AMERICAN AIRLINES GROUP INC. 2021 Financial Overview
Impact of COVID-19
COVID-19 has been declared a global health pandemic by theWorld Health Organization . COVID-19 has surfaced in nearly all regions of the world, which has driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, testing regimes, closing of borders, "stay at home" orders and business closures. Ongoing global vaccination efforts and the corresponding lifting of government restrictions in and between many markets resulted in a partial recovery in demand for air travel in 2021, which improved our revenues as compared to 2020. However, the return of demand was weaker than previous expectations and the speed and strength of this recovery remain uncertain, primarily due to the global rise in COVID-19 cases associated with the delta and omicron variants and the potential for continuation or reimposition of restrictions on global travel. The continued impact of the COVID-19 pandemic, including any increases in infection rates, new variants and renewed governmental action to slow the spread of COVID-19 cannot be estimated. We have taken aggressive actions since the beginning of the COVID-19 pandemic to mitigate its effects on our business, including capacity reductions, structural changes to our fleet, cost reductions including implementing voluntary leave and early retirement programs, and steps to preserve cash and improve our overall liquidity position, consistent with the terms of the financial assistance we have received from theU.S. Government under the CARES Act, the PSP Extension Law and the ARP. Capacity Reductions
Our capacity (as measured by available seat miles) continues to be reduced compared to pre-COVID-19 pandemic levels, with total capacity in 2021 down 24.7% as compared to 2019. Domestic capacity in 2021 was down 14.5% while international capacity was down 44.9% as compared to 2019.
We currently expect our first quarter of 2022 system capacity to be down 8% to 10% as compared to the first quarter of 2019. While demand for domestic and short-haul international markets has largely recovered to 2019 levels, uncertainty remains regarding the timing of a full recovery. We will continue to match our forward capacity with observed booking trends for future travel and make further adjustments to our capacity as needed.
Cost Reductions
In aggregate, we have reduced our 2021 operating expenditures by approximately$1.3 billion , which are permanent non-volume cost reductions and other efficiency measures. These reductions include approximately$600 million in labor productivity enhancements,$500 million in management salaries and benefits and$200 million in other permanent cost reductions. Also, during the first quarter of 2021, approximately 1,600 represented team members opted into a voluntary early retirement program.
Liquidity
As ofDecember 31, 2021 , we had$15.8 billion in total available liquidity, consisting of$12.4 billion in unrestricted cash and short-term investments,$2.8 billion in undrawn capacity under revolving credit facilities and a total of$568 million in undrawn short-term revolving and other facilities.
During 2021, we completed the following financing transactions (see Note 4 to AAG's Consolidated Financial Statements in Part II, Item 8A for further information):
•issued$3.5 billion in aggregate principal amount of 5.50% Senior Secured Notes due 2026 and$3.0 billion in aggregate principal amount of 5.75% Senior Secured Notes due 2029 and entered into the$3.5 billion AAdvantage Term Loan Facility of which the full amount of term loans was drawn at closing; •repaid in full$750 million under the 2013 Revolving Facility,$1.6 billion under the 2014 Revolving Facility and$450 million under theApril 2016 Revolving Facility, all of which was borrowed in the second quarter of 2020 in response to the COVID-19 pandemic;
•repaid the
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•issued 24.2 million shares of AAG common stock at an average price of$19.26 per share pursuant to an at-the-market offering for net proceeds of$460 million (approximately$650 million of at-the-market authorization remains available atDecember 31, 2021 ); •issued approximately$150 million in special facility revenue bonds related to JFK, of which$62 million was used to fund the redemption of other bonds related to JFK;
•repaid in full
•received approximately$94 million in proceeds from enhanced equipment trust certificates (EETCs) and other aircraft and flight equipment financing, all of which was used to repay existing indebtedness; and •received approximately$193 million of cash proceeds from the sale of property and equipment primarily related to aircraft fleets retired in 2020 and raised$181 million principally from aircraft sale-leaseback transactions. In addition to the foregoing financings, during 2021, we received an aggregate of approximately$3.5 billion in financial assistance through the payroll support program (PSP2) established under the PSP Extension Law. In connection with our receipt of this financial assistance, AAG issued a promissory note (the PSP2 Promissory Note) toTreasury for$1.0 billion in aggregate principal amount and warrants to purchase up to an aggregate of approximately 6.6 million shares (the PSP2 Warrant Shares) of AAG common stock. Also in 2021, we received an aggregate of approximately$3.3 billion in financial assistance through the payroll support program (PSP3) established under the ARP. In connection with our receipt of this financial assistance, AAG issued a promissory note (the PSP3 Promissory Note) toTreasury for$946 million in aggregate principal amount and warrants to purchase up to an aggregate of approximately 4.4 million shares (the PSP3 Warrant Shares) of AAG common stock. See Note 1(b) to AAG's Consolidated Financial Statements in Part II, Item 8A for further discussion on PSP2 and PSP3. 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 revolving credit facilities and/or contain loan to value, collateral coverage and/or peak debt service coverage ratio covenants. Given the above actions and our current assumptions about the future impact of the COVID-19 pandemic on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, we expect to meet our cash obligations as well as remain in compliance with the debt covenants in our existing financing agreements for the next 12 months based on our current level of unrestricted cash and short-term investments, our anticipated access to liquidity (including via proceeds from financings), and projected cash flows from operations.
See Note 4 to AAG's Consolidated Financial Statements in Part II, Item 8A for additional information on our debt obligations.
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AAG's 2021 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.
Beginning in the first quarter of 2021, aircraft fuel and related taxes as well
as certain salaries, wages and benefits, other rent and landing fees, selling
and other expenses are no longer allocated to regional expenses on our
statements of operations. The 2020 consolidated statement of operations has been
recast to conform to the 2021 presentation within this Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations. This
statement of operations presentation change has no impact on total operating
expenses or net loss.
