCs) and other aircraft and flight equipment financing, of which
             $1.3 billion was used to repay existing indebtedness;


•            issued $750 million in aggregate principal amount of 5.000% senior
             notes due 2022 (the 5.000% senior notes);

• raised $850 million from aircraft sale-leaseback transactions; and


•            extended the maturities on $2.8 billion of our revolving credit
             facility commitments by one year from 2023 to 2024, and due to
             uncertainty surrounding the timing of the Boeing 737 MAX aircraft
             return to service, entered into an additional $400 million
             short-term revolving line of credit.


See Note 5 to AAG's Consolidated Financial Statements in Part II, Item 8A for
additional information on our debt obligations.
Additionally, we returned $1.3 billion to our stockholders in 2019, including
the repurchase of $1.1 billion of our common stock, or 33.8 million shares, and
quarterly dividend payments totaling $178 million. Since our capital return
program commenced in mid-2014, we have returned $13.6 billion to stockholders,
including $12.4 billion in share repurchases, or 312.7 million shares, and $1.2
billion in quarterly dividend payments.

                                       51
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AAG's Results of Operations
For a comparison of the 2018 to 2017 reporting periods, see Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "AAG's Results of Operations - 2018 Compared to 2017" of our 2018
Form 10-K.
Operating Statistics
The table below sets forth selected operating data for the years ended
December 31, 2019 and 2018.
                                                  Year Ended December 31,      Increase
                                                    2019           2018       (Decrease)
Revenue passenger miles (millions) (a)              241,252       231,160   

4.4%

Available seat miles (millions) (b)                 285,088       282,054   

1.1%

Passenger load factor (percent) (c)                    84.6          82.0   

2.6pts

Yield (cents) (d)                                     17.41         17.60   

(1.0)%

Passenger revenue per available seat mile
(cents) (e)                                           14.74         14.42   

2.2%

Total revenue per available seat mile (cents)
(f)                                                   16.05         15.79   

1.7%

Aircraft at end of period (g)                         1,547         1,551   

(0.3)%

Fuel consumption (gallons in millions)                4,537         4,447   

2.0%

Average aircraft fuel price including related
taxes (dollars per gallon)                             2.07          2.23   

(6.9)%

Full-time equivalent employees at end of period 133,700 128,900

3.7%

Operating cost per available seat mile (cents)
(h)                                                   14.98         14.85           0.9%





(a)    Revenue passenger mile (RPM) - A basic measure of sales volume. One RPM
       represents one passenger flown one mile.


(b)    Available seat mile (ASM) - A basic measure of production. One ASM
       represents one seat flown one mile.

(c) Passenger load factor - The percentage of available seats that are filled

with revenue passengers.

(d) Yield - A measure of airline revenue derived by dividing passenger revenue

by RPMs.

(e) Passenger revenue per available seat mile (PRASM) - Passenger revenue

divided by ASMs.

(f) Total revenue per available seat mile (TRASM) - Total revenues divided by

       ASMs.


(g)    Includes aircraft owned and leased by American as well as aircraft
       operated by third-party regional carriers under capacity purchase
       agreements. Excludes 12 Embraer E140 regional aircraft that are in
       temporary storage.

(h) Operating cost per available seat mile (CASM) - Operating expenses divided

by ASMs.



Results of Operations - 2019 Compared to 2018
Operating Revenues

                              Year Ended December 31,                           Percent
                                                                Increase       Increase
                                  2019              2018       (Decrease)     (Decrease)
                                     (In millions, except percentage changes)
Passenger                $      42,010$ 40,676$     1,334           3.3
Cargo                              863               1,013           (150 )       (14.8 )
Other                            2,895               2,852             43           1.5
Total operating revenues $      45,768$ 44,541$     1,227           2.8



                                       52
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This table presents our total passenger revenue and the year-over-year change in certain operating statistics:

                                                              Increase (Decrease)
                                                       vs. Year Ended December 31, 2018
                        Year Ended       Passenger                        Load     Passenger
                     December 31, 2019    Revenue     RPMs      ASMs     Factor      Yield      PRASM
                       (In millions)
Passenger revenue    $        42,010          3.3%      4.4%      1.1%    2.6pts      (1.0)%      2.2%


Passenger revenue increased $1.3 billion, or 3.3%, in 2019 from 2018 due to
continued strength in passenger demand resulting in a 4.4% increase in RPMs and
a 2.6 point increase in passenger load factor. Domestic PRASM increased 2.0% in
2019 as compared to 2018. Latin America was the best performing international
region in 2019, with PRASM increasing 3.4% followed by Pacific with PRASM
increasing 3.1%, while Atlantic PRASM declined 1.5% principally due to lower
transfer payments related to our joint business arrangement and foreign currency
effects.
Cargo revenue decreased $150 million, or 14.8%, in 2019 from 2018 primarily due
to a 14.4% decrease in cargo ton miles reflecting declines in international
freight volumes, principally as a result of international schedule reductions.
Other operating revenue increased $43 million, or 1.5%, in 2019 from 2018
primarily due to higher revenue associated with our airport clubs and loyalty
program.
Total operating revenues in 2019 increased $1.2 billion, or 2.8%, from 2018
driven principally by a 3.3% increase in passenger revenue as described above.
Our TRASM was 16.05 cents in 2019, a 1.7% increase as compared to 15.79 cents in
2018.
Operating Expenses

                                         Year Ended December 31,                         Percent
                                                                         Increase       Increase
                                           2019             2018        (Decrease)     (Decrease)
                                                (In millions, except percentage changes)
Aircraft fuel and related taxes       $       7,526$    8,053$      (527 )        (6.5 )
Salaries, wages and benefits                 12,609         12,251             358           2.9
Maintenance, materials and repairs            2,380          2,050             330          16.1
Other rent and landing fees                   2,055          1,900             155           8.2
Aircraft rent                                 1,326          1,264              62           4.9
Selling expenses                              1,602          1,520              82           5.4
Depreciation and amortization                 1,982          1,839             143           7.7
Mainline operating special items, net           635            787            (152 )       (19.4 )
Other                                         5,087          5,088              (1 )           -
Regional expenses:
Aircraft fuel and related taxes               1,869          1,843              26           1.4
Other                                         5,632          5,290             342           6.5
Total operating expenses              $      42,703$   41,885$       818           2.0


