What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-17 compared with 2020-02-19 · 1683 added, 1025 removed, 1787 unchanged (60% of the section changed)

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Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business.

Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of fuel can have a material effect on our costs and liquidity.

Because of the amount of fuel needed to operate our business, even a relatively small increase or decrease in the price of aircraft fuel can have a material effect on our operating results and liquidity.

Market prices for aircraft fuel can be volatile, with market spot prices ranging from a low of approximately $0.37 per gallon to a high of approximately $2.35 per gallon during the period from January 1, 2018 to December 31, 2020.

As of December 31, 2020, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption.

Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors.

We do not currently view the market opportunities to hedge fuel prices as attractive because, among other things, our future fuel needs remain unclear due to uncertainties regarding air travel demand and any hedging would potentially require significant capital or collateral to be placed at risk.

As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices.

Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors.

Based on our 2021 forecasted fuel consumption, we estimate that a one cent per gallon increase in the price of aircraft fuel would increase our 2021 annual fuel expense by $38 million.

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dollar value of foreign currency-denominated transactions.

Our largest exposure comes from the British pound, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real.

Our largest exposure comes from the British pound sterling, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real.

We do not currently have a foreign currency hedge program.

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Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021.

The discontinuation date for submission and publication of rates for certain tenors of USD LIBOR (1-month, 3-month, 6-month, and 12-month) is currently under consultation by the ICE Benchmark Administration (the administrator of LIBOR) and may be extended until June 30, 2023.

It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021.

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While the U.S.

Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S.

dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by treasury securities, we cannot currently predict whether this index will gain widespread acceptance as a replacement for LIBOR.

Federal Reserve, in conjunction with the Alternative Reference Rates Committee, has chosen SOFR as the recommended risk-free reference rate for the U.S.

(calculated based on repurchase agreements backed by treasury securities), we cannot currently predict the extent to which this index will gain widespread acceptance as a replacement for LIBOR.

It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere.

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We have audited the accompanying consolidated balance sheets of American Airlines Group Inc.

and subsidiaries (the Company) as of December 31, 2019 and 2018 , the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity (deficit) for each of the years in the three-year period ended December 31, 2019 , and the related notes (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholders’ equity (deficit) for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S.

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 17, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2018 due to the modified retrospective adoption of Accounting Standards Update 2016-02, Leases (Topic 842), as amended.

Basis for Opinion

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of estimated passenger travel revenue

As discussed in Note 1(k) to the consolidated financial statements, the Company recorded passenger travel revenue of $38.8 billion for the year ended December 31, 2019.

Passenger travel revenue includes an estimate for the amount of revenue recognized for tickets that will expire unused in whole or in part.

The percentage of passenger tickets that are expected to expire unused is estimated based on an analysis of the Company’s historical data.

We identified the evaluation of estimated passenger travel revenue as a critical audit matter.

A high degree of auditor judgment was required to assess the underlying assumption made by the Company to develop this estimate.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s passenger revenue recognition process, including controls related to the estimation of the percentage of passenger tickets that are expected to expire unused.

We assessed the Company’s estimate of the percentage of passenger tickets expected to expire unused by comparing previous years’ estimates to the actual percentage of passenger tickets expired unused for the year.

We evaluated the estimated amount of revenue recorded in the current year related to passenger tickets that are expected to expire unused by developing an independent expectation using actual historical ticket expirations.

We compared our independent expectation to that of the Company.

Assessment of the estimated selling price for mileage credits earned through travel

As discussed in Note 1(k) to the consolidated financial statements, the Company applies a relative selling price approach whereby the total amount collected from each applicable passenger ticket sale is allocated between the air transportation and the mileage credits earned.

The mileage credits earned are deferred and recognized in passenger revenue at the time mileage credits are redeemed and transportation is provided.

The Company estimates the selling price of mileage credits earned through travel using an approach based on inputs and assumptions derived from historical data.

Additionally, an adjustment is made to the estimated selling price of mileage credits earned to account for the estimate of mileage credits not expected to be redeemed.

Estimate of mileage credits not expected to be redeemed

As discussed in Note 1(l) to the consolidated financial statements, the Company’s loyalty program awards mileage credits to passengers for flights on the Company’s airline, flights on partner airlines, or for using the services of other program participants.

The Company accounts for such mileage credits earned using the deferred revenue method, which includes an estimate for mileage credits not expected to be redeemed.

The Company’s loyalty program liability was $9.2 billion as of December 31, 2020 and the associated passenger revenue for mileage credits redeemed for travel was $1.1 billion for the year ended December 31, 2020.

We identified the assessment of the estimated selling price for mileage credits earned through travel, including the estimated number of mileage credits not expected to be redeemed, as a critical audit matter.

A high degree of auditor judgment was required to evaluate the historical data used to develop the estimate.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s loyalty program accounting process, including controls related to the estimation of the selling price for mileage credits earned through travel.

We evaluated that the Company’s methodology used to develop the estimated selling price of mileage credits earned through travel, including estimated mileage credits not expected to be redeemed, was consistent with that of historical periods.

We performed sensitivity analyses over the estimated selling price of mileage credits earned through travel, including estimated mileage credits not expected to be redeemed.

We assessed the results of the sensitivity analyses to the Company’s recorded amount of loyalty program liability and the associated passenger revenue.

We compared the Company’s estimate of mileage credits not expected to be redeemed to that of other airlines within the industry.

We identified the assessment of the estimated number of mileage credits not expected to be redeemed as a critical audit matter.

A high degree of auditor judgment was required to evaluate the applicability of historical data used to develop the estimate.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s loyalty program accounting process, including controls related to the estimation of mileage credits not expected to be redeemed.

We assessed the Company’s methodology used to evaluate this estimate and determined it was consistent with historical periods.

We developed an independent expectation of mileage credits not expected to be redeemed, which included consideration of industry and historical information.

We compared the results of our independent expectation to the Company’s recorded amount of loyalty program liability and the associated passenger revenue.

Sufficiency of audit evidence over realizability of operating loss carryforwards

As discussed in Notes 1(i) and 7 to the consolidated financial statements, the Company had $4.0 billion of operating loss carryforwards, which are recorded as deferred tax assets at December 31, 2020.

Deferred tax assets are recognized related to operating loss carryforwards that will reduce future taxable income.

The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all the deferred tax assets, will not be realized.

In evaluating the need for a valuation allowance, management considers the weighting of all available positive and negative evidence, which includes, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, as well as future projections of profitability.

We identified the evaluation of the sufficiency of audit evidence over the realizability of operating loss carryforwards as a critical audit matter.

Evaluating the sufficiency of audit evidence required subjective auditor judgment, and the involvement of tax professionals in order to assess the nature and extent of procedures performed in assessing the realizability of the operating loss carryforwards.

The following are the primary procedures we performed to address this critical audit matter.

We performed risk assessment procedures and applied auditor judgment to determine the nature and extent of procedures to be performed over the income tax accounts and disclosures.

We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s deferred tax asset valuation allowance process, including controls related to the realizability of operating loss carryforwards.

We evaluated positive and negative evidence used in assessing whether the deferred tax assets were more-likely-than-not to be realized in the future, including evaluating the nature, frequency and severity of current and cumulative taxable income or losses, as well as future projections of profitability.

We evaluated the reasonableness of management’s future projections of profitability considering (i) historical profitability of the Company, (ii) consistency with industry data and economic trends, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

We involved tax professionals who assisted in the evaluation of the nature, frequency and severity of current and cumulative taxable income or losses.

Further, we assessed the sufficiency of audit evidence obtained over the realizability of the operating loss carryforwards by evaluating the cumulative results of the audit procedures, qualitative aspects of the Company’s accounting practices, and potential bias in the accounting estimate.

We have served as the Company’s auditor since 2014.

