American Airlines 2002 Annual Report Download - page 46

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44
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitive Instruments and Positions
The risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss
arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed
below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on
overall economic activity, nor do they consider additional actions management may take to mitigate the
Company’s exposure to such changes. Actual results may differ. See Note 9 to the consolidated financial
statements for accounting policies and additional information.
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
by using jet fuel, heating oil, and crude swap and option contracts. Market risk is estimated as a hypothetical 10
percent increase in the December 31, 2002 and 2001 cost per gallon of fuel. Based on projected 2003 fuel usage,
such an increase would result in an increase to aircraft fuel expense of approximately $205 million in 2003, net of
fuel hedge instruments outstanding at December 31, 2002, and assumes the Company’s fuel hedging program
remains effective under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities”. Comparatively, based on projected 2002 fuel usage, such an increase would
have resulted in an increase to aircraft fuel expense of approximately $169 million in 2002, net of fuel hedge
instruments outstanding at December 31, 2001. The change in market risk is due primarily to the increase in fuel
prices. As of December 31, 2002, the Company had hedged approximately 32 percent of its estimated 2003 fuel
requirements, approximately 15 percent of its estimated 2004 fuel requirements, and approximately four percent of
its estimated 2005 fuel requirements, compared to approximately 40 percent of its estimated 2002 fuel
requirements, 21 percent of its estimated 2003 fuel requirements, and approximately five percent of its estimated
2004 fuel requirements hedged at December 31, 2001. The Company’s credit rating has limited its ability to enter
into certain types of fuel hedge contracts. A further deterioration of its credit rating or liquidity position may
negatively affect the Company’s ability to hedge fuel in the future.
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, Euro, Canadian dollar, Japanese yen and various Latin American currencies.
Previously, the Company used options to hedge a portion of its anticipated foreign currency-denominated ticket
sales. After determining its foreign currency hedge program’s impact was no longer materially beneficial, the
Company discontinued entering into foreign currency hedges. The Company plans to periodically evaluate its
foreign currency hedge position to determine whether its foreign currency hedge program should be reinstated.
The result of a uniform 10 percent strengthening in the value of the U.S. dollar from December 31, 2002 and 2001
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 $65 million and $40 million for the years ending December 31,
2003 and 2002, respectively, net of hedge instruments outstanding at December 31, 2001, due to the Company’s
foreign-denominated revenues exceeding its foreign-denominated expenses. This sensitivity analysis was
prepared based upon projected 2003 and 2002 foreign currency-denominated revenues and expenses as of
December 31, 2002 and 2001.