Total operating expenses increased $818 million, or 2.0%, in 2019 from 2018. See
detailed explanations below relating to changes in total CASM.
Total CASM
We sometimes use financial measures that are derived from the consolidated
financial statements but that are not presented in accordance with GAAP to
understand and evaluate our current operating performance and to allow for
period-to-period comparisons. We believe these non-GAAP financial measures may
also provide useful information to investors and others. These non-GAAP measures
may not be comparable to similarly titled non-GAAP measures of other companies,
and should be considered in addition to, and not as a substitute for or superior
to, any measure of performance,

                                       53
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cash flow or liquidity prepared in accordance with GAAP. We are providing a
reconciliation of reported non-GAAP financial measures to their comparable
financial measures on a GAAP basis.
The table below presents the reconciliation of total operating expenses (GAAP
measure) to total operating costs excluding net special items and fuel (non-GAAP
measure). Management uses total operating costs excluding net special items and
fuel to evaluate our current operating performance and for period-to-period
comparisons. The price of fuel, over which we have no control, impacts the
comparability of period-to-period financial performance. The adjustment to
exclude aircraft fuel and net special items allows management an additional tool
to understand and analyze our non-fuel costs and core operating performance.
The major components of our total CASM and our total CASM excluding net special
items and fuel for the years ended December 31, 2019 and 2018 are as follows
(amounts may not recalculate due to rounding):

                                                    Year Ended December 31,         Percent
                                                                                   Increase
                                                      2019             2018       (Decrease)
                                                    (In cents, except percentage changes)
Total CASM:
Aircraft fuel and related taxes                        2.64              2.86          (7.5 )
Salaries, wages and benefits                           4.42              4.34           1.8
Maintenance, materials and repairs                     0.83              0.73          14.9
Other rent and landing fees                            0.72              0.67           7.0
Aircraft rent                                          0.47              0.45           3.8
Selling expenses                                       0.56              0.54           4.3
Depreciation and amortization                          0.70              0.65           6.6
Special items, net                                     0.22              0.28         (20.2 )
Other                                                  1.78              1.80          (1.1 )
Regional expenses:
Aircraft fuel and related taxes                        0.66              0.65           0.3
Other                                                  1.98              1.88           5.3
Total CASM                                            14.98             14.85           0.9
Mainline operating special items, net                 (0.22 )           (0.28 )       (20.2 )
Aircraft fuel and related taxes
Aircraft fuel and related taxes - mainline            (2.64 )           (2.86 )        (7.5 )
Aircraft fuel and related taxes - regional            (0.66 )           (0.65 )         0.3
Total CASM, excluding net special items and fuel      11.46             11.06           3.6


Significant changes in the components of total CASM are as follows: • Mainline aircraft fuel and related taxes per ASM decreased 7.5% in 2019 as

compared to 2018 primarily due to a 7.1% decrease in the average price per

      gallon of fuel including related taxes to $2.05 in 2019 from $2.21 in 2018.


•     Maintenance, materials and repairs per ASM increased 14.9% in 2019 as
      compared to 2018 primarily due to a contract change that resulted in

certain flight equipment transitioning to a flight hour based contract

(referred to as power by the hour) whereby expense is incurred and

recognized based on actual hours flown. Previously, this flight equipment

was covered by a time and materials based contract whereby expense is

incurred and recognized as maintenance is performed. An increase in the

volume of airframe and engine overhauls performed under time and material

      based contracts as well as an increase in the volume of component part
      repairs also drove higher maintenance expenses in 2019.

• Other rent and landing fees per ASM increased 7.0% in 2019 as compared to

2018 primarily due to an expansion at DFW that became fully operational in

      May 2019 and rate increases at certain hub airports.



                                       54
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• Depreciation and amortization per ASM increased 6.6% in 2019 as compared to

2018 due in part to airport and other facility improvements and the

harmonization of interior configurations across the mainline fleet.

Depreciation associated with aircraft acquired as part of our fleet renewal

program also contributed to the increase.

• Regional aircraft fuel and related taxes per ASM increased 0.3% in 2019 as

compared to 2018 primarily due to an 8.3% increase in gallons of fuel

consumed, offset in part by a 6.4% decrease in the average price per gallon

      of fuel including related taxes to $2.15 in 2019 from $2.30 in 2018.


•     Regional other operating expenses per ASM increased 5.3% in 2019 as

compared to 2018 primarily driven by an 8.3% increase in regional capacity,

principally from our wholly-owned regional carriers.


Operating Special Items, Net
                                                              Year Ended December 31,
                                                               2019                  2018
                                                                     (In millions)
Fleet restructuring expenses (1)                        $          271         $          422
Fleet impairment (2)                                               213                      -
Merger integration expenses (3)                                    191                    268
Litigation reserve adjustments                                     (53 )                   45

Mark-to-market adjustments on bankruptcy obligations, net (4)

                                                            (11 )                  (76 )
Severance expenses (5)                                              11                     58
Intangible asset impairment (6)                                      -                     26
Labor contract expenses                                              -                     13
Other operating charges, net                                        13                     31
Total mainline operating special items, net                        635                    787
Regional operating special items, net                                6                      6
Total operating special items, net                      $          641         $          793




(1) Fleet restructuring expenses principally included accelerated depreciation

and rent expense for aircraft and related equipment grounded or expected

to be grounded earlier than planned.

(2) Fleet impairment principally includes a non-cash write-down of aircraft

related to the planned retirement of our Embraer E190 fleet.

(3) Merger integration expenses included costs associated with integration

       projects, principally our technical operations, flight attendant, human
       resources and payroll systems.


(4)    Bankruptcy obligations that will be settled in shares of our common stock
       are marked-to-market based on our stock price.

(5) Severance expenses primarily included costs associated with reductions of

       management and support staff team members.


