American Airlines 1998 Annual Report Download - page 49

47
amount payable to or receivable from counterparties is
included in current liabilities or assets. The fair values of the
swap agreements are not recognized in the financial state-
ments. Gains and losses on terminations of interest rate
swap agreements are deferred as an adjustment to the carry-
ing amount of the outstanding obligation and amortized as
an adjustment to interest expense related to the obligation
over the remaining term of the original contract life of the
terminated swap agreement. In the event of the early extin-
guishment of a designated obligation, any realized or
unrealized gain or loss from the swap would be recognized
in income coincident with the extinguishment.
The following table indicates the notional amounts
and fair values of the Company’s interest rate swap agree-
ments (in millions):
December 31,
1998 1997
Notional Fair Notional Fair
Amount Value Amount Value
Interest rate swap agreements $1,054 $ 38 $1,410 $ 12
The fair values represent the amount the Company
would receive if the agreements were terminated at
December 31, 1998 and 1997, respectively.
At December 31, 1998, the weighted-average
remaining life of the interest rate swap agreements in effect
was 4.2 years. The weighted-average floating rates and
fixed rates on the contracts outstanding were:
December 31,
1998 1997
Average floating rate 5.599% 5.844%
Average fixed rate 6.277% 5.901%
Floating rates are based primarily on LIBOR and
may change significantly, affecting future cash flows.
FUEL PRICE RISK MANAGEMENT American enters into
fuel swap and option contracts to protect against increases
in jet fuel prices. Under the fuel swap agreements, American
receives or makes payments based on the difference
between a fixed price and a variable price for certain fuel
commodities. Under the fuel option agreements, American
pays a premium to cap prices at a fixed level. The changes
in market value of such agreements have a high correlation
to the price changes of the fuel being hedged. Gains or
losses on fuel hedging agreements are recognized as a com-
ponent of fuel expense when the underlying fuel being
hedged is used. Any premiums paid to enter into option
contracts are recorded as a prepaid expense and amortized
to fuel expense over the respective contract periods. Gains
and losses on fuel hedging agreements would be recognized
immediately should the changes in the market value of the
agreements cease to have a high correlation to the price
changes of the fuel being hedged. At December 31, 1998,
American had fuel hedging agreements with broker-dealers
on approximately two billion gallons of fuel products,
which represents approximately 48 percent of its expected
1999 fuel needs and approximately 19 percent of its
expected 2000 fuel needs. The fair value of the Company’s
fuel hedging agreements at December 31, 1998, represent-
ing the amount the Company would pay to terminate the
agreements, totaled $108 million.
FOREIGN EXCHANGE RISK MANAGEMENT To hedge
against the risk of future exchange rate fluctuations on a
portion of American’s foreign cash flows, the Company
enters into various currency put option agreements on a
number of foreign currencies. The option contracts are
denominated in the same foreign currency in which the
projected foreign cash flows are expected to occur. These
contracts are designated and effective as hedges of probable
quarterly foreign cash flows for various periods through
December 31, 1999, which otherwise would expose the
Company to foreign currency risk. Realized gains on the
currency put option agreements are recognized as a compo-
nent of passenger revenues. At December 31, 1998, the
notional amount related to these options totaled approxi-
mately $597 million and the fair value, representing the
amount AMR would receive to terminate the agreements,
totaled approximately $10 million.
The Company has entered into Japanese yen currency
exchange agreements to effectively convert certain lease
obligations into dollar-based obligations. Changes in the
value of the agreements due to exchange rate fluctuations
AMR CORPORATION