American Airlines 2002 Annual Report Download - page 47

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45
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 investments, and its interest expense from variable-rate debt
instruments. The Company’s largest exposure with respect to variable-rate debt comes from changes in the
London Interbank Offered Rate (LIBOR). The Company has variable-rate debt instruments representing
approximately 43 percent and 35 percent of its total long-term debt at December 31, 2002 and 2001, respectively,
and interest rate swaps on notional amounts of approximately $138 million and $148 million, respectively, at
December 31, 2002 and 2001. If the Company’s interest rates average 10 percent more in 2003 than they did at
December 31, 2002, the Company’s interest expense would increase by approximately $15 million and interest
income from cash and short-term investments would increase by approximately $5 million. In comparison, at
December 31, 2001, the Company estimated that if interest rates averaged 10 percent more in 2002 than they did
at December 31, 2001, 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 $9 million. These
amounts are determined 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, 2002 and 2001.
Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value resulting from a
hypothetical 10 percent decrease in interest rates, and amounts to approximately $395 million and $318 million as
of December 31, 2002 and 2001, respectively. The change in market risk is due primarily to the increase in the
Company’s fixed-rate long-term debt during 2002. The fair values of the Company’s long-term debt were
estimated using quoted market prices or discounted future cash flows based on the Company’s incremental
borrowing rates for similar types of borrowing arrangements.
Other In addition, the Company holds investments in certain other entities which are subject to market risk.
However, the impact of such market risk on earnings is not significant due to the immateriality of the carrying value
and the geographically diverse nature of these holdings.