American Airlines 2000 Annual Report Download - page 26

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fixed interest rates over the life of the agreement with-
out 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 recog-
nized 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 adjust-
ment to interest expense related to the obligation over
the remaining 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 rec-
ognized in income coincident with the extinguishment.
During 2000, the Company terminated interest rate
swap agreements on notional amounts of approximately
$425 million which had effectively converted a portion
of its fixed-rate obligations to floating-rate obligations.
The cost of terminating these interest rate swap agree-
ments was not material.
The following table indicates the notional amounts
and fair values of the Company’s interest rate swap
agreements (in millions):
December 31,
200 0 1999
Notion al Notional
Amount Fair Value Amount Fair Value
Interest rate swap agreements $1 58 $ 4 $696 $ (9)
The fair values represent the amount the Com-
pany would receive or pay if the agreements were ter-
minated at December 31, 2000 and 1999, respectively.
At December 31, 2000, the weighted-average
remaining life of the interest rate swap agreements in
effect was 9.7 years. The weighted-average floating
rates and fixed rates on the contracts outstanding were:
December 31,
200 0 1999
Average floating rate 6.798% 5.855%
Average fixed rate 6.631 % 6.593%
Floating rates are based primarily on LIBOR and
may change significantly, affecting future cash flows.
Fuel Price Risk Management American enters into fuel
swap and option contracts to protect against increases
in jet fuel prices. Under the fuel swap agreements,
American receives or makes payments based on the dif-
ference between a fixed price and a variable price for
certain fuel commodities. Under the fuel option agree-
ments, American pays a premium to cap prices at a
fixed level. The changes in market value of such agree-
ments have a high correlation to the price changes of
the fuel being hedged. Effective gains or losses on fuel
hedging agreements are recognized as a component of
fuel expense when the underlying fuel being hedged is
used. Any premiums paid to enter into option contracts
are recorded as assets. Gains and losses on fuel hedg-
ing agreements would be recognized immediately
should the changes in the market value of the agree-
ments cease to have a high correlation to the price
changes of the fuel being hedged. At December 31,
2000, American had fuel hedging agreements with bro-
ker-dealers on approximately 2.3 billion gallons of fuel
products, which represented approximately 40 percent
of its expected 2001 fuel needs, approximately 15 per-
cent of its expected 2002 fuel needs, and approximately
seven percent of its expected 2003 fuel needs. The fair
value of the Company’s fuel hedging agreements at
December 31, 2000, representing the amount the
Company would receive to terminate the agreements,
totaled $223 million. At December 31, 1999, American
had fuel hedging agreements with broker-dealers on
approximately 2.0 billion gallons of fuel products,
which represents approximately 48 percent of its
expected 2000 fuel needs and approximately 10 percent
of its expected 2001 fuel needs. The fair value of the
Company’s fuel hedging agreements at December 31,
1999, representing the amount the Company would
receive to terminate the agreements, totaled $232 million.
Foreign Exchange Risk Management To hedge against
the risk of future exchange rate fluctuations on a por-
tion of American’s foreign cash flows, the Company
enters into various currency put option agreements on a
number of foreign currencies. The option contracts are