American Airlines 2005 Annual Report Download - page 43

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40
Long-lived assets – The Company has approximately $19 billion of long-lived assets as of December 31,
2005, including approximately $18 billion related to flight equipment and other fixed assets. In addition to
the original cost of these assets, their recorded value is impacted by a number of policy elections made by
the Company, including estimated useful lives and salvage values. In accordance with Statement of
Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(SFAS 144), the Company records impairment charges on long-lived assets used in operations when
events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of those assets and the net book value
of the assets exceeds their estimated fair value. In making these determinations, the Company uses certain
assumptions, including, but not limited to: (i) estimated fair value of the assets; and (ii) estimated future
cash flows expected to be generated by these assets, which are based on additional assumptions such as
asset utilization, length of service and estimated salvage values. A change in the Company's fleet plan has
been the primary indicator that has resulted in an impairment charge in the past. In the fourth quarter of
2005, the Company permanently grounded and retired 27 McDonnell Douglas MD-80 airframes, 24 of
which had previously been in temporary storage. See further discussion of the charge related to the
retirement in Note 2 to the consolidated financial statements.
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 industry’s 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 recognized at
the time of departure. The Company’s estimation techniques have been applied consistently from year to
year. However, due to changes in the Company’s ticket refund policy and changes in the travel profile of
customers, historical trends may not be representative of future results.
Frequent flyer program – American uses the incremental cost method to account for the portion of its
frequent flyer liability incurred when AAdvantage members earn mileage credits by flying on American or
American Eagle. American's frequent flyer liability is accrued each time a member accumulates sufficient
mileage in his or her account to claim the lowest level of free travel award (25,000 miles) and the award is
expected to be used for free travel. American includes fuel, food, and reservations/ticketing costs in the
calculation of incremental cost. These estimates are generally updated based upon the Company’s 12-
month historical average of such costs. 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.
At both December 31, 2005 and 2004, American estimated that approximately ten million free travel awards
were expected to be redeemed for free travel on American and American Eagle. In making the estimate of
free travel awards, American has excluded mileage in inactive accounts, mileage related to accounts that
have not yet reached the lowest level of free travel award, and mileage in active accounts that have reached
the lowest level of free travel award but which are not expected to ever be redeemed for free travel on
American or participating airlines. 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 companies was approximately $1.5 billion
and $1.4 billion (and is recorded as a component of Air traffic liability in the consolidated balance sheets),
representing 17.7 percent and 19.6 percent of AMR's total current liabilities, at December 31, 2005 and
2004, respectively.