Year Ended Percent
December 31, Increase Increase
2021 2020 (Decrease) (Decrease) (2)
(In millions, except percentage changes)
Passenger revenue $ 26,063 $ 14,518 $ 11,545 79.5
Cargo revenue 1,314 769 545 70.8
Other operating revenue 2,505 2,050 455 22.2
Total operating revenues 29,882 17,337 12,545 72.4
Aircraft fuel and related taxes 6,792 3,402 3,390 99.6
Salaries, wages and benefits 11,817 11,229 588 5.2
Total operating expenses 30,941 27,758 3,183 11.5
Operating loss (1,059) (10,421) (9,362) (89.8)
Pre-tax loss (2,548) (11,453) (8,905) (77.7)
Income tax benefit (555) (2,568) (2,013) (78.4)
Net loss (1,993) (8,885) (6,892) (77.6)
Pre-tax loss - GAAP $ (2,548) $ (11,453) $ (8,905) (77.7)
Adjusted for: pre-tax net special items (1) (4,395) (796) 3,599 nm (3)
Pre-tax loss excluding net special items
$ (5,306) (43.3)
(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 pre-tax net special items.
(2)Fluctuations may not be meaningful due to the volatility caused by the COVID-19 pandemic.
(3)Not meaningful or greater than 100% change.
Pre-Tax Loss and Net Loss
Pre-tax loss and net loss were$2.5 billion and$2.0 billion , respectively, in 2021. This compares to 2020 pre-tax loss and net loss of$11.5 billion and$8.9 billion , respectively. Excluding the effects of pre-tax net special items, pre-tax loss was$6.9 billion and$12.2 billion in 2021 and 2020, respectively. The year-over-year improvement in our pre-tax loss, on both a GAAP basis and excluding pre-tax net special items, was principally due to higher revenues driven by domestic and short-haul international leisure demand, offset in part by an increase in our operating expenses due to a 49.8% increase in our capacity as compared to 2020 as demand returned from the trough of the COVID-19 pandemic. 73 --------------------------------------------------------------------------------
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Revenue
In 2021, we reported total operating revenues of$29.9 billion , an increase of$12.5 billion , or 72.4%, as compared to 2020. Passenger revenue was$26.1 billion , an increase of$11.5 billion , or 79.5%, as compared to 2020. The increase in passenger revenue in 2021 was due to a 75.9% increase in revenue passenger miles (RPMs) and an 11.2 point increase in passenger load factor. These increases were principally driven by a significant recovery in domestic and short-haul international leisure demand as compared to 2020. In 2021, cargo revenue was$1.3 billion , an increase of$545 million , or 70.8%, as compared to 2020, primarily due to a 50.5% increase in cargo ton miles reflecting higher freight volumes as a result of adding international widebody capacity and the continuation of cargo-only flights, as well as a 13.4% increase in cargo yield as a result of higher rates.
Other operating revenue increased
Our total revenue per available seat mile (TRASM) was
Fuel
In 2021, aircraft fuel expense totaled$6.8 billion , an increase of$3.4 billion , or 99.6%, as compared to 2020. This increase was primarily driven by a 44.7% increase in fuel consumption as a result of increased capacity and a 37.9% increase in the average price per gallon of aircraft fuel including related taxes to$2.04 in 2021 from$1.48 in 2020. As ofDecember 31, 2021 , 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: general economic conditions and the price of fuel. In particular, the onset of the COVID-19 pandemic resulted in a very rapid deterioration in general economic conditions. Our 2021 CASM was14.42 cents , a decrease of 25.6%, from19.39 cents in 2020. This decrease in CASM was primarily driven by higher capacity due to increased passenger demand and cost reduction and efficiency initiatives discussed above, offset in part by an increase in fuel price. Our 2021 CASM excluding net special items and fuel was13.33 cents , a decrease of 24.6%, from17.69 cents in 2020. This decrease in CASM excluding net special items and fuel was primarily driven by higher capacity due to increased passenger demand and cost reduction and efficiency initiatives as previously discussed. For a reconciliation of total operating CASM to total operating CASM excluding net special items and fuel, see Part II, Item 6. Selected Consolidated Financial Data - "Reconciliation of GAAP to Non-GAAP Financial Measures." 74 --------------------------------------------------------------------------------
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AAG's Results of Operations
For a comparison of the 2020 to 2019 reporting periods, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "AAG's Results of Operations" of our 2020 Form 10-K.
Operating Statistics
The table below sets forth selected operating data for the years endedDecember 31, 2021 and 2020. Year Ended December 31, 2021 2020 Increase (Decrease) Revenue passenger miles (millions) (a) 161,538 91,825 75.9% Available seat miles (millions) (b) 214,535 143,167 49.8% Passenger load factor (percent) (c) 75.3 64.1 11.2pts Yield (cents) (d) 16.13 15.81 2.0% Passenger revenue per available seat mile (cents) (e) 12.15 10.14 19.8% Total revenue per available seat mile (cents) (f) 13.93 12.11 15.0% Fuel consumption (gallons in millions) 3,324 2,297 44.7%
Average aircraft fuel price including related taxes (dollars per gallon)
2.04 1.48 37.9%
Total operating cost per available seat mile (cents) (g) 14.42 19.39 (25.6)%
Aircraft at end of period (h) 1,432 1,399 2.4%
Full-time equivalent employees at end of period 123,400 102,700 20.2%
(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)Total operating cost per available seat mile (CASM) - Total operating expenses divided by ASMs.
