American Airlines 2008 Annual Report Download - page 52

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49
Foreign Currency The Company is exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar
value of foreign currency-denominated operating revenues and expenses. The Company’s largest exposure
comes from the British pound, Euro, Canadian dollar, Japanese yen and various Latin American currencies. The
Company does not currently have a foreign currency hedge program related to its foreign currency-denominated
ticket sales. A uniform 10 percent strengthening in the value of the U.S. dollar from December 31, 2008 and 2007
levels relative to each of the currencies in which the Company has foreign currency exposure would result in a
decrease in operating income of approximately $146 million and $132 million for the years ending December 31,
2008 and 2007, respectively, due to the Company’s foreign-denominated revenues exceeding its foreign-
denominated expenses. This sensitivity analysis was prepared based upon projected 2009 and 2008 foreign
currency-denominated revenues and expenses as of December 31, 2008 and 2007, respectively.
Interest The Company’s earnings are also affected by changes in interest rates due to the impact those changes
have on its interest income from cash and short-term investments, and its interest expense from variable-rate debt
instruments. The Company’s largest exposure with respect to variable-rate debt comes from changes in the
London Interbank Offered Rate (LIBOR). The Company had variable-rate debt instruments representing
approximately 28 percent and 22 percent of its total long-term debt at December 31, 2008 and 2007, respectively.
If the Company’s interest rates average 10 percent more in 2009 than they did at December 31, 2008, the
Company’s interest expense would increase by approximately $13 million and interest income from cash and
short-term investments would increase by approximately $7 million. In comparison, at December 31, 2007, the
Company estimated that if interest rates averaged 10 percent more in 2008 than they did at December 31, 2007,
the Company’s interest expense would have increased by approximately $14 million and interest income from
cash and short-term investments would have increased by approximately $25 million. These amounts are
determined by considering the impact of the hypothetical interest rates on the Company’s variable-rate long-term
debt and cash and short-term investment balances at December 31, 2008 and 2007.
Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value resulting from a
hypothetical 10 percent decrease in interest rates, and amounts to approximately $297 million and $326 million as
of December 31, 2008 and 2007, respectively. The fair values of the Company’s long-term debt were estimated
using quoted market prices or discounted future cash flows based on the Company’s incremental borrowing rates
for similar types of borrowing arrangements.