American Airlines 2003 Annual Report Download - page 41

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ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitive Instruments and Positions
The risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising
from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed below.
The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall
economic activity, nor do they consider additional actions management may take to mitigate the Company’s
exposure to such changes. Therefore, actual results may differ. The Company does not hold or issue derivative
financial instruments for trading purposes. See Note 7 to the consolidated financial statements for accounting
policies and additional information.
Aircraft Fuel The Company’s earnings are affected by changes in the price and availability of aircraft fuel. In
order to provide a measure of control over price and supply, the Company trades and ships fuel and maintains fuel
storage facilities to support its flight operations. The Company also manages the price risk of fuel costs primarily
by using jet fuel, heating oil, and crude oil swap and option contracts. Market risk is estimated as a hypothetical 10
percent increase in the December 31, 2003 and 2002 cost per gallon of fuel. Based on projected 2004 fuel usage,
such an increase would result in an increase to aircraft fuel expense of approximately $268 million in 2004,
inclusive of the impact of fuel hedge instruments outstanding at December 31, 2003, and assumes the Company’s
fuel hedging program remains effective under Statement of Financial Accounting Standards No. 133, “Accounting
for Derivative Instruments and Hedging Activities”. Comparatively, based on projected 2003 fuel usage, such an
increase would have resulted in an increase to aircraft fuel expense of approximately $205 million in 2003,
inclusive of the impact of fuel hedge instruments outstanding at December 31, 2002. The change in market risk is
due to the increase in fuel prices and a decrease in the amount of fuel hedged. Beginning in March 2003, because
of the Company’s then existing financial condition, the Company stopped entering into new hedge contracts and, in
June 2003, terminated substantially all of its contracts with maturities beyond March 2004. Commencing in
October 2003, the Company began to enter into new fuel hedging contracts with maturities beyond March 2004 for
a portion of its future fuel requirements. As of December 31, 2003, the Company had hedged, with option
contracts, approximately 12 percent of its estimated 2004 fuel requirements, or approximately 21 percent of its
estimated first quarter 2004 fuel requirements, 16 percent of its second quarter 2004 estimated fuel requirements
and six percent of its estimated fuel requirements for the remainder of 2004. Comparatively, as of December 31,
2002 the Company had hedged approximately 32 percent of its estimated 2003 fuel requirements, 15 percent of its
estimated 2004 fuel requirements, and approximately four percent of its estimated 2005 fuel requirements. The
Company’s credit rating has limited its ability to enter into certain types of fuel hedge contracts. A further
deterioration of its credit rating or liquidity position may negatively affect the Company’s ability to hedge fuel in the
future.
Foreign Currency The Company is exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar
value of foreign currency-denominated operating revenues and expenses. The Company’s largest exposure
comes from the British pound, Euro, Canadian dollar, Japanese yen and various Latin American currencies.
Previously, the Company used options to hedge a portion of its anticipated foreign currency-denominated ticket
sales. After determining its foreign currency hedge program’s impact was no longer materially beneficial, the
Company discontinued entering into foreign currency hedges. The Company plans to periodically evaluate its
foreign currency exposure to determine whether its foreign currency hedge program should be reinstated. The
result of a uniform 10 percent strengthening in the value of the U.S. dollar from December 31, 2003 and 2002
levels relative to each of the currencies in which the Company has foreign currency exposure would result in a
decrease in operating income of approximately $77 million and $65 million for the years ending December 31,
2004 and 2003, respectively, due to the Company’s foreign-denominated revenues exceeding its foreign-
denominated expenses. This sensitivity analysis was prepared based upon projected 2004 and 2003 foreign
currency-denominated revenues and expenses as of December 31, 2003 and 2002, respectively.