(h)Includes aircraft owned and leased by American as well as aircraft operated by third-party regional carriers under capacity purchase agreements. Excludes 36 mainline and 10 regional aircraft that are in temporary storage atDecember 31, 2021 as follows: 36 Boeing 737-800, eight Embraer 145 and two Embraer 170. Operating Revenues Year Ended December 31, Percent 2021 2020 Increase Increase (In millions, except percentage changes) Passenger$ 26,063 $ 14,518 $ 11,545 79.5 Cargo 1,314 769 545 70.8 Other 2,505 2,050 455 22.2 Total operating revenues$ 29,882 $ 17,337 $ 12,545 72.4 75
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This table presents our passenger revenue and the year-over-year change in certain operating statistics:
Increase
vs. Year Ended December 31, 2020
Year Ended
December 31, Passenger Load Passenger
2021 Revenue RPMs ASMs Factor Yield PRASM
(In millions)
Passenger revenue $ 26,063 79.5% 75.9% 49.8% 11.2pts 2.0% 19.8%
Passenger revenue increased $11.5 billion , or 79.5%, in 2021 from 2020 primarily
due to a 75.9% increase in RPMs driven by a significant recovery in domestic and
short-haul international leisure demand, resulting in a 75.3% load factor in
2021.
Cargo revenue increased $545 million , or 70.8%, in 2021 from 2020 primarily due
to a 50.5% increase in cargo ton miles reflecting higher freight volumes as a
result of adding international widebody capacity and the continuation of
cargo-only flights, as well as a 13.4% increase in cargo yield as a result of
higher rates.
Other operating revenue increased
Total operating revenues in 2021 increased$12.5 billion , or 72.4%, from 2020 driven principally by the increase in passenger revenue as described above. Our TRASM increased 15.0% to13.93 cents in 2021 from12.11 cents in 2020. Operating Expenses Year Ended December 31, Percent Increase Increase 2021 2020 (Decrease) (Decrease) (In millions, except percentage changes) Aircraft fuel and related taxes$ 6,792 $ 3,402 $ 3,390 99.6 Salaries, wages and benefits 11,817 11,229 588 5.2 Regional expenses 3,204 2,962 242 8.2 Maintenance, materials and repairs 1,979 1,585 394 24.8 Other rent and landing fees 2,619 2,004 615 30.7 Aircraft rent 1,425 1,341 84 6.2 Selling expenses 1,098 666 432 65.0 Depreciation and amortization 2,019 2,040 (21) (1.1) Mainline operating special items, net (4,006) (657) (3,349) nm Other 3,994 3,186 808 25.4 Total operating expenses$ 30,941 $ 27,758 $ 3,183 11.5 Total operating expenses increased$3.2 billion , or 11.5%, in 2021 from 2020 primarily due to increases in aircraft fuel and related taxes and other costs due to our increased capacity, offset in part by a$3.5 billion increase in net operating special credits and cost reduction actions as described above. See further discussion of operating special items, net below.
Aircraft fuel and related taxes increased
Other rent and landing fees increased$615 million , or 30.7%, in 2021 from 2020 primarily due to an increase in landing fees and variable rent as a result of our increased capacity.
Aircraft rent increased
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Selling expenses increased
Depreciation and amortization decreased$21 million , or 1.1%, in 2021 from 2020 primarily due to the early retirement of aircraft as a result of the COVID-19 pandemic, offset in part by a write down of excess spare parts inventory.
Operating Special Items, Net
Year Ended December 31,
2021 2020
(In millions)
PSP Financial Assistance (1) $ (4,162) $ (3,710)
Severance expenses (2) 168 1,408
Litigation reserve adjustments (19) -
Mark-to-market adjustments on bankruptcy obligations, net (3) (3) (49)
Fleet impairment (4) - 1,484
Labor contract expenses (5) - 228
Other operating special items, net 10 (18)
Mainline operating special items, net (4,006) (657)
PSP Financial Assistance (1) (539) (444)
Regional pilot retention program (6) 61 -
Fleet impairment (4) 27 117
Severance expenses (2) 2 18
Regional operating special items, net (449) (309)
Operating special items, net $ (4,455) $ (966)
(1)The 2021 PSP Financial Assistance represents recognition of a portion of the
financial assistance received from Treasury pursuant to the PSP2 and PSP3
Agreements. See Note 1(b) to AAG's Consolidated Financial Statements in Part II,
Item 8A for further information. The 2020 PSP Financial Assistance represents
recognition of a portion of the financial assistance received from Treasury
pursuant to the PSP1 Agreement.
(2)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. Cash
payments primarily associated with our voluntary early retirement programs were
approximately $520 million and $365 million in 2021 and 2020, respectively.
(3)Bankruptcy obligations that will be settled in shares of our common stock are marked-to-market based on our stock price.
(4)Fleet impairment charges resulted 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. See Note 1(g) to AAG's Consolidated Financial Statements in Part II, Item 8A for further information related to these charges. 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.