(6)    Intangible asset impairment includes a non-cash charge to write-off our
       Brazil route authority as a result of the U.S.-Brazil open skies
       agreement.



                                       55
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Nonoperating Results

                                    Year Ended December 31,                        Percent
                                                                    Increase      Increase
                                     2019             2018         (Decrease)    (Decrease)
                                          (In millions, except percentage changes)
Interest income                 $       127$       118$       9           7.1
Interest expense, net                (1,095 )          (1,056 )         (39 )         3.7
Other income, net                       159               166            (7

) (3.8 ) Total nonoperating expense, net $ (809 )$ (772 )$ (37 ) 4.8



Interest expense, net increased $39 million, or 3.7% in 2019 as compared to
2018, primarily due to lower capitalized interest.
In 2019, other nonoperating income, net principally included $183 million of
non-service related pension and other postretirement benefit plan income. This
income was offset in part by $32 million of net foreign currency losses
principally associated with losses from Latin American currencies.
In 2018, other nonoperating income, net principally included $308 million of
non-service related pension and other postretirement benefit plan income. This
income was offset in part by a $104 million net special charge for
mark-to-market unrealized losses primarily associated with our equity investment
in China Southern Airlines and $55 million of net foreign currency losses from
Latin American currencies.
The decrease in non-service related pension and other postretirement benefit
plan income in 2019 as compared to 2018 is principally due to a decrease in the
expected return on pension plan assets.
Income Taxes
In 2019, we recorded an income tax provision of $570 million at an effective
rate of approximately 25%, which was substantially non-cash due to utilization
of our net operating losses (NOLs). Substantially all of our income before
income taxes is attributable to the United States. At December 31, 2019, we had
approximately $9.1 billion of federal NOLs and $3.0 billion of state NOLs,
substantially all of which we expect to be available in 2020 to reduce future
federal and state taxable income.
In 2018, we recorded an income tax provision of $472 million at an effective
rate of approximately 25%, which was substantially non-cash. This provision
included an $18 million special income tax charge related to an international
income tax matter.
See Note 7 to AAG's Consolidated Financial Statements in Part II, Item 8A for
additional information on income taxes.
American's Results of Operations
For a comparison of the 2018 to 2017 reporting periods, see Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "American's Results of Operations - 2018 Compared to 2017" of
American's 2018 Form 10-K.
Results of Operations - 2019 Compared to 2018
Operating Revenues

                              Year Ended December 31,                          Percent
                                                                Increase       Increase
                                  2019              2018       (Decrease)     (Decrease)
                                    (In millions, except percentage changes)
Passenger                $      42,010$ 40,676$     1,334            3.3
Cargo                              863               1,013           (150 )       (14.8)
Other                            2,888               2,841             47            1.7
Total operating revenues $      45,761$ 44,530$     1,231            2.8



                                       56
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Passenger revenue increased $1.3 billion, or 3.3%, in 2019 from 2018 due to
continued strength in passenger demand resulting in an increase in RPMs and a
year-over-year increase in passenger load factor. Domestic PRASM increased in
2019 as compared to 2018. Latin America PRASM was the best performing
international region in 2019, followed by Pacific PRASM, while Atlantic PRASM
declined principally due to lower transfer payments related to American's joint
business arrangement and foreign currency effects.
Cargo revenue decreased $150 million, or 14.8%, in 2019 from 2018 primarily due
to a decrease in cargo ton miles reflecting declines in international freight
volumes, principally as a result of international schedule reductions.
Other operating revenue increased $47 million, or 1.7% in 2019 from 2018
primarily due to higher revenue associated with American's airport clubs and
loyalty program.
Total operating revenues in 2019 increased $1.2 billion, or 2.8%, from 2018
driven principally by a 3.3% increase in passenger revenue as described above.
Operating Expenses

                                              Year Ended                            Percent
                                             December 31,            Increase      Increase
                                           2019          2018       (Decrease)    (Decrease)
                                             (In millions, except percentage changes)
Aircraft fuel and related taxes       $    7,526$  8,053$     (527 )        (6.5)
Salaries, wages and benefits              12,600         12,240           360            2.9
Maintenance, materials and repairs         2,380          2,050           330           16.1
Other rent and landing fees                2,055          1,900           155            8.2
Aircraft rent                              1,326          1,264            62            4.9
Selling expenses                           1,602          1,520            82            5.4
Depreciation and amortization              1,982          1,839           143            7.7
Mainline operating special items, net        635            787          (152 )       (19.4)
Other                                      5,090          5,090             -              -
Regional expenses:
Aircraft fuel and related taxes            1,869          1,843            26            1.4
Other                                      5,649          5,221           428            8.2
Total operating expenses              $   42,714$ 41,807$      907            2.2


Total operating expenses increased $907 million, or 2.2%, in 2019 from 2018.
Significant changes in the components of American's total operating expenses are
as follows:
•     Mainline aircraft fuel and related taxes decreased 6.5% in 2019 as compared

to 2018 primarily due to a 7.1% decrease in the average price per gallon of

fuel including related taxes to $2.05 in 2019 from $2.21 in 2018.

• Maintenance, materials and repairs increased 16.1% in 2019 as compared to

2018 primarily due to a contract change that resulted in certain flight

      equipment transitioning to a flight hour based contract (referred to as
      power by the hour) whereby expense is incurred and recognized based on

actual hours flown. Previously, this flight equipment was covered by a time

and materials based contract whereby expense is incurred and recognized as

maintenance is performed. An increase in the volume of airframe and engine

overhauls performed under time and material based contracts as well as an

increase in the volume of component part repairs also drove higher

maintenance expenses in 2019.

• Other rent and landing fees increased 8.2% in 2019 as compared to 2018

primarily due to an expansion at DFW that became fully operational in May

2019 and rate increases at certain hub airports.

• Depreciation and amortization increased 7.7% in 2019 as compared to 2018

due in part to airport and other facility improvements and the

harmonization of interior configurations across the mainline fleet.

Depreciation associated with aircraft acquired as part of American's fleet

      renewal program also contributed to the increase.