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Year Ended December 31,

2020 2019 2018

Operating revenues:

Passenger $ 14,518 $ 42,010 $ 40,676

Cargo 769 863 1,013

Other 2,050 2,895 2,852

Total operating revenues 17,337 45,768 44,541

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Special items, net ( 657 ) 635 787

Other 2,969 5,087 5,088

Total operating expenses 27,758 42,703 41,885

Operating income

Operating income (loss) ( 10,421 ) 3,065 2,656

Nonoperating income (expense):

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Total nonoperating expense, net ( 1,032 ) ( 809 ) ( 772 )

Income before income taxes

Income tax provision

Earnings per common share:

Income (loss) before income taxes ( 11,453 ) 2,256 1,884

Income tax provision (benefit) ( 2,568 ) 570 472

Net income (loss) $ ( 8,885 ) $ 1,686 $ 1,412

Earnings (loss) per common share:

Basic $ ( 18.36 ) $ 3.80 $ 3.04

Diluted $ ( 18.36 ) $ 3.79 $ 3.03

Weighted average shares outstanding (in thousands):

Basic 483,888 443,363 464,236

Diluted 483,888 444,269 465,660

Cash dividends declared per common share $ 0.10 $ 0.40 $ 0.40

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AMERICAN AIRLINES GROUP INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

Year Ended December 31,

2020 2019 2018

Net income (loss) $ ( 8,885 ) $ 1,686 $ 1,412

Other comprehensive income (loss), net of tax:

Pension, retiree medical and other postretirement benefits ( 772 ) ( 438 ) ( 117 )

Investments — 3 ( 3 )

Total other comprehensive loss, net of tax ( 772 ) ( 435 ) ( 120 )

Total comprehensive income

Total comprehensive income (loss) $ ( 9,657 ) $ 1,251 $ 1,292

See accompanying notes to consolidated financial statements.

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Current assets

Cash $ 245 $ 280

Short-term investments 6,619 3,546

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Operating lease right-of-use assets 8,039 8,737

Goodwill 4,091 4,091

Intangibles, net of accumulated amortization of $ 745 and $ 704 , respectively

Deferred tax asset 3,239 645

Other assets 1,816 1,237

Total other assets 11,175 8,057

Total assets $ 62,008 $ 59,995

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

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Accumulated other comprehensive loss ( 7,103 ) ( 6,331 )

Retained earnings

Retained earnings (deficit) ( 6,664 ) 2,264

Total stockholders' deficit ( 6,867 ) ( 118 )

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Year Ended December 31,

2020 2019 2018

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating activities

Net income (loss) $ ( 8,885 ) $ 1,686 $ 1,412

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization 2,370 2,318 2,159

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Pension and postretirement ( 319 ) ( 178 ) ( 300 )

Deferred income tax provision

Deferred income tax provision (benefit) ( 2,568 ) 560 440

Share-based compensation 91 94 86

Other, net 47 ( 62 ) ( 97 )

Changes in operating assets and liabilities:

Decrease (increase) in accounts receivable

Decrease in accounts receivable 538 73 222

Increase in other assets ( 38 ) ( 373 ) ( 390 )

Increase (decrease) in accounts payable and accrued liabilities ( 626 ) 327 ( 147 )

Increase in air traffic liability

Increase (decrease) in air traffic liability ( 51 ) 469 297

Increase (decrease) in loyalty program liability 580 76 ( 283 )

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Increase (decrease) in other liabilities 823 ( 209 ) 210

Net cash provided by operating activities

Net cash provided by (used in) operating activities ( 6,543 ) 3,815 3,533

Cash flows from investing activities:

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Proceeds from sale of investments 41 — 207

Purchase of equity investment

Other investing activities ( 153 ) ( 86 ) ( 7 )

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Payments on long-term debt and finance leases ( 3,535 ) ( 4,190 ) ( 2,941 )

Proceeds from issuance of equity 2,970 — —

Deferred financing costs ( 93 ) ( 61 ) ( 59 )

Treasury stock repurchases

Treasury stock repurchases and shares withheld for taxes pursuant to employee stock plans ( 173 ) ( 1,097 ) ( 837 )

Dividend payments ( 43 ) ( 178 ) ( 186 )

Other financing activities 88 ( 2 ) ( 3 )

Net cash used in financing activities

Net cash provided by (used in) financing activities 10,994 ( 1,568 ) ( 1,672 )

Net increase (decrease) in cash and restricted cash 109 4 ( 112 )

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Cash and restricted cash at end of year (a)

$ 399 $ 290 $ 286

(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the consolidated balance sheets:

Cash $ 245 $ 280 $ 275

Restricted cash included in restricted cash and short-term investments 154 10 11

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(In millions, except share amounts)

Stock Additional

Capital Accumulated

Comprehensive

Loss Retained

(Deficit) Total

Balance at December 31, 2017 $ 5 $ 5,714 $ ( 5,776 ) $ ( 723 ) $ ( 780 )

Net income — — — 1,412 1,412

Other comprehensive loss, net — — ( 120 ) — ( 120 )

Issuance of 2,166,861 shares of AAG common stock pursuant to

employee stock plans net of shares withheld for cash taxes

Issuance of 1,709,140 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes

— ( 37 ) — — ( 37 )

Purchase and retirement of 16,606,157 shares of AAG common stock

— ( 799 ) — — ( 799 )

Dividends declared on AAG common stock ($ 0.40 per share)

Settlement of single-dip unsecured claims held in Disputed Claims

— — — ( 188 ) ( 188 )

Share-based compensation expense — 86 — — 86

Impact of adoption of Accounting Standards Update (ASU) 2018-02

related to comprehensive income (See Note 1(b))

Impact of adoption of Accounting Standards Update (ASU) 2016-01 related to financial instruments — — — 60 60

Impact of adoption of ASU 2016-02 related to leases — — — 197 197

Balance at December 31, 2018 5 4,964 ( 5,896 ) 758 ( 169 )

Net income — — — 1,686 1,686

Other comprehensive loss, net — — ( 435 ) — ( 435 )

Issuance of 1,709,140 shares of AAG common stock pursuant to

employee stock plans net of shares withheld for cash taxes

Issuance of 1,682,202 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes

— ( 25 ) — — ( 25 )

Purchase and retirement of 34,090,566 shares of AAG common stock

( 1 ) ( 1,095 ) — — ( 1,096 )

Dividends declared on AAG common stock ($ 0.40 per share)

— — — ( 180 ) ( 180 )

Settlement of single-dip unsecured claims held in Disputed Claims Reserve — 7 — — 7

Share-based compensation expense — 94 — — 94

Impact of adoption of ASU 2016-01 related to financial instruments

Impact of adoption of ASU 2016-02 related to leases

Balance at December 31, 2019 4 3,945 ( 6,331 ) 2,264 ( 118 )

Net loss — — — ( 8,885 ) ( 8,885 )

Other comprehensive loss, net — — ( 772 ) — ( 772 )

Issuance of 1,682,202 shares of AAG common stock pursuant to

employee stock plans net of shares withheld for cash taxes

Issuance of PSP1 Warrants (see Note 1(b)) — 63 — — 63

Issuance of Treasury Loan Warrants (see Note 1(b)) — 25 — — 25

Issuance of 1,603,554 shares of AAG common stock pursuant to employee stock plans net of shares withheld for cash taxes

— ( 15 ) — — ( 15 )

Issuance of 129,490,000 shares of AAG common stock pursuant to public stock offerings, net of offering costs

1 1,686 — — 1,687

Issuance of 68,561,487 shares of AAG common stock pursuant to an at-the-market offering, net of offering costs

1 868 — — 869

Equity component of convertible debt issued, net of tax and offering costs — 320 — — 320

Purchase and retirement of 6,378,025 shares of AAG common stock

— ( 145 ) — — ( 145 )

Dividends declared on AAG common stock ($ 0.10 per share)

— — — ( 43 ) ( 43 )

Settlement of single-dip unsecured claims held in Disputed Claims Reserve — 56 — — 56

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The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, as well as pension and retiree medical and other postretirement benefits.