(5)The 2020 labor contract expenses primarily related to one-time charges due to
the ratification of a new contract with the
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(6)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 airlines included on the pilot seniority list as ofSeptember 1, 2021 . Nonoperating Results Year Ended December 31, Percent Increase Increase 2021 2020 (Decrease) (Decrease) (In millions, except percentage changes) Interest income $ 18$ 41 $ (23) (55.2) Interest expense, net (1,800) (1,227) (573) 46.8 Other income, net 293 154 139 89.6 Total nonoperating expense, net$ (1,489) $ (1,032) $ (457) 44.4 Interest income decreased in 2021 compared to 2020 primarily as a result of lower returns on our short-term investments. Interest expense, net increased in 2021 compared to 2020 primarily due to the issuance of debt, including$10.0 billion associated with the AAdvantage Financing, to improve our liquidity position in response to the COVID-19 pandemic. See Note 4 to AAG's Consolidated Financial Statements in Part II, Item 8A for further information on the AAdvantage Financing. In 2021, other nonoperating income, net included$337 million of non-service related pension and other postretirement benefit plan income, offset in part by$60 million of net special charges principally for mark-to-market net unrealized losses associated with our equity investments in China Southern Airlines and Vertical and certain treasury rate lock derivative instruments and non-cash charges associated with debt refinancings and extinguishments. In 2020, other nonoperating income, net included$329 million of non-service related pension and other postretirement benefit plan income. This income was offset in part by$170 million of net special charges principally for mark-to-market unrealized losses associated with our equity investment in China Southern Airlines and certain treasury rate lock derivative instruments and$24 million of net foreign currency losses, primarily associated with losses from Latin American currencies. Income Taxes In 2021, we recorded an income tax benefit of$555 million at an effective rate of approximately 22%, which was substantially non-cash. Substantially all of our loss before income taxes is attributable tothe United States . AtDecember 31, 2021 , we had approximately$17.2 billion of gross federal NOLs and$3.0 billion of other carryforwards available to reduce future federal taxable income, of which$6.9 billion will expire beginning in 2024 if unused and$13.3 billion can be carried forward indefinitely. We also had approximately$6.0 billion of NOL carryforwards to reduce future state taxable income atDecember 31, 2021 , which will expire in taxable years 2021 through 2041 if unused.
In 2020, we recorded an income tax benefit of
See Note 6 to AAG's Consolidated Financial Statements in Part II, Item 8A for additional information on income taxes.
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American's Results of Operations
For a comparison of the 2020 to 2019 reporting periods, see Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "American's Results of Operations" of American's 2020 Form 10-K.
Operating Revenues
Year Ended December 31, Percent
2021 2020 Increase Increase
(In millions, except percentage changes)
Passenger $ 26,063 $ 14,518 $ 11,545 79.5
Cargo 1,314 769 545 70.8
Other 2,503 2,048 455 22.2
Total operating revenues $ 29,880 $ 17,335 $ 12,545 72.4
Passenger revenue increased
Cargo revenue increased$545 million , or 70.8%, in 2021 from 2020 primarily due to an increase in cargo ton miles reflecting higher freight volumes as a result of adding international widebody capacity and the continuation of cargo-only flights, as well as an increase in cargo yield as a result of higher rates.
Other operating revenue increased
Total operating revenues in 2021 increased
Operating Expenses
Year Ended Percent
December 31, Increase Increase
2021 2020 (Decrease) (Decrease)
(In millions, except percentage changes)
Aircraft fuel and related taxes $ 6,792 $ 3,402 $ 3,390 99.6
Salaries, wages and benefits 11,811 11,224 587 5.2
Regional expenses 3,111 2,746 365 13.3
Maintenance, materials and repairs 1,979 1,585 394 24.8
Other rent and landing fees 2,619 2,004 615 30.7
Aircraft rent 1,425 1,341 84 6.2
Selling expenses 1,098 666 432 65.0
Depreciation and amortization 2,019 2,040 (21) (1.1)
Mainline operating special items, net (4,006) (657) (3,349) nm
Other 3,993 3,208 785 24.5
Total operating expenses $ 30,841 $ 27,559 $ 3,282 11.9
Total operating expenses increased $3.3 billion , or 11.9%, in 2021 from 2020
primarily due to increases in aircraft fuel and related taxes and other costs
due to American's increased capacity, offset in part by a $3.5 billion increase
in net operating special credits and cost reduction actions as described above.
See further discussion of operating special items, net below.
Aircraft fuel and related taxes increased
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Other rent and landing fees increased$615 million , or 30.7%, in 2021 from 2020 primarily due to an increase in landing fees and variable rent as a result of American's increased capacity.
Aircraft rent increased
Selling expenses increased
Depreciation and amortization decreased$21 million , or 1.1%, in 2021 from 2020 primarily due to the early retirement of aircraft as a result of the COVID-19 pandemic, offset in part by a write down of excess spare parts inventory.
Operating Special Items, Net
Year Ended
2021 2020
(In millions)
PSP Financial Assistance (1) $ (4,162) $ (3,710)
Severance expenses (2) 168 1,408
Litigation reserve adjustments (19) -
Mark-to-market adjustments on bankruptcy obligations, net (3) (3) (49)
Fleet impairment (4) - 1,484
Labor contract expenses (5) - 228
Other operating special items, net 10 (18)
Mainline operating special items, net (4,006) (657)
PSP Financial Assistance (1) (539) (444)
Fleet impairment (4) 27 106
Regional operating special items, net (512) (338)
Operating special items, net $ (4,518) $ (995)
(1)The 2021 PSP Financial Assistance represents recognition of a portion of the
financial assistance received from Treasury pursuant to the PSP2 and PSP3
Agreements. See Note 1(b) to American's Consolidated Financial Statements in
Part II, Item 8B for further information. The 2020 PSP Financial Assistance
represents recognition of a portion of the financial assistance received from
Treasury pursuant to the PSP1 Agreement.
(2)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.
Cash payments primarily associated with American's voluntary early retirement
programs were approximately $520 million and $365 million in 2021 and 2020,
respectively.
(3)Bankruptcy obligations that will be settled in shares of AAG common stock are marked-to-market based on AAG's stock price.
