American Airlines 1997 Annual Report Download - page 58

AMR CORPORATION
56
Cash payments for interest were $409 million, $515
million and $685 million for 1997, 1996 and 1995,
respectively.
6. Financial Instruments And Risk Management
As part of the Company’s risk management program,
AMR uses a variety of financial instruments, including
interest rate swaps, fuel swaps and currency exchange
agreements. The Company does not hold or issue
derivative financial instruments for trading purposes.
NOTIONAL AMOUNTS AND CREDIT EXPOSURES OF DERIVATIVES
The notional amounts of derivative financial instruments
summarized in the tables which follow do not represent
amounts exchanged between the parties and, therefore,
are not a measure of the Company’s exposure resulting
from its use of derivatives. The amounts exchanged are
calculated based on the notional amounts and other
terms of the instruments, which relate to interest rates,
exchange rates or other indices.
The Company is exposed to credit losses in the event
of non-performance by counterparties to these financial
instruments, but it does not expect any of the counter-
parties to fail to meet its obligations. The credit exposure
related to these financial instruments is represented by
the fair value of contracts with a positive fair value at the
reporting date, reduced by the effects of master netting
agreements. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure
to a single counterparty under defined guidelines, and
monitors the market position of the program and its rela-
tive market position with each counterparty. The Compa-
ny also maintains industry-standard security agreements
with the majority of its counterparties which may require
the Company or the counterparty to post collateral if the
value of these instruments falls below certain mark-to-
market thresholds. As of December 31, 1997, no collat-
eral was required under these agreements, and the Com-
pany does not expect to post collateral in the near future.
INTEREST RATE RISK MANAGEMENT
American enters into interest rate swap contracts to effec-
tively convert a portion of its fixed-rate obligations to
floating-rate obligations. These agreements involve the
exchange of amounts based on a floating interest rate for
amounts based on fixed interest rates over the life of the
agreement without an exchange of the notional amount
upon which the payments are based. The differential to
be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to
the obligation. The related amount payable to or receiv-
able from counterparties is included in current liabilities
or assets. The fair values of the swap agreements are not
recognized in the financial statements. Gains and losses
on terminations of interest rate swap agreements are
deferred as an adjustment to the carrying amount of the
outstanding obligation and amortized as an adjustment to
interest expense related to the obligation over the remain-
ing term of the original contract life of the terminated
swap agreement. In the event of the early extinguishment
of a designated obligation, any realized or unrealized gain
or loss from the swap would be recognized in income
coincident with the extinguishment.
The following table indicates the notional amounts
and fair values of the Company’s interest rate swap
agreements (in millions):
December 31,
1997 1996
Notional Fair Notional Fair
Amount Value Amount Value
Interest rate swap agreements $1,410 $ 12 $1,480 $ (9)
The fair values represent the amount the Company
would pay or receive to terminate the agreements at
December 31, 1997 and 1996, respectively.
At December 31, 1997, the weighted-average remain-
ing life of the interest rate swap agreements in effect was
3.7 years. The weighted-average floating rates and fixed
rates on the contracts outstanding were:
December 31,
1997 1996
Average floating rate 5.901% 5.728%
Average fixed rate 5.844% 5.627%
Floating rates are based primarily on LIBOR and may
change significantly, affecting future cash flows.