AIG 2011 Annual Report Download - page 189

• the risk of non-performance by lessees;
• the risk that aircraft and related assets cannot be disposed of at the time and in a manner desired; and
• the risk of losses on sales or impairment charges and fair value adjustments on older aircraft.
The airline industry is sensitive to changes in economic conditions and is cyclical and highly competitive.
Airlines and related companies may be affected by political or economic instability, terrorist activities, changes in
national policy, competitive pressures, fuel prices and shortages, labor stoppages, pilot shortages, insurance costs,
recessions, health concerns and other political or economic events adversely affecting world or regional trading
markets.
ILFC’s revenues and pre-tax income may be adversely affected by the volatile competitive environment in which
its customers operate. ILFC is exposed to pre-tax loss and liquidity strain through non-performance of aircraft
lessees, through owning aircraft which it may be unable to sell or re-lease at acceptable rates at lease expiration,
and, in part, through committing to purchase aircraft which it may be unable to lease.
As part of its ongoing fleet strategy, ILFC may pursue the sale or part-out of aircraft while balancing the need
for funds with the long-term value of holding aircraft and other financing alternatives. Significant uncertainties
could exist as to the aircraft comprising any actual sale portfolio, the terms of any sale portfolio (including price),
and whether any portfolio sale will be approved. See Capital Resources and Liquidity — Liquidity of Parent and
Subsidiaries — Aircraft Leasing herein for further discussion.
To date ILFC manages the risk of nonperformance by its lessees with security deposit requirements,
repossession rights, overhaul requirements and close monitoring of industry conditions through its marketing force.
More than 94 percent of ILFC’s lease revenue came from non-U.S. carriers, and its fleet continues to be in high
demand from such carriers.
ILFC’s management formally reviews regularly, and no less frequently than quarterly, issues affecting ILFC’s
fleet, including events and circumstances that may cause impairment of aircraft values. Management evaluates
aircraft in the fleet as necessary based on these events and circumstances. As new and more fuel-efficient aircraft
enter the marketplace and negatively affect the demand for older aircraft, lease rates on older aircraft may
deteriorate and ILFC may incur additional losses on sales or record impairment charges and fair value
adjustments. ILFC recognized asset impairment charges and fair value adjustments related to its fleet in 2011,
2010 and 2009 of $1.7 billion, $1.6 billion and $51 million, respectively.
Other Operations
Global Capital Markets
The active wind-down of the AIGFP derivatives portfolio was completed by the end of the second quarter of
2011. As a consequence of its wind-down strategy, AIGFP is entering into new derivative transactions only to
hedge its current portfolio. Prior to the wind-down, AIGFP engaged as principal in a wide variety of financial
transactions, including standard and customized financial products involving commodities, credit, currencies,
energy, equities and interest rates.
Historically, AIGFP derived a significant portion of its revenues from hedged financial positions entered into in
connection with counterparty transactions. Prior to the wind-down, AIGFP also participated as a dealer in a wide
variety of financial derivatives transactions.
The senior management of AIG defines the policies and establishes general operating parameters for AIGFP’s
operations. AIG’s senior management has established various oversight committees to monitor on an ongoing
basis the various financial market, operational and credit risk attendant to AIGFP’s operations. The senior
management of AIGFP reports the results of its operations to and reviews future strategies with AIG’s senior
management.
AIGFP actively manages its exposures to limit potential economic losses, and in doing so, AIGFP must
continually manage a variety of exposures including credit, market, liquidity, operational and legal risks.
AIG 2011 Form 10-K 175