                                       57
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• Regional aircraft fuel and related taxes increased 1.4% in 2019 as compared

to 2018 primarily due to an 8.3% increase in gallons of fuel consumed,

      offset in part by a 6.4% decrease in the average price per gallon of fuel
      including related taxes to $2.15 in 2019 from $2.30 in 2018.

• Regional other operating expenses increased 8.2% in 2019 as compared to

2018 primarily driven by an increase in regional capacity.

Operating Special Items, Net

                                                                Year Ended December 31,
                                                               2019                  2018
                                                                     (In millions)
Fleet restructuring expenses (1)                        $          271         $          422
Fleet impairment (2)                                               213                      -
Merger integration expenses (3)                                    191                    268
Litigation reserve adjustments                                     (53 )                   45

Mark-to-market adjustments on bankruptcy obligations, net (4)

                                                            (11 )                  (76 )
Severance expenses (5)                                              11                     58
Intangible asset impairment (6)                                      -                     26
Labor contract expenses                                              -                     13
Other operating charges, net                                        13                     31
Total mainline operating special items, net             $          635         $          787



(1) Fleet restructuring expenses principally included accelerated depreciation

and rent expense for aircraft and related equipment grounded or expected

to be grounded earlier than planned.

(2) Fleet impairment principally includes a non-cash write-down of aircraft

related to the planned retirement of American's Embraer E190 fleet.

(3) Merger integration expenses included costs associated with integration

projects, principally American's technical operations, flight attendant,

       human resources and payroll systems.


(4)    Bankruptcy obligations that will be settled in shares of AAG common stock
       are marked-to-market based on AAG's stock price.

(5) Severance expenses primarily included costs associated with reductions of

       management and support staff team members.


(6)    Intangible asset impairment includes a non-cash charge to write-off
       American's Brazil route authority as a result of the U.S.-Brazil open
       skies agreement.


Nonoperating Results

                                       Year Ended                           Percent
                                      December 31,           Increase      Increase
                                   2019          2018       (Decrease)    (Decrease)
                                      (In millions, except percentage changes)
Interest income                 $    515$   330$     185           56.1
Interest expense, net             (1,109 )      (1,028 )         (81 )          7.8
Other income, net                    152           167           (15 )         (9.3 )
Total nonoperating expense, net $   (442 )$  (531 )$      89

(16.9 )

Interest income increased $185 million, or 56.1%, due to higher interest-bearing related party receivables from American's parent company, AAG in 2019 as compared to 2018.

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Interest expense, net increased $81 million, or 7.8%, in 2019 as compared to
2018, primarily due to higher-interest bearing related party payables to other
AAG subsidiaries and lower capitalized interest.
In 2019, other nonoperating income, net principally included $183 million of
non-service related pension and other postretirement benefit plan income. This
income was offset in part by $32 million of net foreign currency losses
principally associated with losses from Latin American currencies.
In 2018, other nonoperating income, net principally included $309 million of
non-service related pension and other postretirement benefit plan income. This
income was offset in part by a $104 million net special charge for
mark-to-market unrealized losses primarily associated with American's equity
investment in China Southern Airlines and $54 million of net foreign currency
losses from Latin American currencies.
The decrease in non-service related pension and other postretirement benefit
plan income in 2019 as compared to 2018 is principally due to a decrease in the
expected return on pension plan assets.
Income Taxes
American is part of the AAG consolidated income tax return.
In 2019, American recorded an income tax provision of $633 million at an
effective rate of approximately 24%, which was substantially non-cash due to
utilization of its NOLs. Substantially all of American's income before income
taxes is attributable to the United States. At December 31, 2019, American had
approximately $9.2 billion of federal NOLs and $2.9 billion of state NOLs,
substantially all of which American expects to be available in 2020 to reduce
future federal and state taxable income.
In 2018, American recorded an income tax provision of $534 million at an
effective rate of approximately 24%, which was substantially non-cash. This
provision included an $18 million special income tax charge related to an
international income tax matter.
See Note 5 to American's Consolidated Financial Statements in Part II, Item 8B
for additional information on income taxes.
Liquidity and Capital Resources
Liquidity
As of December 31, 2019, AAG had approximately $7.0 billion in total available
liquidity and $158 million in restricted cash and short-term investments.
Additional detail regarding our available liquidity is provided in the table
below (in millions):
                                                AAG                American
                                           December 31,          December 31,
                                          2019       2018       2019       2018
Cash                                    $   280$   275$   267$   265
Short-term investments                    3,546      4,485      3,543      4,482

Undrawn revolving credit facilities (1) 3,243 2,843 3,243 2,843 Total available liquidity

               $ 7,069$ 7,603$ 7,053$ 7,590

(1) For 2019, this amount includes $400 million in borrowing capacity under a

short-term revolving line of credit we arranged in December 2019 due to

uncertainty surrounding the timing of the Boeing 737 MAX aircraft return to

     service. We have no present intention to borrow any amounts under this
     facility, which matures in September 2020 with an optional extension to
     December 2020. For additional discussion of this facility see Note 5 to
     AAG's Consolidated Financial Statements in Part II, Item 8A and Note 3 to
     American's Consolidated Financial Statements in Part II, Item 8B.



