American Airlines 1998 Annual Report Download - page 37

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AIRCRAFT FUEL The Company’s earnings are affected by
changes in the price and availability of aircraft fuel. In order
to provide a measure of control over price and supply, the
Company trades and ships fuel and maintains fuel storage
facilities to support its flight operations. The Company also
manages the price risk of fuel costs primarily utilizing fuel
swap and fuel option contracts. Market risk is estimated as a
hypothetical 10 percent increase in the December 31, 1998
and 1997 cost per gallon of fuel. Based on projected 1999
fuel usage, such an increase would result in an increase to
aircraft fuel expense of approximately $73 million in 1999,
net of fuel hedge instruments outstanding at December 31,
1998. Comparatively, based on projected 1998 fuel usage,
such an increase would have resulted in an increase to air-
craft fuel expense of approximately $110 million in 1998, net
of fuel hedge instruments outstanding at December 31, 1997.
The change in market risk is due primarily to the Company
having more hedge instruments outstanding at December 31,
1998 as compared to December 31, 1997. As of December
31, 1998, the Company had hedged approximately 48 per-
cent of its 1999 fuel requirements and approximately 19
percent of its 2000 fuel requirements, compared to approxi-
mately 23 percent of its 1998 fuel requirements hedged at
December 31, 1997.
FOREIGN CURRENCY The Company is exposed to the effect
of foreign exchange rate fluctuations on the U.S. dollar
value of foreign currency-denominated operating revenues
and expenses. The Company’s largest exposure comes from
the British pound, Japanese yen, and various Latin and
South American currencies. The Company uses options to
hedge a portion of its anticipated foreign currency-denomi-
nated net cash flows. The result of a uniform 10 percent
strengthening in the value of the U.S. dollar from
December 31, 1998 and 1997 levels relative to each of the
currencies in which the Company has foreign currency
exposure would result in a decrease in operating income of
approximately $22 million and $24 million for the years
ending December 31, 1999 and 1998, respectively, net of
hedge instruments outstanding at December 31, 1998 and
1997, due to the Company’s foreign-denominated revenues
exceeding its foreign-denominated expenses. This sensitivity
analysis was prepared based upon projected 1999 and 1998
foreign currency-denominated revenues and expenses as of
December 31, 1998 and 1997. Furthermore, this calculation
assumes that each exchange rate would change in the same
direction relative to the U.S. dollar.
INTEREST The Company’s earnings are also affected by
changes in interest rates due to the impact those changes
have on its interest income from cash and short-term invest-
ments and its interest expense from variable-rate debt
instruments. The Company has variable-rate debt instru-
ments representing approximately six percent and five
percent, respectively, of its total long-term debt, and interest
rate swaps on notional amounts of approximately $1.1 bil-
lion and $1.4 billion, respectively, at December 31, 1998
and 1997. If interest rates average 10 percent more in 1999
than they did during 1998, the Company’s interest expense
would increase by approximately $6 million and interest
income from cash and short-term investments would
increase by approximately $12 million. In comparison, at
December 31, 1997, the Company estimated that if interest
rates averaged 10 percent more in 1998 than they did dur-
ing 1997, the Company’s interest expense would have
increased by approximately $10 million and interest income
from cash and short-term investments would have increased
by approximately $14 million. These amounts are deter-
mined by considering the impact of the hypothetical interest
rates on the Company’s variable-rate long-term debt, interest
rate swap agreements, and cash and short-term investment
balances at December 31, 1998 and 1997.
Market risk for fixed-rate long-term debt is estimated
as the potential increase in fair value resulting from a hypo-
thetical 10 percent decrease in interest rates, and amounts
to approximately $96 million and $105 million as of
December 31, 1998 and 1997, respectively. The fair values
of the Company’s long-term debt were estimated using
AMR CORPORATION