American Airlines 2007 Annual Report Download - page 15

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Our indebtedness and other obligations are substantial and could adversely affect our business and
liquidity.
We have and will continue to have a significant amount of indebtedness and obligations to make future payments
on aircraft equipment and property leases, and a high proportion of debt to equity capital. We may incur
substantial additional debt, including secured debt, and lease obligations in the future. We also have substantial
pension funding obligations. Our substantial indebtedness and other obligations could have important
consequences. For example, they could:
• 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 secured bank credit facility which consists of an undrawn $255 million revolving credit facility with
a final maturity on June 17, 2009, and a fully drawn $440 million term loan facility, with a final maturity on
December 17, 2010 (the Revolving Facility and the Term Loan Facility, respectively, and collectively, the Credit
Facility). 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, 2007 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. Fuel prices are volatile, increased significantly in 2007, and remain very
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.