American Airlines 2012 Annual Report Download - page 75

Table of Contents
which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Company’s operations and estimated
salvage values.
Equipment and Property The provision for depreciation of operating equipment and property is computed on the straight-line method applied to each unit of
property, except that major rotable parts, avionics and assemblies are depreciated on a group basis. The depreciable lives used for the principal depreciable
asset classifications are:
Depreciable Life
American jet aircraft and engines 20 - 30 years
Other regional aircraft and engines 16 - 20 years
Major rotable parts, avionics and assemblies Life of equipment to which applicable
Improvements to leased flight equipment Lesser of remaining lease term or expected useful life
Buildings and improvements (principally on leased land) 5 - 30 years or term of lease, including estimated renewal options
when renewal is economically compelled at key airports
Furniture, fixtures and other equipment 3 - 10 years
Capitalized software 5 - 10 years
Residual values for aircraft, engines, major rotable parts, avionics and assemblies are generally five to ten percent, except when guaranteed by a third party for
a different amount.
Equipment and property under capital leases are amortized over the term of the leases or, in the case of certain aircraft, over their expected useful lives. Lease
terms vary but are generally six to 25 years for aircraft and seven to 40 years for other leased equipment and property.
Regional Affiliates Revenue from ticket sales is generally recognized when service is provided. Regional Affiliates revenues for flights connecting to American
flights are based on industry standard proration agreements.
Passenger Revenue Passenger ticket sales are initially recorded as a component of Air traffic liability. Revenue derived from ticket sales is recognized at the
time service is provided. However, due to various factors, including the complex pricing structure and interline agreements throughout the industry, certain
amounts are recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized, including
breakage. These estimates are generally based upon the evaluation of historical trends, including the use of regression analysis and other methods to model the
outcome of future events based on the Company’s historical experience, and are recorded at the scheduled time of departure.
Various taxes and fees assessed on the sale of tickets to end customers are collected by the Company as an agent and remitted to taxing authorities. These taxes
and fees have been presented on a net basis in the accompanying consolidated statement of operations and recorded as a liability until remitted to the
appropriate taxing authority.
Frequent Flyer Program The estimated incremental cost of providing free travel awards is accrued for mileage credits earned by using American’s service
that are expected to be redeemed in the future. American also accrues a frequent flyer liability for the mileage credits that are expected to be used for travel on
participating airlines based on historical usage patterns and contractual rates. American sells mileage credits and related services to companies participating in
its frequent flyer program. The portion of the revenue related to the sale of mileage credits, representing the revenue for air transportation sold, is valued at fair
value and is deferred and amortized over 28 months, which approximates the expected period over which the mileage credits are used. Breakage of sold miles
is recognized over the estimated period of usage. The remaining portion of the revenue, representing the marketing services sold and administrative costs
associated with operating the AAdvantage program, is recognized upon sale as a component of Other revenues, as the related services have been 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 was approximately $1.7 billion (and is recorded as a component of Air traffic liability
on the accompanying consolidated balance sheets) at December 31, 2012 and $1.6 billion as of December 31, 2011.
Income Taxes The Company generally believes that the positions taken on previously filed income tax returns are more likely than not to be sustained by the
taxing authorities. The Company has recorded income tax and related interest liabilities where the Company believes its position may not be sustained or where
the full income tax benefit will not be recognized. Thus, the effects of potential income tax benefits resulting from the Company’s unrecognized tax positions
are not reflected in the tax balances of the financial statements. Recognized and unrecognized tax positions are reviewed and adjusted as events occur that affect
the Company’s judgment about the recognizability of income tax benefits, such as lapsing of applicable statutes of limitations, conclusion of tax audits,
release of administrative guidance, or rendering of a court decision affecting a particular tax position.
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