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Share Repurchase Programs
In April 2018, we announced that our Board of Directors authorized a $2.0
billion share repurchase program that will expire on December 31, 2020. Since
July 2014, our Board of Directors has approved seven share repurchase programs
aggregating $13.0 billion of authority. As of December 31, 2019, there was $565
million of remaining authority to repurchase shares under our current $2.0
billion share repurchase program. Share repurchases under our repurchase
programs may be made through a variety of methods, which may include open market
purchases, privately negotiated transactions, block trades or accelerated share
repurchase transactions. Any such repurchases that may be made from time to time
will be subject to market and economic conditions, applicable legal requirements
and other relevant factors. We are not obligated to repurchase any specific
number of shares and our repurchase of AAG common stock may be limited,
suspended or discontinued at any time at our discretion and without prior
notice.
In 2019, we repurchased 33.8 million shares of AAG common stock for $1.1 billion
at a weighted average cost per share of $32.09. Since the inception of our share
repurchase programs in July 2014 through December 31, 2019, we have repurchased
312.7 million shares of AAG common stock for $12.4 billion at a weighted average
cost per share of $39.76.
Cash Dividends
Our Board of Directors declared the following cash dividends during 2019:
                                                    For
                                                stockholders
                                                of record as                            Total
Period                           Per share           of            Payable on         (millions)
                                                February 6,
First Quarter                  $      0.10          2019        February 20, 2019   $         46
Second Quarter                        0.10      May 8, 2019       May 22, 2019                44
Third Quarter                         0.10     August 7, 2019    August 21, 2019              44
                                                November 6,
Fourth Quarter                        0.10          2019        November 20, 2019             44
Total                          $      0.40$        178


In January 2020, we announced that our Board of Directors declared a $0.10 per
share cash dividend for stockholders of record on February 5, 2020, and payable
on February 19, 2020.
Any future dividends that may be declared and paid from time to time will be
subject to market and economic conditions, applicable legal requirements and
other relevant factors. We are not obligated to continue a dividend for any
fixed period, and the payment of dividends may be suspended or discontinued at
any time at our discretion and without prior notice.
Collateral-Related Covenants
Certain of our debt financing agreements (including our term loans, revolving
credit facilities and spare engine EETCs) contain loan to value ratio covenants
and require us to appraise the related collateral annually. Pursuant to such
agreements, if the loan to value ratio exceeds a specified threshold or the
value of the appraised collateral fails to meet a specified threshold, as the
case may be, we are required, as applicable, to pledge additional qualifying
collateral (which in some cases may include cash or investment securities), or
pay down such financing, in whole or in part. As of December 31, 2019, we were
in compliance with the foregoing collateral coverage tests as of the most recent
applicable measurement dates. For further information regarding our
collateral-related covenants, see Note 5 to AAG's Consolidated Financial
Statements in Part II, Item 8A and Note 3 to American's Consolidated Financial
Statements in Part II, Item 8B.
Sources and Uses of Cash
For a comparison of the 2018 and 2017 reporting periods, see Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Sources and Uses of Cash" of our 2018 Form 10-K.
AAG
2019 Compared to 2018
Operating Activities
Our net cash provided by operating activities was $3.8 billion and $3.5 billion
in 2019 and 2018, respectively, a year-over-year increase of $282 million. This
increase in operating cash flows was primarily due to higher profitability in
2019 as well as working capital increases principally in our air traffic
liability and loyalty program deferred revenue. These increases were offset in
part by higher contributions to our defined benefit pension plans in 2019 as
compared to 2018.

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Investing Activities
Our net cash used in investing activities was $2.2 billion and $2.0 billion in
2019 and 2018, respectively.
Our principal investing activities in 2019 included expenditures of $4.3 billion
for property and equipment, including 21 Embraer E175 aircraft, 12 Bombardier
CRJ900 aircraft, 12 Airbus A321neo aircraft, four Boeing 737 MAX aircraft and
two Boeing 787 Family aircraft. These cash outflows were offset in part by $960
million in net sales of short-term investments, $850 million of proceeds from
aircraft sale-leaseback transactions and $250 million in proceeds from a vendor.
Our principal investing activities in 2018 included expenditures of $3.7 billion
for property and equipment, including 16 Boeing 737 MAX aircraft, six Boeing 787
family aircraft and five Embraer E175 aircraft. These cash outflows were offset
in part by $1.1 billion of proceeds from aircraft sale-leaseback transactions
and $293 million in net sales of short-term investments.
Financing Activities
Our net cash used in financing activities was $1.6 billion and $1.7 billion in
2019 and 2018, respectively.
Our principal financing activities in 2019 included $4.2 billion in debt
repayments, consisting of $2.9 billion in scheduled debt repayments and the
prepayment of $1.3 billion of secured loans. We also had $1.1 billion in share
repurchases and $178 million in dividend payments. These cash outflows were
offset in part by $4.0 billion in proceeds from the issuance of debt, consisting
of $3.2 billion in connection with the issuance of equipment notes related to
EETCs and the financing of certain aircraft and other flight equipment, as well
as the issuance of $750 million aggregate principal amount of 5.000% senior
notes.
Our principal financing activities in 2018 included $2.9 billion in debt
repayments, consisting of $2.4 billion in scheduled debt repayments and the
prepayment of $513 million of secured loans. We also had $837 million in share
repurchases and $186 million in dividend payments. These cash outflows were
offset in part by $2.4 billion in proceeds from the issuance of debt, consisting
of $1.9 billion in connection with the issuance of equipment notes related to
EETCs and the financing of certain aircraft and pre-delivery purchase deposits,
as well as an incremental $500 million on a term loan facility.
American
2019 Compared to 2018
Operating Activities
American's net cash provided by operating activities was $2.4 billion and $1.9
billion in 2019 and 2018, respectively, a year-over-year increase of $486
million. This increase in operating cash flows was primarily due to higher
profitability in 2019 as well as working capital increases principally in
American's air traffic liability and loyalty program deferred revenue. These
increases were offset in part by higher contributions to American's defined
benefit pension plans in 2019 as compared to 2018.
Investing Activities
American's net cash used in investing activities was $2.1 billion and $1.9
billion in 2019 and 2018, respectively.
American's principal investing activities in 2019 included expenditures of $4.2
billion for property and equipment, including 21 Embraer E175 aircraft, 12
Bombardier CRJ900 aircraft, 12 Airbus A321neo aircraft, four Boeing 737 MAX
aircraft and two Boeing 787 Family aircraft. These cash outflows were offset in
part by $960 million in net sales of short-term investments, $850 million of
proceeds from aircraft sale-leaseback transactions and $250 million in proceeds
from a vendor.
American's principal investing activities in 2018 included expenditures of $3.7
billion for property and equipment, including 16 Boeing 737 MAX aircraft, six
Boeing 787 family aircraft and five Embraer E175 aircraft. These cash outflows
were offset in part by $1.1 billion of proceeds from aircraft sale-leaseback
transactions and $293 million in net sales of short-term investments.
Financing Activities
American's net cash used in financing activities was $282 million and $147
million in 2019 and 2018, respectively.