(b) Recent Accounting Pronouncements

Leases (Topic 842) (the New Lease Standard)

The New Lease Standard requires lessees to recognize a lease liability and a right-of-use (ROU) asset on the balance sheet for operating leases.

Accounting for finance leases is substantially unchanged.

The New Lease Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Early adoption is permitted.

In the fourth quarter of 2018, we elected to early adopt the New Lease Standard as of January 1, 2018 using a modified retrospective transition, with the cumulative-effect adjustment to the opening balance of retained earnings as of the effective date (the effective date method).

Under the effective date method, financial results reported in periods prior to 2018 are unchanged.

We also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

The adoption of the New Lease Standard had a significant impact on our consolidated balance sheet due to the recognition of approximately $ 10 billion of lease liabilities with corresponding right-of-use assets for operating leases.

Additionally, we recognized a $ 197 million cumulative effect adjustment credit, net of tax, to retained earnings.

The adjustment to retained earnings was driven principally by sale-leaseback transactions including the recognition of unamortized deferred aircraft sale-leaseback gains.

Prior to the adoption of the New Lease Standard, gains on sale-leaseback transactions were generally deferred and recognized in the income statement over the lease term.

Under the New Lease Standard, gains on sale-leaseback transactions (subject to adjustment for off-market terms) are recognized immediately.

Income Statement – Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This ASU provides the option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings due to the U.S.

federal corporate income tax rate change as a result of H.R.

1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act).

The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previous U.S.

federal corporate income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U.S.

federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations.

This standard is effective for interim and annual reporting periods beginning after December 15, 2018.

In the first quarter of 2019, we adopted this standard retrospectively as of December 22, 2017, the date the 2017 Tax Act was enacted, which resulted in the recast of prior reporting periods.

As a result of the adoption, we reclassified $ 622 million of stranded tax effects principally related to our pension plans from accumulated other comprehensive loss to retained earnings.

(b) Impact of Coronavirus (COVID-19)

COVID-19 has been declared a global health pandemic by the World Health Organization.

COVID-19 has surfaced in nearly all regions of the world, which has driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, testing regimes, closing of borders, “stay at home” orders and business closures.

As a result, we have experienced an unprecedented decline in the demand for air travel, which has resulted in a material deterioration in our revenues.

While our business performed largely as expected in January and February of 2020, a severe reduction in air travel starting in March 2020 resulted in our total operating revenues decreasing approximately 62 % in 2020 as compared to 2019.

While the length and severity of the reduction in demand due to the COVID-19 pandemic is uncertain, our business, operations and financial condition in 2020 were severely impacted.

We have taken aggressive actions to mitigate the effects of the COVID-19 pandemic on our business including deep capacity reductions, structural changes to our fleet, cost reductions, and steps to preserve cash and improve our overall liquidity position.

We remain extremely focused on taking all self-help measures available to manage our business during this unprecedented time, consistent with the terms of the financial assistance we have received from the U.S.

Government under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Capacity Reductions

We have significantly reduced our capacity (as measured by available seat miles), with 2020 flying decreasing by 50 % year-over-year.

Domestic capacity in 2020 was down 41 % year-over-year while international capacity was down 68 % year-over-year.

The demand environment continues to be uncertain as COVID-19 cases have continued to fluctuate in jurisdictions to which we fly and travel restrictions have generally remained in place.

Due to this uncertainty, we will continue to adjust our future capacity to match observed booking trends for future travel and make further adjustments to our capacity as needed.

To better align our network with lower passenger demand, we accelerated the retirement of Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft.

These retirements remove complexity from our operation and bring forward cost savings and efficiencies associated with operating fewer aircraft types.

See Note 1(g) below for further information on the accounting for our fleet retirements.

Due to the inherent uncertainties of the current operating environment, we will continue to evaluate our current fleet and may decide to permanently retire additional aircraft.

In addition, we have placed a number of Boeing 737-800 and certain regional aircraft into temporary storage.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Financial Instruments – Credit Losses (Topic 326)

Cost Reductions

We moved quickly to better align our costs with our reduced schedule.

In aggregate, we estimate that we reduced our 2020 operating and capital expenditures by more than $ 17 billion.

These savings were achieved primarily through capacity reductions.

In addition, we implemented a series of actions, including the accelerated fleet retirements discussed above as well as reductions in maintenance expense and $ 700 million in non-aircraft capital expenditures through less fleet modification work, the elimination of ground service equipment purchases and pausing non-critical facility investments and information technology projects.

We also suspended all non-essential hiring, paused non-contractual pay rate increases, reduced executive and board of director compensation, implemented voluntary leave and early retirement programs and decreased our management and support staff team, including officers, by approximately 30 %.

In total, more than 20,000 team members have opted for an early retirement or long-term partially paid leave.

Additionally, we have made reductions in marketing, contractor, event and training expenses as well as consolidated space at airport facilities.

Due to the effects of the COVID-19 pandemic, we involuntarily furloughed certain team members starting October 1, 2020, and subsequently recalled the team members effective December 1, 2020 covered by the financial assistance provided pursuant to the payroll support program (PSP2) established under Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) (see Note 18 for further information).

As of December 31, 2020, we had $ 14.3 billion in total available liquidity, consisting of $ 6.9 billion in unrestricted cash and short-term investments, $ 7.0 billion in an undrawn term loan facility under the CARES Act and a total of $ 446 million in undrawn short-term revolving and other facilities.

During 2020, we completed the following financing transactions (see Note 5 for further information):

• refinanced the $ 1.2 billion 2014 Term Loan Facility at a lower interest rate and extended the maturity from 2021 to 2027;

• issued $ 500 million in aggregate principal amount of 3.75 % unsecured senior notes due 2025;

• raised $ 1.0 billion from the senior secured delayed draw term loan credit facility (Delayed Draw Term Loan Credit Facility);

• borrowed $ 750 million under the 2013 Revolving Facility, $ 1.6 billion under the 2014 Revolving Facility and $ 450 million under the April 2016 Revolving Facility;

• issued $ 1.0 billion in aggregate principal amount of 6.50 % convertible senior notes due 2025;

• issued 85.2 million shares of AAG common stock at a price of $ 13.50 per share and 44.3 million shares of AAG common stock at a price of $ 12.975 per share pursuant to two underwritten public offerings of common stock for aggregate net proceeds of $ 1.7 billion;

• issued $ 2.5 billion in aggregate principal amount of 11.75 % senior secured notes due 2025 and used the proceeds thereof, in part, to repay the $ 1.0 billion Delayed Draw Term Loan Credit Facility that we borrowed in March 2020;

• issued approximately $ 360 million in special facility revenue bonds, of which $ 47 million was used to fund the redemption of certain outstanding bonds;

• entered into a $ 7.5 billion secured term loan facility with the U.S.

Department of Treasury (Treasury), of which we borrowed $ 550 million (see below for additional information on the Treasury Loan Agreement);

• issued $ 1.2 billion in aggregate principal amount of two series of 10.75 % senior secured notes due 2026 secured by various collateral;

• issued 68.6 million shares of AAG common stock at an average price of $ 12.87 per share pursuant to an at-the-market offering for net proceeds of $ 869 million (see Note 18 for further information);

• raised $ 665 million principally from aircraft sale-leaseback transactions as well as $ 351 million from asset sales primarily related to previously parked aircraft;

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

• received approximately $ 600 million of proceeds from enhanced equipment trust certificates (EETCs) and other aircraft and flight equipment financings, of which $ 17 million was used to repay existing indebtedness.