(4)Fleet impairment charges resulted 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. See Note 1(g) to American's Consolidated Financial Statements in Part II, Item 8B for further information related to these charges. 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. (5)The 2020 labor contract expenses primarily related to one-time charges due to the ratification of a new contract with theTWU-IAM Association for American's maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases. 80 --------------------------------------------------------------------------------
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Nonoperating Results
Year Ended Percent
December 31, Increase Increase
2021 2020 (Decrease) (Decrease)
(In millions, except percentage changes)
Interest income $ 34 $ 337 $ (303) (90.0)
Interest expense, net (1,642) (1,171) (471) 40.3
Other income, net 292 155 137 87.7
Total nonoperating expense, net
Interest income decreased in 2021 compared to 2020 primarily as a result of lower interest-bearing related party receivables from American's parent company, AAG and lower returns on American's short-term investments. Interest expense, net increased in 2021 compared to 2020 primarily due to the issuance of debt, including$10.0 billion associated with the AAdvantage Financing, to improve American's liquidity position in response to the COVID-19 pandemic. See Note 3 to American's Consolidated Financial Statements in Part II, Item 8B for further information on the AAdvantage Financing. In 2021, other nonoperating income, net included$335 million of non-service related pension and other postretirement benefit plan income, offset in part by$60 million of net special charges principally for mark-to-market net unrealized losses associated with American's equity investments in China Southern Airlines and Vertical and certain treasury rate lock derivative instruments and non-cash charges associated with debt refinancings and extinguishments. In 2020, other nonoperating income, net included$329 million of non-service related pension and other postretirement benefit plan income. This income was offset in part by$170 million of net special charges principally for mark-to-market unrealized losses associated with American's equity investment in China Southern Airlines and certain treasury rate lock derivative instruments and$24 million of net foreign currency losses, primarily associated with losses from Latin American currencies.
Income Taxes
American is a member of AAG's consolidated federal and certain state income tax returns.
In 2021, American recorded an income tax benefit of$500 million at an effective rate of approximately 22%, which was substantially non-cash. Substantially all of American's loss before income taxes is attributable tothe United States . AtDecember 31, 2021 , American had approximately$17.1 billion of gross federal NOLs and$2.4 billion of other carryforwards available to reduce future federal taxable income, of which$7.3 billion will expire beginning in 2024 if unused and$12.2 billion can be carried forward indefinitely. American also had approximately$6.0 billion of NOL carryforwards to reduce future state taxable income atDecember 31, 2021 , which will expire in taxable years 2021 through 2041 if unused.
In 2020, American recorded an income tax benefit of
See Note 5 to American's Consolidated Financial Statements in Part II, Item 8B for additional information on income taxes.
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Liquidity and Capital Resources
Liquidity
AtDecember 31, 2021 , AAG had$15.8 billion in total available liquidity and$990 million in restricted cash and short-term investments. Additional detail regarding our available liquidity is provided in the table below (in millions): AAG American December 31, December 31, 2021 2020 2021 2020 Cash$ 273 $ 245 $ 265 $ 231 Short-term investments 12,158 6,619 12,155 6,617 Undrawn facilities 3,411 7,396 3,411 7,396 Total available liquidity$ 15,842 $ 14,260 $ 15,831 $ 14,244 Given the actions we have taken in response to the COVID-19 pandemic and our assumptions about its future impact on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, we expect to meet our cash obligations as well as remain in compliance with the debt covenants in our existing financing agreements for the next 12 months based on our current level of unrestricted cash and short-term investments, our anticipated access to liquidity (including via proceeds from financings) and projected cash flows from operations. In the ordinary course of our business, we or our affiliates may, at any time and from time to time, seek to prepay, retire or repurchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, prepayments, retirements or exchanges, if any, will be conducted on such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Certain Covenants
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 to pay down such financing, in whole or in part, or the interest rate for the relevant financing will be increased. As of the most recent applicable measurement dates, we were in compliance with each of the foregoing LTV, collateral coverage and peak debt service coverage tests. 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 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. For further information regarding our debt covenants, see Note 4 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. 82 --------------------------------------------------------------------------------
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Sources and Uses of Cash
For a comparison of the 2020 and 2019 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 2020 Form 10-K.
AAG
Operating Activities
Our net cash provided by operating activities was$704 million in 2021 as compared to net cash used in operating activities of$6.5 billion in 2020, a$7.2 billion year-over-year increase. In 2021 and 2020, we received cash proceeds of approximately$4.7 billion and$4.2 billion associated with the PSP Financial Assistance, respectively. Excluding the PSP Financial Assistance, our operating cash flows increased$6.7 billion compared to 2020 driven by a decrease in our pre-tax loss as well as working capital increases principally in our air traffic liability as demand for travel returned. In addition, during 2021, we made$247 million in contributions to our pension plans and approximately$520 million in cash payments associated with our voluntary early retirement programs. Excluding the enhanced healthcare benefits provided to eligible team members, we estimate cash payments under these programs to be approximately$170 million in 2022 and approximately$20 million in 2023 and beyond. Investing Activities
Our net cash used in investing activities was
Our principal investing activities in 2021 included$5.5 billion in net purchases of short-term investments as well as a$401 million increase in restricted short-term investments primarily related to collateral associated with the AAdvantage Financing and collateral held to support workers' compensation obligations. We had capital expenditures of$208 million , net of aircraft purchase deposit returns of$996 million , which expenditures principally related to the harmonization of interior configurations across the mainline fleet and the purchase of two Airbus A321neo aircraft. Additionally, we incurred$204 million related to airport construction projects, net of reimbursements, principally in connection with the renovation and expansion of Terminal 8 at JFK and the modernization of Terminals 4 and 5 at LAX. These cash outflows were offset in part by$193 million of proceeds from the sale of property and equipment principally related to our retired aircraft fleet and$181 million of proceeds primarily from aircraft sale-leaseback transactions. Our principal investing activities in 2020 included$3.1 billion in net purchases of short-term investments, capital expenditures of$2.0 billion for property and equipment, including 16 Airbus A321neo aircraft, eight Embraer 175 aircraft, three Bombardier CRJ900 aircraft and the harmonization of interior configurations across the mainline fleet as well as a$308 million increase in restricted short-term investments primarily related to cash proceeds from special facility revenue bonds related to JFK. These cash outflows were offset in part by$665 million of proceeds primarily from aircraft sale-leaseback transactions,$351 million of proceeds from the sale of property and equipment and$90 million of proceeds from a vendor.
