American Airlines 2007 Annual Report Download - page 61

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58
4. Commitments, Contingencies and Guarantees (Continued)
On December 18, 2007, the European Commission issued a Statement of Objection (“SO”) against 26 airlines,
including the Company. The SO alleges that these carriers participated in a conspiracy to set surcharges on
cargo shipments in violation of EU law. The SO states that, in the event that the allegations in the SO are
affirmed, the Commission will impose fines against the Company. The Company intends to vigorously contest the
allegations and findings in the SO under EU laws, and it intends to cooperate fully with all other pending
investigations. In the event that the SO is affirmed or other investigations uncover violations of the U.S. antitrust
laws or the competition laws of some other jurisdiction, or if the Company were named and found liable in any
litigation based on these allegations, such findings and related legal proceedings could have a material adverse
impact on the Company. The evaluation of this allegation is still in the early stages, but based on the information
to date, the Company has not recorded any reserve for this exposure in the 2007 consolidated financial
statements.
The Company has contracts related to facility construction or improvement projects, primarily at airport locations.
The contractual obligations related to these projects totaled approximately $102 million as of December 31, 2007.
The Company expects to make payments of $97 million and $5 million in 2008 and 2009, respectively. See
Footnote 6 for information related to financing of JFK construction costs which are included in these amounts. In
addition, the Company has an information technology support related contract that requires minimum annual
payments of $150 million through 2013.
American has capacity purchase agreements with two regional airlines, Chautauqua Airlines, Inc. (Chautauqua)
and Trans States Airlines, Inc. (collectively the American Connection® carriers) to provide Embraer EMB-140/145
regional jet services to certain markets under the brand “American Connection”. Under these arrangements, the
Company pays the American Connection carriers a fee per block hour to operate the aircraft. The block hour fees
are designed to cover the American Connection carriers’ fully allocated costs plus a margin. Assumptions for
certain costs such as fuel, landing fees, insurance, and aircraft ownership are trued up to actual values on a pass
through basis. In consideration for these payments, the Company retains all passenger and other revenues
resulting from the operation of the American Connection regional jets. Minimum payments under the contracts
are $97 million in 2008 and $22 million over the years 2009 and 2010. In addition, if the Company terminates the
Chautauqua contract without cause, Chautauqua has the right to put its 15 Embraer aircraft to the Company. If
this were to happen, the Company would take possession of the aircraft and become liable for lease obligations
totaling approximately $21 million per year with lease expirations in 2018 and 2019.
The Company is a party to many routine contracts in which it provides general indemnities in the normal course of
business to third parties for various risks. The Company is not able to estimate the potential amount of any liability
resulting from the indemnities. These indemnities are discussed in the following paragraphs.
The Company’s loan agreements and other London Interbank Offered Rate (LIBOR)-based financing transactions
(including certain leveraged aircraft leases) generally obligate the Company to reimburse the applicable lender for
incremental costs due to a change in law that imposes (i) any reserve or special deposit requirement against
assets of, deposits with, or credit extended by such lender related to the loan, (ii) any tax, duty, or other charge
with respect to the loan (except standard income tax) or (iii) capital adequacy requirements. In addition, the
Company’s loan agreements, derivative contracts and other financing arrangements typically contain a
withholding tax provision that requires the Company to pay additional amounts to the applicable lender or other
financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a
change in the applicable tax law.
These increased cost and withholding tax provisions continue for the entire term of the applicable transaction, and
there is no limitation on the maximum additional amounts the Company could be obligated to pay under such
provisions. Any failure to pay amounts due under such provisions generally would trigger an event of default, and,
in a secured financing transaction, would entitle the lender to foreclose upon the collateral to realize the amount
due.