American Airlines 2007 Annual Report Download - page 12

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9
The impact of fuel price changes on the Company and its competitors depends on various factors, including
hedging strategies. The Company has a fuel hedging program in which it enters into jet fuel and heating oil
hedging contracts to dampen the impact of the volatility of jet fuel prices. During 2007, 2006 and 2005, the
Company’s fuel hedging program reduced the Company’s fuel expense by approximately $239 million, $97 million
and $64 million, respectively. As of January 2008, the Company had hedged, with option contracts, primarily
heating oil collars and call options, approximately 24 percent of its estimated 2008 fuel requirements. The
consumption hedged for 2008 is capped at an average price of approximately $2.31 per gallon of jet fuel
excluding taxes and transportation costs. A deterioration of the Company’s financial position could negatively
affect the Company’s ability to hedge fuel in the future. See the Risk Factors under Item 1A for additional
information regarding fuel.
Additional information regarding the Company’s fuel program is also included in Item 7(A) – Quantitative and
Qualitative Disclosures about Market Risk, Item 7 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations and in Note 7 to the consolidated financial statements.
Frequent Flyer Program
American established the AAdvantage frequent flyer program (AAdvantage) to develop passenger loyalty by
offering awards to travelers for their continued patronage. The Company believes that the AAdvantage program is
one of its competitive strengths. AAdvantage benefits from a growing base of approximately sixty million members
with desirable demographics who have demonstrated a strong willingness to collect AAdvantage miles over other
loyalty program incentives and are generally disposed to adjusting their purchasing behavior in order to earn
additional AAdvantage miles. AAdvantage members earn mileage credits by flying on American, American Eagle,
and the American Connection carriers or by using services of other participants in the AAdvantage program.
Mileage credits can be redeemed for free, discounted or upgraded travel on American, American Eagle or other
participating airlines, or for other awards. Once a member accrues sufficient mileage for an award, the member
may book award travel. Most travel awards are subject to capacity controlled seating. A member’s mileage credit
does not expire provided that member has any type of qualifying activity at least once every 18 months.
American sells mileage credits and related services to other participants in the AAdvantage program. There are
over 1,000 program participants, including a leading credit card issuer, hotels, car rental companies and other
products and services companies in the AAdvantage program. The Company believes that program participants
benefit from the sustained purchasing behavior of AAdvantage members, which translates into a recurring stream
of revenues for AAdvantage. Under its agreements with AAdvantage members and program participants, the
Company reserves the right to change the AAdvantage program at any time without notice, and may end the
program with six months notice. As of December 31, 2007, AAdvantage had approximately 60 million total
members, and 613 billion outstanding award miles. During 2007, AAdvantage issued approximately 200 billion
miles, of which approximately one-half were sold to program participants. See Critical Accounting Policies and
Estimates under Item 7 for more information on AAdvantage.
Other Matters
Seasonality and Other Factors The Company’s results of operations for any interim period are not necessarily
indicative of those for the entire year, since the air transportation business is subject to seasonal fluctuations.
Higher demand for air travel has traditionally resulted in more favorable operating and financial results for the
second and third quarters of the year than for the first and fourth quarters. Fears of terrorism or war, fare
initiatives, fluctuations in fuel prices, labor actions, weather and other factors could impact this seasonal pattern.
Unaudited quarterly financial data for the two-year period ended December 31, 2007 is included in Note 15 to the
consolidated financial statements. In addition, the results of operations in the air transportation business have
also significantly fluctuated in the past in response to general economic conditions.
No material part of the business of AMR and its subsidiaries is dependent upon a single customer or very few
customers. Consequently, the loss of the Company's largest few customers would not have a materially adverse
effect upon the Company.
Insurance The Company carries insurance for public liability, passenger liability, property damage and all-risk
coverage for damage to its aircraft.
As a result of the terrorist attacks of September 11, 2001 (the Terrorist Attacks), aviation insurers significantly
reduced the amount of insurance coverage available to commercial air carriers for liability to persons other than