Financing Activities
Our net cash provided by financing activities was
Our principal financing activities in 2021 included$12.2 billion in proceeds from the issuance of debt, including approximately$10.0 billion associated with the AAdvantage Financing,$1.0 billion in aggregate principal amount under the PSP2 Promissory Note,$946 million in aggregate principal amount under the PSP3 Promissory Note and the$150 million issuance of special facility revenue bonds related to JFK. We also received$460 million in net proceeds from the issuance of equity pursuant to an at-the-market offering. These cash inflows were offset in part by$7.3 billion in debt repayments, including prepayments totaling$2.8 billion for our revolving credit facilities,$950 million for theApril 2016 Spare Parts Term Loan Facility and$550 million of outstanding loans under the Treasury Loan Agreement and$2.9 billion in scheduled debt repayments. In addition, we had$209 million of deferred financing cost cash outflows. 83 --------------------------------------------------------------------------------
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Our principal financing activities in 2020 included$11.8 billion in proceeds from the issuance of debt and$3.0 billion in proceeds from the issuance of equity. These proceeds principally include$2.8 billion borrowed under the 2014 Revolving Facility, the 2013 Revolving Facility and theApril 2016 Revolving Facility,$2.5 billion in aggregate principal amount of 11.75% senior secured notes,$1.8 billion in aggregate principal amount under the PSP1 Promissory Note,$1.2 billion in aggregate principal amount of two series of 10.75% senior secured notes due 2026,$1.0 billion in aggregate principal amount of AAG's 6.50% convertible senior notes,$1.0 billion under the Delayed Draw Term Loan Credit Facility,$600 million in connection with the issuance of equipment notes related to EETCs and the financing of certain aircraft,$550 million under the Treasury Term Loan Facility,$500 million in aggregate principal amount of 3.75% unsecured senior notes due 2025 and the$360 million issuance of special facility revenue bonds as well as$1.7 billion of net proceeds from two underwritten public offerings of common stock and$869 million of net proceeds from an at-the-market offering of common stock. These cash inflows were offset in part by$3.5 billion in debt repayments, consisting of approximately$2.5 billion in scheduled debt repayments, including repayment of$500 million of 4.625% senior notes, and the prepayment of the$1.0 billion Delayed Draw Term Loan Credit Facility, as well as$216 million in share repurchases and dividend payments (which occurred in the first quarter of 2020).
American
Operating Activities
American's net cash provided by operating activities was$3.2 billion in 2021 as compared to net cash used in operating activities of$1.4 billion in 2020, a$4.6 billion year-over-year increase. In 2021 and 2020, American received cash proceeds of approximately$4.2 billion and$3.7 billion associated with the PSP Financial Assistance, respectively. American also had a$2.3 billion net decrease in intercompany cash receipts principally from AAG's financing transactions. Excluding the PSP Financial Assistance and decrease in AAG's financing transactions, American's operating cash flows increased$6.4 billion compared to 2020 driven by a decrease in its pre-tax loss as well as working capital increases principally in American's air traffic liability as demand for travel returned. In addition, during 2021, American made$247 million in contributions to its pension plans and approximately$520 million in cash payments associated with American's voluntary early retirement programs. Excluding the enhanced healthcare benefits provided to eligible team members, American estimates cash payments under these programs to be approximately$170 million in 2022 and approximately$20 million in 2023 and beyond.
Investing Activities
American's net cash used in investing activities was
American's principal investing activities in 2021 included$5.5 billion in net purchases of short-term investments as well as a$401 million increase in restricted short-term investments primarily related to collateral associated with the AAdvantage Financing and collateral held to support workers' compensation obligations. American had capital expenditures of$169 million , net of aircraft purchase deposit returns of$996 million , which expenditures principally related to the harmonization of interior configurations across the mainline fleet and the purchase of two Airbus A321neo aircraft. Additionally, American incurred$204 million related to airport construction projects, net of reimbursements, principally in connection with the renovation and expansion of Terminal 8 at JFK and the modernization of Terminals 4 and 5 at LAX. These cash outflows were offset in part by$192 million of proceeds from the sale of property and equipment principally related to American's retired aircraft fleet and$181 million of proceeds primarily from aircraft sale-leaseback transactions. American's principal investing activities in 2020 included$3.1 billion in net purchases of short-term investments, capital expenditures of$1.9 billion for property and equipment, including 16 Airbus A321neo aircraft, eight Embraer 175 aircraft, three Bombardier CRJ900 aircraft and the harmonization of interior configurations across the mainline fleet as well as a$308 million increase in restricted short-term investments primarily related to cash proceeds from special facility revenue bonds related to JFK. These cash outflows were offset in part by$665 million of proceeds primarily from aircraft sale-leaseback transactions,$351 million of proceeds from the sale of property and equipment and$90 million of proceeds from a vendor. 84 --------------------------------------------------------------------------------
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Financing Activities
American's net cash provided by financing activities was
American's principal financing activities in 2021 included$10.2 billion in proceeds from the issuance of debt, including approximately$10.0 billion associated with the AAdvantage Financing and the$150 million issuance of special facility revenue bonds related to JFK. These cash inflows were offset in part by$7.3 billion in debt repayments, including prepayments totaling$2.8 billion for American's revolving credit facilities,$950 million for theApril 2016 Spare Parts Term Loan Facility and$550 million of outstanding loans under the Treasury Loan Agreement and$2.9 billion in scheduled debt repayments. In addition, American had$207 million of deferred financing cost cash outflows. American's principal financing activities in 2020 included$9.0 billion in proceeds from the issuance of debt, including$2.8 billion borrowed under the 2014 Revolving Facility, the 2013 Revolving Facility and theApril 2016 Revolving Facility,$2.5 billion in aggregate principal amount of 11.75% senior secured notes,$1.2 billion in aggregate principal amount of two series of 10.75% senior secured notes due 2026,$1.0 billion under the Delayed Draw Term Loan Credit Facility,$600 million in connection with the issuance of equipment notes related to EETCs and the financing of certain aircraft,$550 million under the Treasury Term Loan Facility and the$360 million issuance of special facility revenue bonds. These cash inflows were offset in part by$3.0 billion in debt repayments, consisting of approximately$2.0 billion in scheduled debt repayments and the prepayment of the$1.0 billion Delayed Draw Term Loan Credit 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 4 Note 3
Leases Note 5 Note 4
Employee benefit plans Note 9 Note 8
Commitments, contingencies and guarantees Note 11 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 has 344 owned aircraft, 11 leased 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.
