American Airlines 2004 Annual Report Download - page 52

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1. Summary of Accounting Policies (Continued)
Equipment and Property The provision for depreciation of operating equipment and property is computed on
the straight-line method applied to each unit of property, except that major rotable parts, avionics and assemblies
are depreciated on a group basis. The depreciable lives used for the principal depreciable asset classifications
are:
Depreciable Life
American jet aircraft and engines 20 – 30 years
Saab 340 aircraft 2005 1
Other regional aircraft and engines 16 - 20 years
Major rotable parts, avionics and assemblies Life of equipment to which
applicable
Improvements to leased flight equipment Term of lease
Buildings and improvements (principally on
leased land)
10-30 years or term of lease
Furniture, fixtures and other equipment 3-10 years
Capitalized software 3-10 years
1Final aircraft retirement date.
Effective January 1, 2005, in order to more accurately reflect the expected useful life of its aircraft, the Company
changed its estimate of the depreciable lives of certain American aircraft types from 25 to 30 years.
Residual values for aircraft, engines, major rotable parts, avionics and assemblies are generally five to ten
percent, except when guaranteed by a third party for a different amount.
Equipment and property under capital leases are amortized over the term of the leases or, in the case of certain
aircraft, over their expected useful lives. Lease terms vary but are generally ten to 25 years for aircraft and seven
to 40 years for other leased equipment and property.
Regional Affiliates Revenue from ticket sales is generally recognized when service is provided. Regional
Affiliates revenues for flights connecting to American flights are allocated based on industry standard proration
agreements.
Passenger Revenue Passenger ticket sales are initially recorded as a component of Air traffic liability.
Revenue derived from ticket sales is recognized at the time service is provided. However, due to various factors,
including the complex pricing structure and interline agreements throughout the industry, certain amounts are
recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of
revenue to be recognized, including breakage. These estimates are generally based upon the evaluation of
historical trends, including the use of regression analysis and other methods to model the outcome of future
events based on the Company’s historical experience, and are recorded at the time of departure.
Frequent Flyer Program The estimated incremental cost of providing free travel awards is accrued when such
award levels are reached. American also accrues a frequent flyer liability for the mileage credits that are expected
to be used for travel on participating airlines (based on historical usage patterns and contractual rates). American
sells mileage credits and related services to companies participating in its frequent flyer program. The portion of
the revenue related to the sale of mileage credits, representing the revenue for air transportation sold, is valued at
current market rates and is deferred and amortized over 28 months, which approximates the expected period over
which the mileage credits are used. The remaining portion of the revenue, representing the marketing products
sold and administrative costs associated with operating the AAdvantage program, is recognized upon sale, as the
related services have been provided. The Company’s total liability for future AAdvantage award redemptions for
free, discounted or upgraded travel on American, American Eagle or participating airlines as well as unrecognized
revenue from selling AAdvantage miles to other airlines was approximately $1.4 billion and $1.2 billion (and is
recorded as a component of Air traffic liability on the accompanying consolidated balance sheets) at December 31,
2004 and 2003, respectively.