American Airlines 2012 Annual Report Download - page 55

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Table of Contents
the mileage credits expected to be used for travel on participating airlines based on historical usage patterns and contractual rates.
Revenue earned from selling AAdvantage miles to other companies is recognized in two components. The first component represents the revenue for air
transportation sold and is valued at fair value. This revenue is deferred along with revenue related to expected breakage of sold miles and recognized over the
period the mileage is expected to be used, which is currently estimated to be 28 months. The second revenue component, based on the residual method (for
contracts in existence prior to January 1, 2011) and representing the marketing services sold, is recognized as related services are provided.
The Company’s total liability for future AAdvantage award redemptions for free, discounted or upgraded travel on American, American Eagle or participating
airlines, as well as unrecognized revenue from selling AAdvantage miles to other companies, was approximately $1.7 billion and $1.6 billion at December 31,
2012 and 2011, respectively (and is recorded as a component of Air traffic liability in the consolidated balance sheets), representing 14.4 percent and 15.8
percent of the Company's total current liabilities, at December 31, 2012 and 2011, respectively.
The approximate number of free travel awards used for travel on American and American Eagle was 6.0 million one-way travel awards in 2012 and 6.0
million one-way travel awards in 2011 representing approximately 8.6 percent of passengers boarded in each year. The Company believes displacement of
revenue passengers is minimal given the Company’s load factors, its ability to manage frequent flyer seat inventory, and the relatively low ratio of free award
usage to total passengers boarded.
Changes to the percentage of the amount of revenue deferred, deferred recognition period, percentage of awards expected to be redeemed for travel on
participating airlines, breakage or cost per mile estimates could have a significant impact on the Company’s revenues or incremental cost accrual in the year of
the change as well as in future years.
Stock Compensation
Prior to the Petition Date, the Company granted awards under its various share based payment plans. The Company utilizes option pricing models or fair
value models to estimate the fair value of its awards. Certain awards contain a market performance condition, which is taken into account in estimating the
fair value on the date of grant. The fair value of those awards is calculated by multiplying the stock price on the date of grant by the expected payout
percentage and the number of shares granted. The Company accounts for these awards over the three year term of the award based on the grant date fair value,
provided adequate shares are available to settle the awards. For awards where adequate shares are not anticipated to be available or that only permit settlement
in cash, the fair value is re-measured each reporting period.
The Company believes that all of its stock options will be cancelled as part of its emergence from Chapter 11. It is expected that no future awards will be made
under existing plans. See Note 10 to the consolidated financial statements for additional information regarding the Company’s share based compensation.
Pensions and retiree medical and other benefits
The Company recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension and
postretirement plans in the consolidated balance sheet with a corresponding adjustment to Accumulated other comprehensive income (loss).
The Company’s pension and other postretirement benefit costs and liabilities are calculated using various actuarial assumptions and methodologies. The
Company uses certain assumptions including, but not limited to, the selection of the: (i) discount rate; (ii) expected return on plan assets; and (iii) expected
health care cost trend rate and, starting in 2007 (iv) the estimated age of pilot retirement (as discussed below).
These assumptions as of December 31 were:
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