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American's principal financing activities in 2019 included $3.4 billion in debt
repayments, consisting of $2.1 billion in scheduled debt repayments and the
prepayment of $1.3 billion of secured loans. These cash outflows were offset in
part by $3.2 billion in proceeds from the issuance of debt for equipment notes
related to EETCs and the financing of certain aircraft and other flight
equipment.
American's principal financing activities in 2018 included $2.4 billion in debt
repayments, consisting of $1.9 billion in scheduled debt repayments and the
prepayment of $513 million of secured loans. These cash outflows were offset by
$2.4 billion in proceeds from the issuance of debt, consisting of $1.9 billion
in connection with the issuance of equipment notes related to EETCs and the
financing of certain aircraft and pre-delivery purchase deposits, as well as an
incremental $500 million on a term loan facility.
Commitments
For further information regarding our commitments, see the Notes to AAG's
Consolidated Financial Statements in Part II, Item 8A and the Notes to
American's Consolidated Financial Statements in Part II, Item 8B at the
referenced footnotes below.
                                            AAG     American

Long-term debt and debt covenants Note 5 Note 3 Leases

                                    Note 6     Note 4
Employee benefit plans                    Note 10    Note 8

Commitments, contingencies and guarantees Note 12 Note 10



Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other
contractual arrangement involving an unconsolidated entity under which a company
has (1) made guarantees, (2) a retained or a contingent interest in transferred
assets, (3) an obligation under derivative instruments classified as equity or
(4) any obligation arising out of a material variable interest in an
unconsolidated entity that provides financing, liquidity, market risk or credit
risk support to us, or that engages in leasing, hedging or research and
development arrangements with us.
We have no off-balance sheet arrangements of the types described in the first
three categories above that we believe may have a material current or future
effect on financial condition, liquidity or results of operations.
Pass-Through Trusts
American currently operates 382 owned aircraft and 69 leased aircraft, and owns
79 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.
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 or, in certain cases, by a
separate owner trust in connection with a leveraged lease financing of the
aircraft. In the case of a leveraged lease financing, the owner trust then
leases the aircraft to American. In both cases, 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, in the case of mortgage financings, 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, 2019, $11.9
billion associated with these mortgage financings is reflected as debt in the
accompanying consolidated balance sheet.

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With respect to leveraged leases, American evaluated whether the leases had
characteristics of a variable interest entity. American concluded the leasing
entities met the criteria for variable interest entities; however, American
concluded it is not the primary beneficiary under these leasing arrangements and
accounts for the majority of its EETC leveraged lease financings as operating
leases. American's total future payments to the trusts of each of the relevant
EETCs under these leveraged lease financings are $177 million as of December 31,
2019.
Letters of Credit and Other
We provide financial assurance, such as letters of credit, surety bonds or
restricted cash and investments, primarily to support projected workers'
compensation obligations and airport commitments. As of December 31, 2019, we
had $572 million of letters of credit and surety bonds securing various
obligations. The letters of credit and surety bonds that are subject to
expiration will expire on various dates through 2022.
Contractual Obligations
The following table provides details of our future cash contractual obligations
as of December 31, 2019. Except to the extent set forth in the applicable
accompanying footnotes, this table does not include commitments that are
contingent on events or other factors that are uncertain or unknown at this
time.
                                                                Payments 

Due by Period

                                                                                               2025 and
                                 2020         2021        2022        2023        2024        Thereafter        Total
American (a)
Long-term debt:
Principal amount (b), (d)
(See Note 3)                  $  2,293$  3,508$ 1,551$ 4,072$ 1,521$       9,632$ 22,577
Interest obligations (c), (d)      830          721         596         510         388               885        3,930
Finance lease obligations
(See Note 4)                       153          128         132         110         116               171          810
Aircraft and engine purchase
commitments (e) (See Note
10(a))                           1,629          750       1,599       1,543       2,574             4,855       12,950
Operating lease
commitments (See Note 4)         2,013        1,979       1,807       1,623       1,227             4,451       13,100
Regional capacity purchase
agreements (f) (See Note
10(b))                           1,115        1,185       1,126       1,077       1,077             3,402        8,982
Minimum pension obligations
(g) (See Note 8)                   193          493         607         618         654               413        2,978
Retiree medical and other
postretirement benefits (See
Note 8)                             24           18          18          17          29               265          371
Other purchase obligations
(h) (See Note 10(a))             3,546        3,508       1,328         130          81                77        8,670
Total American Contractual
Obligations                   $ 11,796$ 12,290$ 8,764$ 9,700

$ 7,667$ 24,151$ 74,368

AAG Parent and Other AAG
Subsidiaries (a)
Long-term debt:
Principal amount (b) (See
Note 5)                       $    505$      2$   752$     2$     2     $          16     $  1,279
Interest obligations (c)            51           39          21           1           1                 3          116
Operating lease commitments
(See Note 6)                        16           13          12           5           2                 8           56
Minimum pension obligations
(g) (See Note 10)                    3            4           4           4           5                13           33
Total AAG Contractual
Obligations                   $ 12,371$ 12,348$ 9,553$ 9,712$ 7,677$      24,191$ 75,852

(a) For additional information, see the Notes to AAG's and American's

Consolidated Financial Statements in Part II, Items 8A and 8B,

respectively, referenced in the table above.

(b) Amounts represent contractual amounts due. Excludes $205 million and $6

million of unamortized debt discount, premium and issuance costs as of

December 31, 2019 for American and AAG Parent, respectively.

(c) For variable-rate debt, future interest obligations are estimated using

       the current forward rates at December 31, 2019.



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(d)    Includes $11.9 billion of future principal payments and $2.3 billion of
       future interest payments as of December 31, 2019, related to EETCs

associated with mortgage financings of certain aircraft and spare engines.

