American Airlines 2006 Annual Report Download - page 35

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31
The Credit Facility contains a covenant (the Liquidity Covenant) requiring American to maintain, as defined,
unrestricted cash, unencumbered short term investments and amounts available for drawing under committed
revolving credit facilities of not less than $1.25 billion for each quarterly period through the life of the Credit
Facility. In addition, the Credit Facility contains a covenant (the EBITDAR Covenant) requiring AMR to maintain a
ratio of cash flow (defined as consolidated net income, before interest expense (less capitalized interest), income
taxes, depreciation and amortization and rentals, adjusted for certain gains or losses and non-cash items) to fixed
charges (comprising interest expense (less capitalized interest) and rentals). The required ratio was 1.20 to 1.00
for the four quarter period ending December 31, 2006 and will increase gradually for each four quarter period
ending on each fiscal quarter thereafter until it reaches 1.50 to 1.00 for the four quarter period ending June 30,
2009. AMR and American were in compliance with the Liquidity Covenant and the EBITDAR covenant 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 AMR and American will, in fact, be able to continue to comply with these covenants, and there are no
assurances that AMR and American will be able to do so. Failure to comply with these covenants would result in
a default under the Credit Facility which - - if the Company did not take steps to obtain a waiver of, or otherwise
mitigate, the default - - could result in a default under a significant amount of the Company’s other debt and lease
obligations and otherwise have a material adverse impact on the Company. See Note 6 to the consolidated
financial statements for the required ratios at each measurement date through the life of the Credit Facility.
Cash Flow Activity
The Company’s cash flow from operating activities improved in 2006. Net cash provided by operating activities
during the year ended December 31, 2006 was $1.9 billion, an increase of $915 million over 2005, due primarily
to an improved revenue environment and the impact of certain Company initiatives to improve revenue.
Capital expenditures during 2006 were $530 million and primarily included the acquisition of two Boeing 777-
200ER aircraft and the cost of improvements at JFK. Substantially all of the Company’s construction costs at JFK
are being reimbursed through a fund established from a previous financing transaction. See Note 6 to the
consolidated financial statements for additional information.
During the second quarter of 2006, the Company issued and sold 15 million shares of its common stock. The
Company realized $400 million from the equity sale.
During 2006, the Company repurchased approximately $190 million of its debt and lease obligations. Going
forward, depending on market conditions, its cash position and other considerations, the Company may from time
to time redeem or repurchase its debt, or take other steps to reduce its debt or lease obligations or otherwise
improve its balance sheet.
Working Capital
AMR (principally American) historically operates with a working capital deficit, as do most other airline companies.
In addition, the Company has historically relied heavily on external financing to fund capital expenditures. More
recently, the Company has also relied on external financing to fund operating losses, employee pension
obligations and debt maturities.
Off Balance Sheet Arrangements
American has determined that it holds a significant variable interest in, but is not the primary beneficiary of, certain
trusts that are the lessors under 84 of its aircraft operating leases. These leases contain a fixed price purchase
option, which allows American to purchase the aircraft at a predetermined price on a specified date. However,
American does not guarantee the residual value of the aircraft. As of December 31, 2006, future lease payments
required under these leases totaled $2.3 billion.