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
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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 ofDecember 31, 2021 ,$9.4 billion associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet. 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$20 million as ofDecember 31, 2021 , which are reflected in the operating lease obligations in Note 5 to AAG's Consolidated Financial Statements in Part II, Item 8A and Note 4 to American's Consolidated Financial Statements in Part II, Item 8B.
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 ofDecember 31, 2021 , we had$439 million of letters of credit and surety bonds securing various obligations, of which$94 million is collateralized with our restricted cash. The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2025. 86 --------------------------------------------------------------------------------
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Contractual Obligations
The following table provides details of our material cash requirements from known contractual obligations as ofDecember 31, 2021 (in millions). Except to the extent set forth in the applicable accompanying footnotes, the table does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time. Payments Due by Period 2027 and 2022 2023 2024 2025 2026 Thereafter Total American (a) Long-term debt: Principal amount (b), (d) (See Note 3)$ 1,637 $ 4,167
$ 31,785 Interest obligations (c), (d) 1,544 1,537 1,373 1,180 618 762
7,014
Finance lease obligations (See Note 4) 215 183 180 113 87 77
855
Aircraft and engine purchase commitments (e) (See Note 10(a)) 1,987 1,851 3,358 3,535 1,663 688
13,082
Operating lease commitments (See Note 4) 1,957 1,899 1,576 1,210 936 4,684
12,262
Regional capacity purchase agreements (f) (See Note 10(b)) 1,495 1,834 1,875 1,729 1,123 2,317
10,373
Minimum pension obligations (g) (See Note 8) - 31 23 - - -
54
Retiree medical and other postretirement benefits (See Note 8) 94 89 84 81 78 312
738
Other purchase obligations (h) (See Note 10(a)) 4,364 1,758 1,416 154 610 942
9,244
Total American Contractual Obligations
AAG Parent and Other AAG Subsidiaries (a) Long-term debt: Principal amount (b) (See Note 4)$ 750 $ -
$ -
$ 5,996 Interest obligations (c) 140 121 121 133 125 649
1,289
Operating lease commitments (See Note 5) 16 14 12 7 5 14
68
Minimum pension obligations (g) (See Note 9) - 1 - - - 1
2
Total AAG Contractual Obligations
$ 13,485 $ 17,391 $ 9,657 $ 24,545 $ 92,762
(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
(c)For variable-rate debt, future interest obligations are estimated using the
current forward rates at
(d)Includes
(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 footnote 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 most current estimate;
however, the actual delivery schedule may differ from the table above,
potentially materially. Additionally, the amounts in the table exclude 10 and
three Boeing 787-8 aircraft scheduled to be delivered in 2022 and 2023,
respectively, as well as four and one Boeing 787-9 aircraft scheduled to be
delivered in 2023 and 2024, respectively, in each case, for which we have
obtained committed lease financing. This financing is reflected in the operating
lease commitments line above.
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(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)Represents minimum pension contributions based on actuarially determined estimates as ofDecember 31, 2021 and is based on estimated payments through 2031. OnMarch 11, 2021 , the ARP was enacted, which included funding relief provisions benefiting single employer qualified retirement benefit pension plans such as those sponsored by American.
(h)Includes purchase commitments for aircraft fuel, flight equipment maintenance, construction projects and information technology support.
Capital Raising Activity and Other Possible Actions
In light of the cash needs imposed by the current operating losses due to
reduced demand in response to the COVID-19 pandemic as well as our significant
financial commitments related to, among other things, the servicing and
amortization of existing debt and equipment leasing arrangements, new flight
equipment and pension funding obligations, we and our subsidiaries will
regularly consider, and enter into negotiations related to, capital raising and
liability management activity, which may include the entry into leasing
transactions and future issuances of, and transactions designed to manage the
timing and amount of, secured or unsecured debt obligations or additional equity
securities in public or private offerings or otherwise. The cash available from
operations (if any) and these sources, however, may not be sufficient to cover
our cash 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 (in particular the ongoing global outbreak of COVID-19), natural
disasters or other causes could reduce the demand for air travel, which would
reduce the amount of cash generated by operations. See Part I, Item 1A. Risk
Factors - "The outbreak and global spread of COVID-19 has resulted in a severe
decline in demand for air travel which has adversely impacted our business,
operating results, financial condition and liquidity. The duration and severity
of the COVID-19 pandemic, and similar public health threats that we may face in
the future, could result in additional adverse effects on our business,
operating results, financial condition and liquidity" for additional discussion.
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 or similar liquidity 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 4 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, lease and other 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.