(e) See Part I, Item 2. Properties - "Aircraft and Engine Purchase

Commitments" for additional information about the firm commitment aircraft

delivery schedule, in particular the footnotes to the table thereunder as

to potential changes to such delivery schedule. Due to uncertainty

surrounding the timing of delivery of certain aircraft, the amounts in the

table represent our current best estimate, including with respect to the

delivery of Boeing 737 MAX aircraft; however, the actual delivery schedule

may differ from the table above, potentially materially. Additionally, the

amounts in the table exclude 22 787-8 aircraft to be delivered in 2020 and

2021 for which Boeing has committed to provide sale-leaseback financing

       (in the form of operating leases). This financing is reflected in the
       operating lease commitments line above.


(f)    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 our actual payments could differ materially. Rental
       payments under operating leases for certain aircraft flown under these
       capacity purchase agreements are reflected in the operating lease
       commitments line above.

(g) Includes minimum pension contributions based on actuarially determined

estimates and is based on estimated payments through 2029.

(h) Includes purchase commitments for aircraft fuel, construction projects and

information technology support.



Capital Raising Activity and Other Possible Actions
In light of our significant financial commitments related to, among other
things, new flight equipment, the servicing and amortization of existing debt
and equipment leasing arrangements, and future pension funding obligations, we
and our subsidiaries will regularly consider, and enter into negotiations
related to, capital raising activity, which may include the entry into leasing
transactions and future issuances of secured or unsecured debt obligations or
additional equity securities in public or private offerings or otherwise. The
cash available from operations and these sources, however, may not be sufficient
to cover cash contractual obligations because economic factors may reduce the
amount of cash generated by operations or increase costs. For instance, an
economic downturn or general global instability caused by military actions,
terrorism, disease outbreaks, natural disasters or other causes could reduce the
demand for air travel, which would reduce the amount of cash generated by
operations. An increase in costs, either due to an increase in borrowing costs
caused by a reduction in credit ratings or a general increase in interest rates,
or due to an increase in the cost of fuel, maintenance, aircraft, aircraft
engines or parts, could decrease the amount of cash available to cover cash
contractual obligations. Moreover, certain of our financing arrangements contain
significant minimum cash balance requirements. As a result, we cannot use all of
our available cash to fund operations, capital expenditures and cash obligations
without violating these requirements. See Note 5 to AAG's Consolidated Financial
Statements in Part II, Item 8A and Note 3 to American's Consolidated Financial
Statements in Part II, Item 8B for information regarding our financing
arrangements.
In the past, we have from time to time refinanced, redeemed or repurchased our
debt and taken other steps to reduce or otherwise manage the aggregate amount
and cost of our debt or lease obligations or otherwise improve our balance
sheet. Going forward, depending on market conditions, our cash position and
other considerations, we may continue to take such actions.
Our Board of Directors has from time to time authorized programs to repurchase
shares of our common stock, one of which is currently in effect, and may
authorize additional share repurchase programs in the future.
OTHER INFORMATION
Basis of Presentation
See Note 1 to AAG's Consolidated Financial Statements in Part II, Item 8A and
Note 1 to American's Consolidated Financial Statements in Part II, Item 8B for
information regarding the basis of presentation.

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Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with 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. We
believe our estimates and assumptions are reasonable; however, actual results
could differ from those estimates. Critical accounting policies are defined as
those that are reflective of significant judgments and uncertainties and could
potentially result in materially different results under different assumptions
and conditions. We have identified the following critical accounting policies
that impact the preparation of our consolidated financial statements. See the
"Basis of Presentation and Summary of Significant Accounting Policies" included
in Note 1 to AAG's Consolidated Financial Statements in Part II, Item 8A and
Note 1 to American's Consolidated Financial Statements in Part II, Item 8B for
additional discussion of the application of these estimates and other accounting
policies.
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, ticketing change 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, as well as estimated future refunds and exchanges
of tickets sold for past travel.
The majority of tickets sold are nonrefundable. A small percentage of tickets,
some of which are partially used tickets, expire unused. Due to complex pricing
structures, refund and exchange policies, and interline agreements with other
airlines, certain amounts are recognized in passenger revenue using estimates
regarding both the timing of the revenue recognition and the amount of revenue
to be recognized. These estimates are generally based on the analysis of our
historical data. We have consistently applied this accounting method to estimate
revenue from unused tickets at the date of travel. Estimated future refunds and
exchanges included in the air traffic liability are routinely evaluated based on
subsequent activity to validate the accuracy of our estimates. 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.
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 the Citi and Barclaycard US 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 miles is adjusted for an estimate of
miles that will not be redeemed based on historical redemption patterns. For the
year ended December 31, 2019, a hypothetical 10% increase in the estimated
selling price of miles would have decreased revenues by approximately $135
million as a result of additional amounts deferred from passenger ticket sales
to be recognized in future periods.

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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 terms extending generally for one to seven years. 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 partner agreements are our co-branded credit card
agreements with Citi and Barclaycard US that we entered into in 2016. We
identified the following revenue elements in these co-branded credit card
agreements: the transportation component; and the use of intellectual property,
including the American brand and access to loyalty program member lists, which
is the predominant element in the agreements, as well as advertising
(collectively, the marketing component). Accordingly, we recognize the marketing
component in other revenue in the period of the mileage sale following the
sales-based royalty method.
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.
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 are based on analysis of historical
redemptions. For the year ended December 31, 2019, a hypothetical 10% increase
in our estimate of miles not expected to be redeemed would have increased
revenues by approximately $95 million.
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 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, advertising and vacation-related
services.
Long-lived Assets
Long-lived assets consist of flight equipment, as well as other fixed assets and
definite-lived intangible assets such as certain domestic airport slots,
customer relationships, marketing agreements, tradenames and airport gate
leasehold rights. In addition to the original cost, the recorded value of our
fixed assets is impacted by a number of estimates made, including estimated
useful lives, salvage values and our determination as to whether aircraft are
temporarily or permanently grounded. Definite-lived intangible assets are
originally recorded at their acquired fair values and are subsequently amortized
over their estimated useful lives. See Note 1 to AAG's Consolidated Financial
Statements in Part II, Item 8A and Note 1 to American's Consolidated Financial
Statements in Part II, Item 8B for further information.
We assess impairment of long-lived assets used in operations when events and
circumstances indicate that the assets may be impaired. An asset or group of
assets is considered impaired when the undiscounted cash flows estimated to be
generated by the assets are less than the carrying amount of the assets and the
net book value of the assets exceeds their estimated fair value. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Estimates of fair value represent management's best estimate based
on appraisals, industry trends and reference to market rates and transactions.
The majority of American's aircraft fleet types are depreciated over 25-30
years. It is possible that the ultimate lives of our aircraft will be
significantly different than the current estimate due to unforeseen events in
the future that impact our fleet plan.