In addition to the foregoing financings, we received an aggregate of $ 6.0 billion in financial assistance through the payroll support program (PSP1) established under the CARES Act, all of which was received by the end of September 2020.

In connection with our receipt of this financial assistance, AAG issued a promissory note (the PSP1 Promissory Note) to Treasury for $ 1.8 billion in aggregate principal amount and warrants to purchase up to an aggregate of approximately 14.1 million shares (the PSP1 Warrant Shares) of AAG common stock.

See below for further discussion on PSP1.

In January 2021, we received $ 1.5 billion (of an expected total of at least $ 3.0 billion) in financial assistance through PSP2.

In connection with our receipt of this financial assistance, AAG issued a promissory note (the PSP2 Promissory Note) to Treasury for an initial principal sum of approximately $ 433 million and warrants to purchase up to an aggregate of approximately 2.8 million shares (the PSP2 Warrant Shares) of AAG common stock.

See Note 18 for further discussion on PSP2.

Also, we are permitted to, and have, deferred payment of the employer portion of Social Security taxes through the end of 2020 (with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022).

This deferral provided approximately $ 350 million in additional liquidity during 2020.

Additionally, we have suspended our capital return program, including share repurchases and the payment of future dividends for at least the period that the restrictions imposed by the CARES Act and the PSP Extension Law are applicable.

We continue to evaluate future financing opportunities and work with third-party appraisers on valuations of our remaining unencumbered assets.

A significant portion of our debt financing agreements contain covenants requiring us to maintain an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and/or contain loan to value, collateral coverage and/or debt service coverage ratio covenants.

Given the above actions and our current assumptions about the future impact of the COVID-19 pandemic on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, we expect to meet our cash obligations as well as remain in compliance with the debt covenants in our existing financing agreements for the next 12 months based on our current level of unrestricted cash and short-term investments, our anticipated access to liquidity (including via proceeds from financings and funds from government assistance obtained pursuant to the CARES Act and the PSP Extension Law) and projected cash flows from operations.

On April 20, 2020 (the PSP1 Closing Date), American, Envoy Air Inc.

(Envoy), Piedmont Airlines, Inc.

(Piedmont) and PSA Airlines, Inc.

(PSA and together with American, Envoy and Piedmont, the Subsidiaries), entered into a Payroll Support Program Agreement (the PSP1 Agreement) with Treasury, with respect to PSP1 provided pursuant to the CARES Act.

In connection with our entry into the PSP1 Agreement, on the PSP1 Closing Date, AAG also entered into a warrant agreement (the PSP1 Warrant Agreement) with Treasury and issued the PSP1 Promissory Note to Treasury, with the Subsidiaries as guarantors (the Guarantors).

PSP1 Agreement

In connection with PSP1, we are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the PSP1 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the requirement against involuntary furloughs and reductions in employee pay rates and benefits, which expired on September 30, 2020, the requirement that certain levels of commercial air service be maintained and the provisions that prohibit the repurchase of AAG common stock, and the payment of common stock dividends through at least September 30, 2021, as well as those that restrict the payment of certain executive compensation until March 24, 2022.

The PSP1 Agreement also imposes substantial reporting obligations on us.

These provisions were subsequently extended upon our entry into PSP2.

See Note 18 for further discussion on PSP2.

In addition, we have entered into the Treasury Loan Agreement (as defined below) and, as a result, the stock repurchase, dividend and executive compensation restrictions imposed by the Treasury Loan Agreement will remain in place through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid.

See below for additional information on the Treasury Loan Agreement.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Pursuant to the PSP1 Agreement, Treasury provided us financial assistance in an aggregate of approximately $ 6.0 billion.

As partial compensation to the U.S.

Government for the provision of financial assistance under PSP1, AAG issued the PSP1 Promissory Note in an aggregate principal amount of approximately $ 1.8 billion and issued warrants (each a PSP1 Warrant and, collectively, the PSP1 Warrants) to Treasury to purchase up to an aggregate of approximately 14.1 million PSP1 Warrant Shares.

See Note 5 for further information on the PSP1 Promissory Note and below for more information on the PSP1 Warrant Agreement and the PSP1 Warrants.

For accounting purposes, the $ 6.0 billion of aggregate financial assistance we received pursuant to the PSP1 Agreement is allocated to the PSP1 Promissory Note, the PSP1 Warrants and other PSP1 financial assistance (the PSP1 Financial Assistance).

The aggregate principal amount of approximately $ 1.8 billion of the PSP1 Promissory Note was recorded as unsecured long-term debt, and the total fair value of the PSP1 Warrants of $ 63 million, estimated using a Black-Scholes option pricing model, was recorded in stockholders' equity in the consolidated balance sheet.

The remaining amount of approximately $ 4.2 billion of PSP1 Financial Assistance was recognized as a credit to special items, net in the consolidated statement of operations in the second and third quarters of 2020, the period over which the continuation of payment of eligible employee wages, salaries and benefits was required.

PSP1 Warrant Agreement and PSP1 Warrants

As partial compensation to the U.S.

Government for the provision of financial assistance under the PSP1 Agreement, and pursuant to the PSP1 Warrant Agreement, AAG agreed to issue warrants to Treasury to purchase up to an aggregate of approximately 14.1 million PSP1 Warrant Shares of AAG common stock.

The exercise price of the PSP1 Warrant Shares is $ 12.51 per share (which was the closing price of AAG common stock on The Nasdaq Global Select Market on April 9, 2020) subject to certain anti-dilution provisions provided for in the PSP1 Warrants.

Pursuant to the PSP1 Warrant Agreement, on each of the PSP1 Closing Date, May 29, 2020, June 30, 2020, July 30, 2020 and September 30, 2020, AAG issued to Treasury a PSP1 Warrant to purchase up to an aggregate of approximately 6.7 million shares, 2.8 million shares, 2.8 million shares, 1.4 million shares and 0.4 million shares, respectively, of AAG common stock based on the terms described herein.

The PSP1 Warrants do not have any voting rights and are freely transferrable, with registration rights.

Each PSP1 Warrant expires on the fifth anniversary of the date of issuance of such PSP1 Warrant.

The PSP1 Warrants will be exercisable either through net share settlement or cash, at our option.

The PSP1 Warrants were issued solely as compensation to the U.S.

Government related to entry into the PSP1 Agreement.

No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP1 Warrants or will be received upon exercise thereof.

Treasury Loan Agreement

On September 25, 2020 (the Treasury Loan Closing Date), AAG and American entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which provided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $ 5.5 billion.

Subsequently, on October 21, 2020, AAG and American entered into an amendment to the Treasury Loan Agreement, which increased the borrowing amount to up to $ 7.5 billion.

The Treasury Loan Agreement will involve the issuance of additional warrants to purchase up to an aggregate of approximately 60.0 million shares of AAG common stock, assuming the Treasury Term Loan Facility is fully drawn.

As of December 31, 2020, American had borrowed $ 550 million under the Treasury Term Loan Facility, which is scheduled to mature on June 30, 2025, and issued warrants to Treasury to purchase up to an aggregate of approximately 4.4 million shares of AAG common stock.

See Note 5 for further information on the Treasury Loan Agreement and below for more information on the Treasury Loan Warrant Agreement and Treasury Loan Warrants.

Treasury Loan Warrant Agreement and Warrants

In connection with the Treasury Loan Agreement, AAG also entered into a warrant agreement (the Treasury Loan Warrant Agreement) with Treasury.

Pursuant to the Treasury Loan Warrant Agreement, AAG agreed to issue warrants (each a Treasury Loan Warrant and, collectively, the Treasury Loan Warrants) to Treasury to purchase up to an aggregate of approximately 60.0 million shares (the Treasury Loan Warrant Shares) of AAG's common stock based on the $ 7.5 billion commitment amount under the Treasury Term Loan Facility.

