American Airlines 2008 Annual Report Download - page 63

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2. Special Charges and Restructuring Activities (Continued)
Aircraft Charges
In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (SFAS 144), the Company records impairment charges on long-lived assets used
in operations when events and circumstances indicate that the assets may be impaired. Assets or groups of
assets are considered impaired when the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of those assets and the net book value of the assets exceeds their estimated fair
value. In connection with the May 2008 capacity reduction announcement, the Company concluded that a
triggering event had occurred requiring that fixed assets be tested for impairment. As a result of this test, the
Company concluded the carrying values of its McDonnell Douglas MD-80 and the Embraer RJ-135 aircraft fleets
were no longer recoverable. Consequently, during the second quarter of 2008, the Company recorded an
impairment charge of $1.1 billion to write these and certain related long-lived assets down to their estimated fair
values. No portion of the impairment charge will result in future cash expenditures. All other fleet types were
tested for impairment but were concluded to be recoverable with projected undiscounted cash flows or these fleet
types had fair values at levels above current carrying value. Included in the charge for the Embraer RJ-135 fleet
were write downs on 29 aircraft, of which 19 were considered held for sale as of December 31, 2008. The
McDonnell Douglas MD-80 aircraft are being depreciated over their remaining useful lives averaging
approximately five years.
In determining the asset recoverability, management estimated the undiscounted future cash flows utilizing models
used by the Company in making fleet and scheduling decisions. In determining fair market value, the Company
utilized recent external appraisals of its fleets, a published aircraft pricing survey and recent transactions involving
sales of similar aircraft, adjusted based on estimates of maintenance status and to consider the impact of recent
industry events on these values. As a result of the write down of these aircraft to fair value, as well as the
acceleration of the retirement dates, depreciation expense related to these assets is expected to decrease by
approximately $141 million on an annualized basis.
As part of these capacity reductions, the Company expects to ground over the next twelve months its leased
Airbus A300 aircraft prior to lease expiration. As of December 31, 2008, the Company estimates that it will incur
approximately $130 million in net present value of future lease payments and lease return costs related to the
grounding of the leased A300 fleet, of which $33 million was incurred in 2008 as four aircraft were removed from
service. The remaining charges will be incurred over the next three quarters as the aircraft are removed from
service. These expected future charges do not yet consider potential sublease contracts or similar arrangements
with respect to the leased Airbus 300 aircraft, which could offset a portion of the charges, as significant contract
amendments are required in order to execute any sublease agreements. The Company estimates that virtually all
of these charges will result in future cash expenditures.
In the fourth quarter of 2007, the Company permanently grounded and held for disposal 24 McDonnell Douglas
MD-80 airframes and certain other equipment, all of which had previously been in temporary storage. Of these 24
aircraft, 12 are owned by the Company, seven are accounted for as capital leases and five are accounted for as
operating leases. Primarily as a result of the retirement, the Company incurred a charge of $63 million, included in
Special charges expenses in the consolidated statement of operations, to accrue future lease commitments and
write-down the aircraft frames to their fair values. In determining the fair values of these aircraft, the Company
considered recent transactions involving inventory for the aircraft.
Employee Charges
In conjunction with the capacity reductions announced in May 2008, the Company reduced its workforce
commensurate with the announced system-wide capacity reductions. This reduction in workforce was
accomplished through various measures, including voluntary programs, part-time work schedules, furloughs in
accordance with collective bargaining agreements, and other reductions. As a result of this reduction in workforce,
the Company incurred employee charges of approximately $71 million for severance related costs in accordance
with Statement of Financial Accounting Standards No. 112, “Employers Accounting for Postemployment Benefits”
(SFAS 112), based on probable expectations of involuntary terminations. The Company does not expect
remaining charges related to the reduction in workforce to be significant.