                                       66
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Goodwill and Indefinite-lived Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and liabilities assumed. Goodwill is not amortized but is
assessed for impairment annually on October 1 or more frequently if events or
circumstances indicate that goodwill may be impaired. We have one consolidated
reporting unit.
Indefinite-lived intangible assets other than goodwill include certain domestic
airport slots and international slots and route authorities. Indefinite-lived
intangible assets are not amortized but instead are assessed for impairment
annually on October 1 or more frequently if events or circumstances indicate
that the asset may be impaired.
Goodwill and indefinite-lived intangible assets are assessed for impairment by
initially performing a qualitative assessment. Under the qualitative approach,
we analyze the following factors, among others, to determine if events and
circumstances have affected the fair value of goodwill and indefinite-lived
intangible assets: (1) negative trends in our market capitalization, (2) an
increase in fuel prices, (3) declining per mile passenger yields, (4) lower
passenger demand as a result of a weakened U.S. and global economy and
(5) changes to the regulatory environment.
Based upon our annual assessment, there were no impairments of our goodwill and
no material impairments of our indefinite-lived assets in 2019.
Pensions and Retiree Medical and Other Postretirement Benefits
We recognize the funded status (i.e., the difference between the fair value of
plan assets and the projected benefit obligations) of our pension and retiree
medical and other postretirement benefits plans in the consolidated balance
sheets with a corresponding adjustment to accumulated other comprehensive income
(loss).
Our pension and retiree medical and other postretirement benefits costs and
liabilities are calculated using various actuarial assumptions and
methodologies. We use certain assumptions including, but not limited to, the
selection of the: (1) discount rate, (2) expected return on plan assets and
(3) expected health care cost trend rate (as discussed below). These assumptions
as of December 31 were:
                                                            2019            

2018

Pension weighted average discount rate (1)                      3.4 %           4.4 %
Retiree medical and other postretirement benefits
weighted average discount rate (1)                              3.3 %           4.3 %
Expected rate of return on plan assets (2)                      8.0 %           8.0 %
Weighted average health care cost trend rate assumed
for next year (3):
Initial                                                         3.7 %           3.9 %
Ultimate (2027)                                                 3.3 %           3.5 %






(1)    When establishing our discount rate to measure our obligations, we match
       high quality corporate bonds available in the marketplace whose cash flows

approximate our projected benefit disbursements. Lowering the discount

rate by 50 basis points as of December 31, 2019 would increase our pension

and retiree medical and other postretirement benefits obligations by

approximately $1.3 billion and $40 million, respectively, decrease

estimated 2020 pension expense by approximately $5 million and increase

estimated 2020 retiree medical and other postretirement benefits expense

by less than $1 million.

(2) The expected rate of return on plan assets is based upon an evaluation of

       our historical trends and experience, taking into account current and
       expected market conditions and our target asset allocation of 26% U.S.

stocks, 16% developed international stocks, 30% fixed income securities,

20% alternative (private) investments and 8% emerging market stocks. The

expected rate of return on plan assets component of our net periodic

benefit cost is calculated based on the fair value of plan assets and our

target asset allocation. Lowering the expected long-term rate of return on

plan assets by 50 basis points as of December 31, 2019 would increase

       estimated 2020 pension expense and retiree medical and other
       postretirement benefits expense by approximately $65 million and $1
       million, respectively.

(3) The assumed health care cost trend rate is based upon an evaluation of our

historical trends and experience, taking into account current and expected

market conditions. Increasing the assumed health care cost trend rate by

       100 basis points would increase estimated 2020 retiree medical and other
       postretirement benefits expense by approximately $5 million.



                                       67

--------------------------------------------------------------------------------



During 2019, we reviewed and revised certain economic and demographic
assumptions including the pension and retiree medical and other postretirement
benefits discount rates and health care cost trend rates. The net effect of
changing these assumptions for the pension plans resulted in an increase of $2.1
billion in the projected benefit obligation at December 31, 2019. The net effect
of changing these assumptions for retiree medical and other postretirement
benefits plans resulted in an increase of $71 million in the projected benefit
obligation at December 31, 2019. We also revised our mortality assumptions to
incorporate the new Pri-2012 mortality tables and improvement scale issued by
the Society of Actuaries. This resulted in a decrease in the projected benefit
obligations of our pension and retiree medical and other postretirement benefits
plans of $127 million and $11 million, respectively.
See Note 10 to AAG's Consolidated Financial Statements in Part II, Item 8A and
Note 8 to American's Consolidated Financial Statements in Part II, Item 8B for
additional information regarding our employee benefit plans.
Recent Accounting Pronouncement
ASU 2016-13: Financial Instruments - Credit Losses (Topic 326)
This ASU requires the use of an expected loss model for certain types of
financial instruments and requires consideration of a broader range of
reasonable and supportable information to calculate credit loss estimates. For
trade receivables, loans and held-to-maturity debt securities, an estimate of
lifetime expected credit losses is required. For available-for-sale debt
securities, an allowance for credit losses will be required rather than a
reduction to the carrying value of the asset. This standard is effective for
interim and annual reporting periods beginning after December 15, 2019. While we
have not completed our evaluation of the impact of adoption of this standard, we
do not expect it to have a material impact on our consolidated financial
statements.

© Edgar Online, source Glimpses

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