The exercise price of the Treasury Loan Warrant Shares is $ 12.51 per share, subject to certain anti-dilution provisions provided for in the Treasury Loan Warrant Agreement.

For accounting purposes, the fair value for the Treasury Loan Warrant Shares is estimated using a Black-Scholes option pricing model and recorded in stockholders' equity with an offsetting debt discount to the Treasury Term Loan Facility in the consolidated balance sheet.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Pursuant to the Treasury Loan Warrant Agreement, on the Treasury Loan Closing Date, AAG issued to Treasury a Treasury Loan Warrant to purchase up to an aggregate of approximately 4.4 million Treasury Loan Warrant Shares based on the terms described herein.

On the date of each additional borrowing under the Treasury Loan Agreement, AAG will issue to Treasury an additional Treasury Loan Warrant for a number of Treasury Loan Warrant Shares equal to 10 % of such borrowing, divided by $ 12.51 , the exercise price of such shares.

The Treasury Loan Warrants do not have any voting rights and are freely transferrable, with registration rights.

Each Treasury Loan Warrant expires on the fifth anniversary of the date of issuance of such Treasury Loan Warrant.

The Treasury Loan Warrants will be exercisable either through net share settlement or cash, at AAG's option.

The Treasury Loan Warrants were issued solely as compensation to the U.S.

Government related to entry into the Treasury Loan Agreement.

No separate proceeds were received upon issuance of the Treasury Loan Warrants or will be received upon exercise thereof.

Measurement of Credit Losses on Financial Instruments

This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates.

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For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset.

This standard is effective for interim and annual reporting periods beginning after December 15, 2019.

While we have not completed our evaluation of the impact of adoption of this standard, we do not expect it to have a material impact on our consolidated financial statements.

We adopted this accounting standard prospectively as of January 1, 2020, and it did not have a material impact on our consolidated financial statements.

Accounting for Convertible Instruments and Contracts In An Entity's Own Equity (the New Convertible Debt Standard)

The New Convertible Debt Standard simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature and for convertible instruments with a beneficial conversion feature.

As a result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features.

Additionally, the New Convertible Debt Standard amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method.

The treasury stock method is no longer available.

Entities may adopt the New Convertible Debt Standard using either a full or modified retrospective approach, and it is effective for interim and annual reporting periods beginning after December 15, 2021.

Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2020.

The New Convertible Debt Standard is applicable to our 6.50 % convertible senior notes due 2025.

We early adopted the New Convertible Debt Standard as of January 1, 2021 using the modified retrospective method to recognize our 6.50 % convertible senior notes as a single liability instrument.

As of January 1, 2021, we recorded a $ 415 million ($ 320 million net of tax) reduction to additional paid-in capital to remove the equity component of the 6.50 % convertible senior notes from our balance sheet and a $ 19 million cumulative effect adjustment credit, net of tax, to retained deficit related to non-cash debt discount amortization recognized in periods prior to adoption resulting in a corresponding reduction of $ 389 million to the debt discount associated with the 6.50 % convertible senior notes.

See Note 5(h) for additional information on our 6.50 % convertible senior notes.

(d) Short-term Investments

Short-term investments are classified as available-for-sale and stated at fair value.

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Unrealized gains and losses are recorded in accumulated other comprehensive loss on our consolidated balance sheets.

(d) Restricted Cash and Short-term Investments

We have restricted cash and short-term investments related primarily to collateral held to support workers’ compensation obligations.

(e) Aircraft Fuel, Spare Parts and Supplies, Net

For investments in an unrealized loss position, we determine whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions.

There have been no credit losses.

(e) Restricted Cash and Short-term Investments

We have restricted cash and short-term investments related primarily to money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at JFK and collateral held to support workers’ compensation obligations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

(f) Aircraft Fuel, Spare Parts and Supplies, Net

Aircraft fuel is recorded on a first-in, first-out basis.

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These items are expensed when used.

(f) Operating Property and Equipment

(g) Operating Property and Equipment

Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or the lease term, whichever is less, using the straight-line method.

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The estimated useful lives for the principal property and equipment classifications are as follows:

Principal Property and Equipment Classification

Estimated Useful Life

Aircraft, engines and related rotable parts

20 – 30 years

Buildings and improvements

Furniture, fixtures and other equipment

Capitalized software

We assess impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired.

An asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the carrying amount of the assets and the net book value of the assets exceeds their estimated fair value.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell.

Principal Property and Equipment Classification Estimated Useful Life

Aircraft, engines and related rotable parts 20 – 30 years

Buildings and improvements 5 – 30 years

Furniture, fixtures and other equipment 3 – 10 years

Capitalized software 5 – 10 years

Total depreciation and amortization expense was $ 2.4 billion, $ 2.6 billion and $ 2.4 billion for the years ended December 31, 2020, 2019 and 2018, respectively.

We assess impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired.

An impairment of an asset or group of assets exists only when the sum of the estimated undiscounted cash flows expected to be generated directly by the assets are less than the carrying value of the assets.

We group assets principally by fleet-type when estimating future cash flows, which is generally the lowest level for which identifiable cash flows exist.

Estimates of future cash flows are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions, including our current fleet plan.

If such assets are impaired, the impairment charge recognized is the amount by which the carrying value of the assets exceed their fair value.

Fair value reflects management’s best estimate including inputs from published pricing guides and bids from third parties as well as contracted sales agreements when applicable.

In 2020, our operations, liquidity and stock price were significantly impacted by decreased passenger demand and government travel restrictions due to the COVID-19 pandemic.

Additionally, we decided to retire certain mainline aircraft earlier than planned, including Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 aircraft as well as certain regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft.

As a result of these events and circumstances, we performed impairment tests for our long-lived assets in the first three quarters of 2020.

As a result of the impairment tests performed, we determined the sum of the estimated undiscounted future cash flows exceeded the carrying value except for the aircraft being retired earlier than planned as discussed above.

For those aircraft and certain related spare parts, we recorded $ 1.5 billion in non-cash special impairment charges reflecting the difference between the carrying values of these assets and their fair values for the year ended December 31, 2020.

At December 31, 2020, prepaid expense and other on the consolidated balance sheet included $ 164 million of these retired aircraft that are expected to be sold in the next year, and other assets on the consolidated balance sheet included $ 401 million of nonoperating retired aircraft.

Due to the inherent uncertainties of the current operating environment, we will continue to evaluate our current fleet (including aircraft in temporary storage) and may decide to permanently retire additional aircraft.

We determine if an arrangement is a lease at inception.

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For real estate, we account for the lease and non-lease components as a single lease component.

(h) Income Taxes

(i) Income Taxes

Income taxes are accounted for under the asset and liability method.

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Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand.

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and liabilities assumed.

Goodwill is not amortized but assessed for impairment annually on October 1 or more frequently if events or circumstances indicate that goodwill may be impaired.

We have one consolidated reporting unit.

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill.

If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill.

If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded.

Based upon our annual assessment, there was no goodwill impairment in 2019 .

The carrying value of the goodwill on our consolidated balance sheets was $ 4.1 billion as of December 31, 2019 and 2018 .

(j) Other Intangibles, Net

Intangible assets consist primarily of domestic airport slots, customer relationships, marketing agreements, international slots and route authorities, airport gate leasehold rights and tradenames.

Definite-Lived Intangible Assets

Definite-lived intangible assets are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the merger with US Airways Group.

We have one reporting unit.

We assess goodwill for impairment annually or more frequently if events or circumstances indicate that the fair value of goodwill may be lower than the carrying value.

Our annual assessment date is October 1.

Goodwill is assessed for impairment by initially performing a qualitative assessment.

If we determine that it is more likely than not that our goodwill may be impaired, we use a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any.

