American Express 2009 Annual Report Download - page 62

2009 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
to the Company’s reengineering initiatives in 2009 and 2008
as previously discussed. Expenses in 2008 of $2.5 billion were
$284 million or 13 percent higher than 2007, due to increased
salaries and employee benefits and other operating expenses,
partially offset by a decrease in marketing and promotion
expenses.
Marketing and promotion expenses decreased $32 million
or 6 percent to $521 million in 2009 compared to 2008,
reflecting lower brand and merchant-related marketing costs
during the first nine months of 2009. Marketing and
promotion expenses decreased 7 percent in 2008 to $553
million compared to 2007, reflecting lower brand and other
marketing and promotion expenses as compared to
incremental business-building costs in 2007.
Salaries and employee benefits and other operating
expenses decreased $253 million or 13 percent to $1.7 billion
in 2009 compared to 2008, primarily reflecting the benefits
from the Company’s reengineering initiatives. Salaries and
employee benefits and other operating expenses increased
$326 million or 20 percent to $1.9 billion in 2008 compared
to 2007, primarily due to increased merchant-related reserve
due to the challenging economic environment, 2007 gains
related to the sale of the Company’s merchant-related
operations in Russia, greater salaries and employee benefits
expense, which reflected the expansion of the merchant sales
force and the costs related to the Company’s reengineering
initiatives in 2008 and higher volume-related expenses.
Income Taxes
The effective tax rate was 35 percent in 2009, 33 percent in
2008 and 34 percent in 2007.
CORPORATE & OTHER
Corporate & Other had net income of $297 million, $168
million and $454 million in 2009, 2008 and 2007, respectively.
Net income in 2009 reflected the $372 million and $172
million after-tax income related to the MasterCard and Visa
litigation settlements, respectively, and $135 million of
after-tax income related to the ICBC sale.
In the third quarter of 2009, the Company recorded a $180
million ($113 million after-tax) benefit associated with the
Company’s accounting for a net investment in consolidated
foreign subsidiaries. $135 million ($85 million after-tax) of
this benefit represents the correction of an error related to the
accounting for cumulative translation adjustments in prior
periods. The error resulted in a $60 million ($38 million after-
tax) income overstatement in the second quarter of 2009, a
$135 million ($85 million after-tax) income understatement
in the fourth quarter of 2008 and minimal amounts for all
other periods affected dating back to the third quarter of
2007, when the incorrect accounting originated. Also included
in the $180 million is a non-recurring $45 million ($28
million after-tax) related benefit which was recorded in the
third quarter of 2009 as a result of changes in the fair value of
certain foreign exchange forward contracts that are economic
hedges to foreign currency exposures of net investments in
consolidated foreign subsidiaries. Reengineering costs of $35
million after-tax, $108 million after-tax and $4 million after-
tax, for 2009, 2008 and 2007, respectively, primarily related to
the Company’s reengineering initiatives previously discussed.
Net income in 2008 reflected the $186 million and
$172 million after-tax income related to the MasterCard
and Visa litigation settlements, respectively, offset by a
$19 million after-tax charge primarily relating to the ongoing
AEB operations retained by the Company in the first quarter
of 2008.
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, and a $31 million after-tax charge for the contribution
to the American Express Charitable Fund.
EXPOSURE TO AIRLINE INDUSTRY
The Company has multiple co-brand relationships and
rewards partners, of which airlines are one of the most
important and valuable. The Company’s largest airline
co-brand is Delta Air Lines (Delta) and this relationship
includes exclusive co-brand credit card partnerships and
other arrangements, including Membership Rewards,
merchant acceptance and travel. 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. Refer to Note 8 to the Consolidated
Financial Statements for further discussion of prepaid miles
acquired from Delta.
Over the last couple of years, there were a significant
number of airline bankruptcies and liquidations, driven in
part by volatile fuel costs and weakening economies around
the world. 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 because volumes generated by that airline
are typically shifted to other participants in the industry that
accept the Company’s card products. The Company’s
exposure to business and credit risk in the airline industry is
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”.
The Company mitigates this risk by delaying payment to the
airlines with deteriorating financial situations, thereby
increasing cash withheld to protect the Company in the event
the airline is liquidated. To date, the Company has not
experienced significant losses from airlines that have ceased
operations.
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