American Airlines 2003 Annual Report Download - page 60

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4. Commitments, Contingencies and Guarantees (Continued)
The Company has general indemnity clauses in many of its airport and other real estate leases where the
Company as lessee indemnifies the lessor (and related parties) against liabilities related to the Company’s use of
the leased property. Generally, these indemnifications cover liabilities resulting from the negligence of the
indemnified parties, but not liabilities resulting from the gross negligence or willful misconduct of the indemnified
parties. In addition, the Company provides environmental indemnities in many of these leases for contamination
related to the Company’s use of the leased property.
Under certain contracts with third parties, the Company indemnifies the third party against legal liability arising out
of an action by the third party, or certain other parties. The terms of these contracts vary and the potential
exposure under these indemnities cannot be determined. Generally, the Company has liability insurance
protecting the Company for its obligations it has undertaken under these indemnities.
AMR and American have event risk covenants in approximately $2.0 billion of indebtedness and operating leases
as of December 31, 2003. These covenants permit the holders of such obligations to receive a higher rate of
return (between 100 and 650 basis points above the stated rate) if a designated event, as defined, should occur
and the credit ratings of such obligations are downgraded below certain levels within a certain period of time. No
designated event, as defined, has occurred as of December 31, 2003.
The Company is subject to environmental issues at various other airport and non-airport locations for which it has
accrued $72 million and $92 million, which are included in Accrued liabilities on the accompanying consolidated
balance sheets, at December 31, 2003 and 2002, respectively. Management believes, after considering a number
of factors, that the ultimate disposition of these environmental issues is not expected to materially affect the
Company’s consolidated financial position, results of operations or cash flows. Amounts recorded for
environmental issues are based on the Company’s current assessments of the ultimate outcome and, accordingly,
could increase or decrease as these assessments change.
The Company is involved in certain claims and litigation related to its operations. In the opinion of management,
liabilities, if any, arising from these claims and litigation would not have a material adverse effect on the
Company’s consolidated financial position, results of operations, or cash flows.
5. Leases
As discussed in Note 2, in 2003, the Company reached concessionary agreements with certain lessors. The
Vendor Agreements with these lessors affected the payments, lease term, and other conditions of certain leases.
As a result of these changes, 30 leases, which were previously accounted for as operating leases, were converted
to capital leases, and one lease, which was previously accounted for as a capital lease, was converted to an
operating lease. The Company recorded the new capital leases at the fair value of the respective assets being
leased. These changes did not have a significant effect on the Company’s accompanying consolidated balance
sheet.
In addition, certain of the Vendor Agreements provide that the Company’s obligations under the related lease
revert to the original terms if certain events occur prior to December 31, 2005, including: (i) an event of default
under the related lease (which generally occurs only if a payment default occurs), (ii) an event of loss with respect
to the related aircraft, (iii) rejection by the Company of the lease under the provisions of Chapter 11 of the U.S.
Bankruptcy Code or (iv) the Company’s filing for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. If any
one of these events were to occur, the Company would be responsible for approximately $24 million in additional
operating lease payments and $11 million in additional payments related to capital leases as of December 31,
2003. This amount will increase to approximately $119 million in operating lease payments and $111 million in
payments related to capital leases prior to the expiration of the provision on December 31, 2005. These amounts
are being accounted for as contingent rentals and will only be recognized if they become payable.