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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 each of AAG's and American's Consolidated Financial Statements in Part II, Item 8A and 8B, respectively, 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 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. While the contract duration of passenger tickets is generally one year, in response to the COVID-19 pandemic, we extended the contract duration for certain tickets toMarch 31, 2022 , principally those tickets which were scheduled to expire fromMarch 1, 2020 throughMarch 31, 2021 . Additionally, tickets to certain international destinations have extended contract duration toDecember 31, 2022 . We also have eliminated change fees for most domestic and international tickets providing more flexibility for customers to change travel plans. Given these changes and the uncertainty surrounding the future demand for air travel, our estimates of revenue that will be recognized from the air traffic liability for future flown or unused tickets as well as our estimates of refunds may be subject to variability and differ from historical experience.
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.
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Loyalty Revenue
We currently operate the loyalty program, AAdvantage. This program awards mileage credits to passengerswho 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. In response to the COVID-19 pandemic, we suspended the expiration of mileage credits throughMarch 31, 2022 and eliminated mileage reinstatement fees for canceled award tickets.
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 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. Given the inherent uncertainty of the current operating environment due to the COVID-19 pandemic, we will continue to monitor redemption patterns and may adjust our estimates in the future. For the year endedDecember 31, 2021 , a hypothetical 10% increase in the estimated selling price of miles would have decreased revenues by approximately$55 million as a result of additional amounts deferred from passenger ticket sales to be recognized in future periods.
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 five 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. 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 use a statistical model based on historical redemption patterns to develop an estimate of the likelihood of future redemption. For the year endedDecember 31, 2021 , a hypothetical 10% increase in our estimate of miles not expected to be redeemed would have increased revenues by approximately$70 million . 90 --------------------------------------------------------------------------------
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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 on 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 and (2) expected return on plan assets (as discussed below). These assumptions as ofDecember 31 were: 2021 2020 Pension weighted average discount rate (1) 3.0 % 2.7 %
Retiree medical and other postretirement benefits weighted average discount rate (1)
2.8 % 2.4 %
Expected rate of return on plan assets (2) 8.0 % 8.0 %
(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, 2021 would increase our pension and retiree
medical and other postretirement benefits obligations by approximately $1.2
billion and $40 million , respectively, and decrease estimated 2022 pension and
retiree medical and other postretirement benefits expense by approximately $10
million and $1 million , respectively.
(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 30% fixed income
securities, 24% U.S. stocks, 22% alternative (private) investments, 16%
developed international stocks 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, 2021 would increase estimated 2022 pension
expense and retiree medical and other postretirement benefits expense by
approximately $70 million and $1 million , respectively.
During 2021, 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 a decrease of $720
million in the projected benefit obligation at December 31, 2021 . The net effect
of changing these assumptions for retiree medical and other postretirement
benefits plans resulted in a decrease of $32 million in the accumulated
postretirement benefit obligation at December 31, 2021 . We also revised our
mortality assumptions to incorporate the new improvement scale issued by the
Society of Actuaries . This resulted in an increase in our pension and retiree
medical and other postretirement benefit obligations by $57 million and less
than $1 million , respectively.
See Note 9 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.
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. 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 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 presently have a$34 million valuation allowance on certain net deferred tax assets related to state NOL carryforwards. 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. 91 --------------------------------------------------------------------------------
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Recent Accounting Pronouncements
Accounting Standards Update (ASU) 2020-06: Accounting for Convertible Instruments and Contracts In An Entity's Own Equity (the New Convertible Debt Standard)
The New Convertible Debt Standard simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature and for convertible instruments with a beneficial conversion feature. As a result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, the New Convertible Debt Standard amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available. Entities may adopt the New Convertible Debt Standard using either a full or modified retrospective approach, and it is effective for interim and annual reporting periods beginning afterDecember 15, 2021 . Early adoption is permitted for interim and annual reporting periods beginning afterDecember 15, 2020 . The New Convertible Debt Standard is applicable to our 6.50% convertible senior notes due 2025 (the Convertible Notes). We early adopted the New Convertible Debt Standard as ofJanuary 1, 2021 using the modified retrospective method to recognize the Convertible Notes as a single liability instrument. As ofJanuary 1, 2021 , we recorded a$415 million ($320 million net of tax) reduction to additional paid-in capital to remove the equity component of the Convertible Notes from our consolidated balance sheet and a$19 million cumulative effect adjustment credit, net of tax, to retained deficit related to non-cash debt discount amortization recognized in periods prior to adoption resulting in a corresponding reduction of$389 million to the debt discount associated with the Convertible Notes. See Note 4(h) to AAG's Consolidated Financial Statements in Part II, Item 8A for additional information on the Convertible Notes.
ASU 2019-12: Simplifying the Accounting for Income Taxes (Topic 740)
This standard simplifies the accounting and disclosure requirements for income taxes by clarifying the existing guidance to improve consistency in the application of Accounting Standards Codification 740. This standard also removed the requirement to calculate income tax expense for the stand-alone financial statements of wholly-owned subsidiaries that are not subject to income tax. We adopted this standard effectiveJanuary 1, 2021 , and it did not have a material impact on our consolidated financial statements.
ASU 2021-10: Disclosures by Business Entities about Government Assistance (Topic 832)
This standard provides guidance on the disclosure requirements for business entities receiving government assistance. Specifically, entities are required to disclose information about the nature of the assistance received, including the related accounting, the affected line items on the financial statements and amounts, and the significant terms and conditions, including any commitments and contingencies. This standard is effective for annual periods beginning afterDecember 15, 2021 , and early adoption is permitted. We adopted this standard as ofDecember 31, 2021 . See Note 1(b) in each of AAG's and American's Consolidated Financial Statements in Part II, Items 8A and 8B, respectively, for disclosure related to the financial assistance we have received fromTreasury .
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