In addition to our annual impairment assessment, we performed interim impairment tests in 2020 on our goodwill as a result of the events and circumstances previously discussed due to the impact of the COVID-19 pandemic on our business.

We performed a quantitative analysis by using a market approach.

Under the market approach, the fair value of the reporting unit was determined based on quoted market prices for equity and the fair value of debt as described in Note 9.

The fair value exceeded the carrying value of the reporting unit, and our goodwill was not impaired.

The carrying value of our goodwill on our consolidated balance sheets was $ 4.1 billion as of December 31, 2020 and 2019.

As discussed above, due to the inherent uncertainties of the current operating environment, we will continue to evaluate our goodwill for events and circumstances that indicate that the fair value of the reporting unit may be lower than the carrying value.

(k) Other Intangibles, Net

Intangible assets consist primarily of certain domestic airport slots and gate leasehold rights, customer relationships, marketing agreements, international slots and route authorities and tradenames.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Definite-Lived Intangible Assets

Definite-lived intangible assets are originally recorded at their acquired fair values, subsequently amortized over their respective estimated useful lives and are assessed for impairment whenever events and circumstances indicate that the assets may be impaired.

The following table provides information relating to our amortizable intangible assets as of December 31, 2020 and 2019 (in millions):

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Marketing agreements 105 105

Tradenames 35 35

Airport gate leasehold rights 137 137

Accumulated amortization ( 745 ) ( 704 )

Total $ 197 $ 238

Certain domestic airport slots and airport gate leasehold rights are amortized on a straight-line basis over 25 years.

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Tradenames are fully amortized.

We recorded amortization expense related to these intangible assets of $ 41 million for both years ended December 31, 2019 and 2018 and $ 44 million for 2017 .

We recorded amortization expense related to these intangible assets of $ 41 million for each of the years ended December 31, 2020, 2019 and 2018.

We expect to record annual amortization expense for these intangible assets as follows (in millions):

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Indefinite-lived intangible assets include certain domestic airport slots and international slots and route authorities.

Indefinite-lived intangible assets are not amortized but instead are assessed for impairment annually on October 1 or more frequently if events or circumstances indicate that the asset may be impaired.

As of December 31, 2019 and 2018 , we had $ 1.8 billion and $ 1.9 billion , respectively, of indefinite-lived intangible assets on our consolidated balance sheets.

Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment to determine whether we believe it is more likely than not that an asset has been impaired.

If we believe impairment has occurred, we then evaluate for impairment by comparing the estimated fair value of assets to the carrying value.

An impairment charge is recognized if the asset’s estimated fair value is less than its carrying value.

Based upon our annual assessment, there were no material indefinite-lived intangible asset impairments in 2019 .

We assess indefinite-lived intangible assets for impairment annually or more frequently if events or circumstances indicate that the fair values of indefinite-lived intangible assets may be lower than their carrying values.

Our annual assessment date is October 1.

Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment.

If we determine that it is more likely than not that our indefinite-lived intangible assets may be impaired, we use a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any.

In addition to our annual impairment assessment, we performed interim impairment tests in 2020 on our indefinite-lived intangible assets as a result of the events and circumstances previously discussed due to the impact of the COVID-19 pandemic on our business.

We performed qualitative impairment tests on our indefinite-lived intangible assets and determined there was no material impairment.

We had $ 1.8 billion of indefinite-lived intangible assets on our consolidated balance sheets at each of December 31, 2020 and 2019.

As discussed above, due to the inherent uncertainties of the current operating environment, we will continue to evaluate our indefinite-lived intangible assets for events and circumstances that indicate that their fair values may be lower than the carrying values.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

(k) Revenue Recognition

(l) Revenue Recognition

The following are the significant categories comprising our reported operating revenues (in millions):

Year Ended December 31,

2020 2019 2018

Passenger revenue:

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Loyalty revenue - travel (1)

1,062 3,179 3,219

Total passenger revenue 14,518 42,010 40,676

Cargo 769 863 1,013

Loyalty revenue - marketing services 1,825 2,361 2,352

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Total operating revenues $ 17,337 $ 45,768 $ 44,541

Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions earned through travel or from co-branded credit card and other partners.

(1) Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions, which were earned from travel or co-branded credit card and other partners.

See “ Loyalty Revenue ” below for further discussion on these mileage credits.

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Year Ended December 31,

2020 2019 2018

Domestic $ 11,765 $ 30,881 $ 29,573

Latin America 1,852 5,047 5,125

654 4,624 4,376

Pacific 247 1,458 1,602

Total passenger revenue $ 14,518 $ 42,010 $ 40,676

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Passenger Revenue

We recognize all revenues generated from transportation on American and our regional flights operated under the brand name American Eagle, including associated baggage fees, ticketing change fees and other inflight services, as passenger revenue when transportation is provided.

We recognize all revenues generated from transportation on American and our regional flights operated under the brand name American Eagle, including associated baggage fees and other inflight services, as passenger revenue when transportation is provided.

Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on our consolidated balance sheets.

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Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Various taxes and fees assessed on the sale of tickets to end customers are collected by us as an agent and remitted to taxing authorities.

These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.

The CARES Act

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

provided for a temporary tax holiday from collecting and remitting certain government ticket taxes for tickets purchased between March 28, 2020 and December 31, 2020.

Loyalty Revenue

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For mileage credits earned by AAdvantage loyalty program members, we apply the deferred revenue method.

In response to the COVID-19 pandemic, we suspended the expiration of mileage credits through June 30, 2021 and eliminated mileage reinstatement fees for canceled award tickets.

Mileage credits earned through travel

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The estimated selling price of mileage credits is determined using an equivalent ticket value approach, which uses historical data, including award redemption patterns by geographic region and class of service, as well as similar fares as those used to settle award redemptions.

The estimated selling price of miles is adjusted for an estimate of miles that will not be redeemed based on historical redemption patterns.

The estimated selling price of miles is adjusted for an estimate of the miles that will not be redeemed using statistical models based on historical redemption patterns to develop an estimate of the likelihood of future redemption.

Given the inherent uncertainty of the current operating environment due to the COVID-19 pandemic, we will continue to monitor redemption patterns and may adjust our estimates in the future.

Mileage credits sold to co-branded credit cards and other partners

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We allocate the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered.

Our most significant partner agreements are our co-branded credit card agreements with Citi and Barclaycard US that we entered into in 2016.

Our most significant partner agreements are our co-branded credit card agreements with Citi and Barclaycard US.

We identified the following revenue elements in these co-branded credit card agreements:

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For the portion of our outstanding mileage credits that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining mileage credits are redeemed.

Our estimates are based on analysis of historical redemptions.

Our estimates use statistical models based on historical redemption patterns to develop an estimate of the likelihood of future redemption.

Cargo Revenue

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Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage sales to co-branded credit card and other partners and other marketing related payments.

Loyalty revenue included in other revenue was $ 2.4 billion for both years ended December 31, 2019 and 2018 and $ 2.1 billion for 2017 .

The accounting and recognition for the loyalty program marketing services are discussed above in “ Loyalty Revenue .” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation-related services.

Loyalty revenue included in other revenue was $ 1.8 billion for the year ended December 31, 2020 and $ 2.4 billion for both 2019 and 2018.

The accounting and recognition for the loyalty program marketing services are discussed above in “ Loyalty

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Revenue .” The remaining amounts included within other revenue relate to airport clubs, advertising and vacation-related services.

Contract Balances

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Air traffic liability 4,757 4,808

Total $ 13,952 $ 13,423

The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded credit card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue).

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As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period.

Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months .

As of December 31, 2019 , our current loyalty program liability was $ 3.2 billion and represents our current estimate of revenue expected to be recognized in the next 12 months based on historical trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.

