American Airlines 1997 Annual Report Download - page 45

AMR CORPORATION
43
the currencies in which the Company’s sales and expens-
es are denominated and have not historically adjusted for
such foreign exchange rate fluctuations would result in a
decrease in operating income of approximately $60 mil-
lion for the year ending December 31, 1998, net of hedge
instruments outstanding at December 31, 1997, due to
the Company’s foreign-denominated revenues exceeding
its foreign-denominated expenses. The increase to other
income due to the remeasurement of net foreign currency-
denominated liabilities and the increase to common stock-
holders’ equity due to the translation of net foreign cur-
rency-denominated liabilities resulting from a 10 percent
strengthening in the value of the U.S. dollar is not materi-
al. This sensitivity analysis was prepared based upon
projected 1998 foreign currency-denominated revenues
and expenses and foreign currency-denominated assets
and liabilities as of December 31, 1997. Furthermore, this
calculation assumes that each exchange rate would change
in the same direction relative to the U.S. dollar.
Interest The Company’s earnings are also affected by
changes in interest rates due to the impact those changes
have on its interest income from cash and short-term
investments and its interest expense from variable-rate
debt instruments. The Company has variable-rate debt
instruments representing approximately five percent of its
total long-term debt and interest rate swaps on notional
amounts of approximately $1.4 billion at December 31,
1997. If interest rates average 10 percent more in 1998
than they did during 1997, the Company’s interest
expense would increase by approximately $10 million. If
interest rates average 10 percent more in 1998 than they
did during 1997, the Company’s interest income from
cash and short-term investments would increase by
approximately $14 million. These amounts are deter-
mined by considering the impact of the hypothetical inter-
est rates on the Company’s variable-rate long-term debt,
interest rate swap agreements, cash and short-term invest-
ment balances at December 31, 1997.
Market risk for fixed-rate long-term debt is estimated
as the potential increase in fair value resulting from a
hypothetical 10 percent decrease in interest rates and
amounts to approximately $105 million. The fair values
of the Company’s long-term debt were estimated using
quoted market prices or discounted future cash flows
based on the Company’s incremental borrowing rates for
similar types of borrowing arrangements.
Other The Company is also subject to market risk in its
investment in the cumulative mandatorily redeemable con-
vertible preferred stock of Canadian Airlines International
Limited (Canadian). However, the impact of such market
risk on earnings is not significant as the Company wrote
down its investment in Canadian to its estimated fair mar-
ket value in 1996. Furthermore, the Company considers its
investment in Canadian as an available for sale security
and, as such, any future increase in the value of the Com-
pany’s investment in Canadian would be recorded directly
to stockholders’ equity and would not impact the Compa-
ny’s earnings. The cumulative mandatorily redeemable
convertible preferred stock of Canadian is not publicly
traded and has no readily determinable fair value.
OTHER INFORMATION
Environmental Matters Subsidiaries of AMR have been
notified of potential liability with regard to several envi-
ronmental cleanup sites and certain airport locations. At
sites where remedial litigation has commenced, potential
liability is joint and several. AMR’s alleged volumetric con-
tributions at these sites are minimal. AMR does not expect
these matters, individually or collectively, to have a mater-
ial impact on its results of operations, financial position or
liquidity. Additional information is included in Note 3 to
the consolidated financial statements.
Year 2000 Compliance The Company has implemented
a Year 2000 compliance program designed to ensure that
the Company’s computer systems and applications will
function properly beyond 1999. Such program includes
both systems and applications operated by the Company’s
businesses as well as software licensed to or operated for
third parties by The SABRE Group. The Company
believes that it has allocated adequate resources for this
purpose and expects its Year 2000 date conversion pro-
gram to be completed on a timely basis. The Company
has commenced testing on certain systems and applica-
tions and will continue to test the remainder of the sys-
tems and applications throughout the course of the Year
2000 program. However, there can be no assurance that