American Airlines 2006 Annual Report Download - page 16

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• limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and
general corporate purposes, or adversely affect the terms on which such financing could be obtained;
• require us to dedicate a substantial portion of our cash flow from operations to payments on our
indebtedness and other obligations, thereby reducing the funds available for other purposes;
• make us more vulnerable to economic downturns;
• limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing
business and economic conditions; or
• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we
operate.
We may be unable to comply with our financial covenants.
American has a fully drawn $740 million Credit Facility, which consists of a $295 million Revolving Facility with a
final maturity on June 17, 2009 and a $445 million Term Loan Facility with a final maturity on December 17, 2010.
The Credit Facility contains a liquidity covenant and a ratio of cash flow to fixed charges covenant. We complied
with these covenants as of December 31, 2006 and expect to be able to continue to comply with these covenants.
However, given fuel prices that are high by historical standards and the volatility of fuel prices and revenues, it is
difficult to assess whether we will, in fact, be able to continue to comply with these covenants, and there are no
assurances that we will be able to do so. Failure to comply with these covenants would result in a default under
the Credit Facility which - - if we did not take steps to obtain a waiver of, or otherwise mitigate, the default - -
could result in a default under a significant amount of our other debt and lease obligations, and otherwise have a
material adverse impact on us.
We are being adversely affected by increases in fuel prices, and we would be adversely affected by
disruptions in the supply of fuel.
Our results are very significantly affected by the price and availability of jet fuel, which are in turn affected by a
number of factors beyond our control. Although fuel prices have moderated somewhat from the record high prices
reached in July and August 2006, they are volatile and remain high by historical standards.
Due to the competitive nature of the airline industry, we may not be able to pass on increased fuel prices to
customers by increasing fares. In fact, recent history would indicate that we have limited ability to pass along the
increased costs of fuel. If fuel prices decline in the future, increased fare competition and lower revenues may
offset any potential benefit of lower fuel prices.
While we do not currently anticipate a significant reduction in fuel availability, dependency on foreign imports of
crude oil, limited refining capacity and the possibility of changes in government policy on jet fuel production,
transportation and marketing make it impossible to predict the future availability of jet fuel. If there are additional
outbreaks of hostilities or other conflicts in oil producing areas or elsewhere, or a reduction in refining capacity
(due to weather events, for example), or governmental limits on the production or sale of jet fuel, there could be
reductions in the supply of jet fuel and significant increases in the cost of jet fuel. Major reductions in the
availability of jet fuel or significant increases in its cost, or a continuation of current high prices for a significant
period of time, would have a material adverse impact on us.
While we seek to manage the price risk of fuel costs by using derivative contracts, there can be no assurance
that, at any given time, we will have derivatives in place to provide any particular level of protection against
increased fuel costs. In addition, a deterioration of our financial position could negatively affect our ability to enter
into derivative contracts in the future.