(2) Mileage credits can be redeemed at any time and generally do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months.

As previously discussed, in response to the COVID-19 pandemic, we suspended the expiration of mileage credits through June 30, 2021 and eliminated mileage reinstatement fees for canceled award tickets.

As of December 31, 2020, our current loyalty program liability was $ 2.0 billion and represents our current estimate of revenue expected to be recognized in the next 12 months based on historical as well as projected trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.

Given the inherent uncertainty of the current operating environment due to the COVID-19 pandemic, we will continue to monitor redemption patterns and may adjust our estimates in the future.

The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel.

The balance in our air traffic liability also fluctuates with seasonal travel patterns.

The contract duration of passenger tickets is one year .

The contract duration of passenger tickets is generally one year .

Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months.

For 2020, $ 2.8 billion of revenue was recognized in passenger revenue that was included in our air traffic liability at December 31, 2019.

With respect to contract receivables, reflected as accounts receivable, net on the accompanying consolidated balance sheets, these primarily include receivables for tickets sold to individual passengers through the use of major credit cards.

In response to the COVID-19 pandemic, we extended the contract duration for certain tickets to December 31, 2021, principally those with travel scheduled from March 1, 2020 through December 31, 2020.

Additionally, we have eliminated change fees for most domestic and international tickets.

As of December 31, 2020, the air traffic liability included approximately $ 2.6 billion of travel credits related to these unused tickets for travel prior to December 31, 2020.

Accordingly, any revenue associated with these tickets will be recognized within the next 12 months.

Given this change in contract duration and uncertainty surrounding the future demand for air travel, our estimates of revenue that will be recognized from the air traffic liability for future flown or unused tickets as well as our estimates of refunds may be subject to variability and differ from historical experience.

Our ticket contract receivables relate to ticket sales to individual passengers primarily through the use of major credit cards and are reflected as accounts receivable, net on the accompanying consolidated balance sheets.

These receivables are short-term, mostly settled within seven days after sale.

Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.

(l) Maintenance, Materials and Repairs

All accounts receivable are reported net of an allowance for

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

credit losses, which have been minimal in the past.

We consider past and future financial and qualitative factors when establishing the allowance for credit losses.

(m) Maintenance, Materials and Repairs

Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms when an obligation exists.

(m) Selling Expenses

(n) Selling Expenses

Selling expenses include credit card fees, commissions, computerized reservations systems fees and advertising.

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Advertising expense was $ 50 million, $ 129 million and $ 128 million for the years ended December 31, 2020, 2019 and 2018, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(n) Share-based Compensation

(o) Share-based Compensation

We account for our share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award.

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See Note 15 for further discussion of share-based compensation.

(o) Foreign Currency Gains and Losses

(p) Foreign Currency Gains and Losses

Foreign currency gains and losses are recorded as part of other income, net within total nonoperating expense, net in our consolidated statements of operations.

For the years ended December 31, 2020, 2019 and 2018, respectively, foreign currency losses were $ 24 million, $ 32 million and $ 55 million.

(p) Other Operating Expenses

Other operating expenses includes costs associated with ground and cargo handling, crew travel, aircraft food and catering, passenger accommodation, airport security, international navigation fees and certain general and administrative expenses.

(q) Regional Expenses

(q) Other Operating Expenses

Other operating expenses includes costs associated with ground and cargo handling, crew travel, aircraft food and catering, aircraft cleaning, passenger accommodation, airport security, international navigation fees and certain general and administrative expenses.

(r) Regional Expenses

Expenses associated with American Eagle operations are classified as regional expenses on our consolidated statements of operations.

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Year Ended December 31,

2020 2019 2018

Aircraft fuel and related taxes $ 821 $ 1,869 $ 1,843

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Capacity purchases from third-party regional carriers (1)

1,054 1,398 1,431

Maintenance, materials and repairs 314 403 340

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Special items, net ( 309 ) 6 6

Other 434 626 593

Total regional expenses $ 4,892 $ 7,501 $ 7,133

In 2019 , 2018 , and 2017 , we recognized $ 590 million , $ 565 million and $ 544 million , respectively, of expense under our capacity purchase agreement with Republic Airline Inc.

(1) In 2020 , 2019, and 2018, we recognized $ 438 million, $ 590 million and $ 565 million, respectively, of expense under our capacity purchase agreement with Republic Airways Inc.

We hold a 25 % equity interest in Republic Airways Holdings Inc.

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Year Ended December 31,

Fleet restructuring expenses (1)

2020 2019 2018

PSP1 Financial Assistance (1)

$ ( 3,710 ) $ — $ —

Fleet impairment (2)

Severance expenses (3)

Labor contract expenses (4)

Mark-to-market adjustments on bankruptcy obligations, net (5)

( 49 ) ( 11 ) ( 76 )

Fleet restructuring expenses (6)

Merger integration expenses (7)

Litigation reserve adjustments — ( 53 ) 45

Mark-to-market adjustments on bankruptcy obligations, net (4)

Severance expenses (5)

Intangible asset impairment (8)

Labor contract expenses

Employee 2017 Tax Act bonus expense (7)

Other operating charges, net

Other operating special items, net ( 18 ) 13 31

Mainline operating special items, net ( 657 ) 635 787

PSP1 Financial Assistance (1)

Fleet impairment (2)

Severance expenses (3)

Other operating special items, net — 6 6

Regional operating special items, net ( 309 ) 6 6

Operating special items, net ( 966 ) 641 793

Debt refinancing and extinguishment charges

Mark-to-market adjustments on equity and other investments, net (9)

Other nonoperating income, net

135 ( 5 ) 104

Debt refinancing, extinguishment and other, net 35 8 9

Nonoperating special items, net 170 3 113

Income tax special items (10)

Impact of the 2017 Tax Act (10)

Income tax special items, net

Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment grounded or expected to be grounded earlier than planned.

Fleet impairment principally includes a non-cash write-down of aircraft related to the planned retirement of our Embraer E190 fleet.

Merger integration expenses included costs associated with integration projects, principally our technical operations, flight attendant, human resources and payroll systems.

Bankruptcy obligations that will be settled in shares of our common stock are marked-to-market based on our stock price.

Severance expenses primarily included costs associated with reductions of management and support staff team members.

Intangible asset impairment includes a non-cash charge to write-off our Brazil route authority as a result of the U.S.-Brazil open skies agreement.

Employee bonus expense included costs related to the $ 1,000 cash bonus and associated payroll taxes granted to mainline employees in recognition of the 2017 Tax Act.

Mark-to-market adjustments on equity and other investments, net primarily relates to net unrealized gains and losses associated with our equity investment in China Southern Airlines Company Limited (China Southern Airlines).

Income tax special items for 2018 included an $ 18 million charge related to an international income tax matter.

(1) PSP1 Financial Assistance represents recognition of financial assistance received from Treasury pursuant to the PSP1 Agreement.

See Note 1(b) for further information.

(2) The 2020 fleet impairment resulted from our decision to retire certain aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic.

Aircraft retired include Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300, Embraer 190, certain Embraer 140 and Bombardier CRJ200 aircraft.

This included a $ 1.5 billion non-cash write-down of mainline and regional aircraft and spare parts and $ 109 million in cash charges primarily for impairment of ROU assets and lease return costs.

See Note 1(g) for further information related to these charges.

The 2019 fleet impairment principally included a non-cash write-down of aircraft related to the retirement of our Embraer 190 fleet.

(3) The 2020 severance expenses included salary and medical costs primarily associated with certain team members who opted in to voluntary early retirement programs offered as a result of reductions to our operation due to the COVID-19 pandemic.

Cash payments related to these charges for the year ended December 31, 2020 were approximately $ 365 million.

