American Airlines 2008 Annual Report Download - page 67

Download and view the complete annual report

Please find page 67 of the 2008 American Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 114

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114

64
4. Commitments, Contingencies and Guarantees (Continued)
American has capacity purchase agreements with two regional airlines, Chautauqua Airlines, Inc. (Chautauqua)
and Trans States Airlines, Inc. (collectively the AmericanConnection® carriers) to provide Embraer EMB-140/145
regional jet services to certain markets under the brand “AmericanConnection”. Under these arrangements, the
Company pays the AmericanConnection® carriers a fee per block hour to operate the aircraft. The block hour fees
are designed to cover the AmericanConnection® 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 AmericanConnection® regional jets. Minimum payments under the contracts
are $68 million in 2009, $120 million over the years 2010 and 2011 and $17 million in 2012 and 2013. 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.
In certain transactions, including certain aircraft financing leases and loans and derivative transactions, the
lessors, lenders and/or other parties have rights to terminate the transaction based on changes in foreign tax law,
illegality or certain other events or circumstances. In such a case, the Company may be required to make a lump
sum payment to terminate the relevant transaction.
In its aircraft financing agreements, the Company generally indemnifies the financing parties, trustees acting on
their behalf and other relevant parties against liabilities (including certain taxes) resulting from the financing,
manufacture, design, ownership, operation and maintenance of the aircraft regardless of whether these liabilities
(or taxes) relate to the negligence of the indemnified parties.
The Company has general indemnity clauses in many of its airport and other real estate leases where the
Company as lessee indemnifies the lessor (and related parties) against liabilities related to the Company’s use of
the leased property. Generally, these indemnifications cover liabilities resulting from the negligence of the
indemnified parties, but not liabilities resulting from the gross negligence or willful misconduct of the indemnified
parties. In addition, the Company provides environmental indemnities in many of these leases for contamination
related to the Company’s use of the leased property.
Under certain contracts with third parties, the Company indemnifies the third party against legal liability arising out
of an action by the third party, or certain other parties. The terms of these contracts vary and the potential
exposure under these indemnities cannot be determined. Generally, the Company has liability insurance
protecting the Company for the obligations it has undertaken under these indemnities.