American Express 2007 Annual Report Download - page 63

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
higher marketing and promotion expenses. Expenses in 2007 and
2006 included $6 million and $8 million of reengineering costs,
respectively, primarily related to international establishment
services. Expenses in 2006 of $2.1 billion were $123 million
or 6 percent higher than 2005, primarily due to higher human
resources and other operating expenses, offset by a decrease in
marketing and promotion expenses.
Marketing and promotion expenses increased $77 million
or 15 percent in 2007 to $595 million, reflecting an increase
in brand, merchant, and partner-related advertising costs.
Marketing and promotion expenses decreased 14 percent in
2006 to $518 million, reflecting a reduction in brand-related
advertising costs.
Human resources and other operating expenses of $1.7
billion in 2007 increased $116 million or 7 percent, reflecting
higher human resources and volume-related expenses, partially
offset by the $5 million pension-related gain discussed
previously. Human resources and other operating expenses also
reflect the $27 million gain related to the sale of the Company’s
merchant-related activities in Russia and the 2006 adjustment
of the amortization of an intangible asset relating to an overseas
joint venture, partially offset by the $25 million gain in 2006
related to the sale of the Company’s merchant-related activities
in Brazil.
Provisions for Losses
Provisions for losses in 2007 of $44 million decreased $45 million
or 51 percent due to a reduction in merchant-related reserves,
primarily related to airlines. Provisions for losses in 2006 were
35 percent higher than 2005 due to higher merchant-related
provisions.
Income Taxes
The effective tax rate was 34 percent in 2007 and 2006 and
35 percent in 2005. The 2007 effective tax rate reflected $22
million of the tax benefits previously discussed.
CORPORATE & OTHER
Corporate & Other had net income of $376 million and net
expense of $140 million in 2007 and 2006, respectively, and net
income of $17 million in 2005. Net income in 2007 reflected
the $700 million after-tax gain resulting from the initial $1.13
billion due March 31, 2008, from Visa as part of the litigation
settlement. This was partially offset by a $46 million after-tax
litigation related charge, a $57 million after-tax charge related
to the reclassification of the AEIDC investment portfolio
from Available-for-Sale to the Trading investment category
as a result of the related AEB sale agreement’s impact on the
holding period for these investments and the sale of certain
AEIDC securities, and a $31 million after-tax charge for the
contribution to the American Express Charitable Fund. The
net expenses in 2007 and 2006 included $4 million after-tax
and $20 million after-tax, respectively, of reengineering costs.
Net expenses in 2006 also included the $42 million after-tax
gain related to the rebalancing of the Travelers Cheque and
Gift Card investment portfolio previously discussed. Net
income in 2005 reflected the $73 million after-tax benefit from
the September 11, 2001-related insurance claims.
EXPOSURE TO AIRLINE INDUSTRY
Many industry analysts and some carriers have indicated that
there could be significant consolidation in the airline industry
in 2008, particularly in the United States. The Company would
not expect consolidation to have any significant effect on its
merchant relationships with the airlines. However, airlines are
also some of the most important and valuable partners in the
Company’s Membership Rewards program. If a participating
airline merged with an airline that did not participate in
Membership Rewards, the combined airline would have to
determine whether or not to continue participation. Similarly, if
one of the Company’s co-brand airline partners merged with an
airline that had a competing co-brand card, the combined airline
would have to determine which co-brand cards it would offer. If
a surviving airline determined to withdraw from Membership
Rewards or to cease offering an American Express co-brand
card, the Company’s business could be adversely affected. The
Company has multiple co-brand relationships and rewards
partners. The Company’s largest airline co-brand partner is
Delta Air Lines (Delta). American Express’ Delta SkyMiles
Credit Card co-brand portfolio accounts for approximately 5
percent of the Company’s worldwide billed business and less
than 15 percent of worldwide cardmember lending receivables.
Historically, the Company has not experienced significant
revenue declines when a particular airline scales back or ceases
operations due to a bankruptcy or other financial challenges.
This is because volumes generated by that airline are typically
shifted to other participants in the industry that accept the
Company’s card products. Nonetheless, the Company is exposed
to business and credit risk in the airline industry primarily
through business arrangements where the Company has
remitted payment to the airline for a cardmember purchase of
tickets that have not yet been used or “flown.” In the event that
the cardmember is not able to use the ticket and the Company,
based on the facts and circumstances, credits the cardmember
for the unused ticket, a potential credit exposure is created for
the Company. This credit exposure is disclosed in Note 13 to
the Consolidated Financial Statements. Historically, even for
an airline that is operating under bankruptcy protection, this
type of exposure has not generated any significant losses for the
Company. The Company’s goal in these distressed situations is
to hold sufficient cash over time to ensure that upon liquidation,
the cash held is equivalent to the credit exposure related to any
unused tickets.
As part of Delta’s decision to file for protection under
Chapter 11 of the Bankruptcy Code during 2005, the
Company lent funds to Delta as part of Delta’s post-petition,
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