The 2019 and 2018 severance expenses primarily included costs associated with reductions of management and support staff team members.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Impact of the 2017 Tax Act includes an $ 823 million non-cash charge to income tax expense to reflect the impact of lower corporate income tax rates on our deferred tax asset and liabilities resulting from the 2017 Tax Act, which reduced the federal corporate income tax rate from 35% to 21%.

Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (EPS) (in millions, except share and per share amounts):

(4) The 2020 labor contract expenses primarily related to one-time charges resulting from the ratification of a new contract with the Transport Workers Union and International Association of Machinists & Aerospace Workers (TWU-IAM Association) for our maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.

(5) Bankruptcy obligations that will be settled in shares of AAG common stock are marked-to-market based on AAG’s stock price.

(6) Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment expected to be retired earlier than planned.

(7) Merger integration expenses included costs associated with integration projects, principally our technical operations, flight attendant, human resources and payroll systems.

(8) Intangible asset impairment included a non-cash charge to write-off our Brazil route authority as a result of the U.S.-Brazil open skies agreement.

(9) Mark-to-market adjustments on equity and other investments, net primarily related to net unrealized gains and losses associated with our equity investment in China Southern Airlines Company Limited (China Southern Airlines) and certain treasury rate lock derivative instruments.

(10) Income tax special items included an $ 18 million charge related to an international income tax matter.

Earnings (Loss) Per Common Share

The following table sets forth the computation of basic and diluted earnings (loss) per common share (EPS) (in millions, except share and per share amounts):

Year Ended December 31,

2020 2019 2018

Net income (loss) $ ( 8,885 ) $ 1,686 $ 1,412

Weighted average common shares outstanding (in thousands) 483,888 443,363 464,236

Net income for purposes of computing diluted EPS

Basic EPS $ ( 18.36 ) $ 3.80 $ 3.04

Net income (loss) for purposes of computing diluted EPS $ ( 8,885 ) $ 1,686 $ 1,412

Share computation for diluted EPS (in thousands):

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Diluted weighted average common shares outstanding 483,888 444,269 465,660

Restricted stock unit awards excluded from the calculation of diluted EPS because inclusion would be antidilutive (in thousands)

Diluted EPS $ ( 18.36 ) $ 3.79 $ 3.03

Securities that could potentially dilute EPS in the future, and which were excluded from the calculation of diluted EPS because inclusion of such shares would be antidilutive, are as follows (in thousands):

Year Ended December 31,

2020 2019 2018

6.50% convertible senior notes 31,882 — —

Restricted stock unit awards 4,584 2,520 1,266

PSP1 Warrants 349 — —

Treasury Loan Warrants 107 — —

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Share Repurchase Programs and Dividends

In April 2018, we announced that our Board of Directors authorized a $ 2.0 billion share repurchase program that will expire on December 31, 2020.

Since July 2014, our Board of Directors has approved seven share repurchase programs aggregating $ 13.0 billion of authority.

As of December 31, 2019 , there was $ 565 million of remaining authority to repurchase shares under our current $ 2.0 billion share repurchase program.

Share repurchases under our repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions.

Any such repurchases that may be made from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors.

We are not obligated to repurchase any specific number of shares and our repurchase of AAG common stock may be limited, suspended or discontinued at any time at our discretion and without prior notice.

Since July 2014, as part of our capital deployment program, our Board of Directors had approved seven share repurchase programs aggregating $ 13.0 billion of authority.

The $ 420 million of remaining authority to repurchase shares under our most recent $ 2.0 billion share repurchase program expired on December 31, 2020.

In connection with our receipt of financial assistance under PSP1 and PSP2, we agreed not to repurchase shares of or make dividend payments in respect of AAG common stock through at least March 31, 2022.

In addition, we have entered into the Treasury Loan Agreement, and, as a result, we are further prohibited from repurchasing shares of AAG common stock and paying dividends on AAG common stock through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid.

In 2020, we repurchased 6.4 million shares of AAG common stock for $ 145 million at a weighted average cost per share of $ 22.77 , all of which were purchased in the first quarter of 2020.

In 2019, we repurchased 33.8 million shares of AAG common stock for $ 1.1 billion at a weighted average cost per share of $ 32.09 .

In 2018, we repurchased 16.6 million shares of AAG common stock for $ 800 million at a weighted average cost per share of $ 48.15 .

In 2017 , we repurchased 33.9 million shares of AAG common stock for $ 1.6 billion at a weighted average cost per share of $ 45.68 .

Since the inception of our share repurchase programs in July 2014 through December 31, 2019, we have repurchased 312.7 million shares of AAG common stock for $ 12.4 billion at a weighted average cost per share of $ 39.76 .

Our Board of Directors declared quarterly cash dividends of $ 0.10 per share totaling $ 43 million, $ 178 million and $ 186 million for 2020, 2019 and 2018, respectively.

1 unchanged sentence

Long-term debt included on our consolidated balance sheets consisted of (in millions):

2013 Credit Facilities, variable interest rate of 3.54%, installments through 2025 (a)

2014 Credit Facilities, variable interest rate of 3.72%, installments through 2021 (a)

April 2016 Credit Facilities, variable interest rate of 3.80%, installments through 2023 (a)

December 2016 Credit Facilities, variable interest rate of 3.74%, installments through 2023 (a)

Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 8.39%, averaging 4.05%, maturing from 2020 to 2032 (b)

Equipment loans and other notes payable, fixed and variable interest rates ranging from 2.99% to 7.31%, averaging 3.45%, maturing from 2020 to 2031 (c)

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 8.00%, maturing from 2020 to 2031

4.625% senior notes, interest only payments until due in March 2020 (d)

5.000% senior notes, interest only payments until due in June 2022 (d)

2013 Term Loan Facility, variable interest rate of 1.90 %, installments through 2025 (a)

$ 1,788 $ 1,807

2013 Revolving Facility, variable interest rate of 2.15 %, due 2024 (a)

2014 Term Loan Facility, variable interest rate of 1.90 %, installments through 2027 (a)

2014 Revolving Facility, variable interest rate of 2.15 %, due 2024 (a)

April 2016 Term Loan Facility, variable interest rate of 2.15 %, installments through 2023 (a)

April 2016 Revolving Facility, variable interest rate of 2.15 %, due 2024 (a)

December 2016 Term Loan Facility, variable interest rate of 2.16 %, installments through 2023 (a)

11.75 % senior secured notes, interest only payments until due in July 2025 (b)

10.75 % senior secured IP notes, interest only payments until due in February 2026 (b)

10.75 % senior secured LGA/DCA notes, interest only payments until due in February 2026 (b)

Treasury Term Loan Facility, variable interest rate of 3.73 %, interest only payments until due June 2025 (c)

Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00 % to 8.39 %, averaging 3.98 %, maturing from 2021 to 2032 (d)

11,013 11,933

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.32 % to 5.83 %, averaging 1.88 %, maturing from 2021 to 2032 (e)

Special facility revenue bonds, fixed interest rates ranging from 5.00 % to 8.00 %, maturing from 2021 to 2036 (f)

28,755 22,606

PSP1 Promissory Note (g)

6.50 % convertible senior notes, interest only payments until due in July 2025 (h)

5.000 % senior notes, interest only payments until due in June 2022 (i)

3.75 % senior notes, interest only payments until due in March 2025 (i)

4.625 % senior notes

3 unchanged sentences

Long-term debt, net of current maturities $ 29,324 $ 20,896

The table below shows the maximum availability under revolving credit facilities, all of which were undrawn, as of December 31, 2019 (in millions):

2013 Revolving Facility

2014 Revolving Facility

April 2016 Revolving Facility

Other Short-term Revolving Facility

Secured financings are collateralized by assets, primarily aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots and certain pre-delivery payments.

As of December 31, 2020, the maximum availability under our Treasury Term Loan Facility and other facilities is as follows (in millions):

Treasury Term Loan Facility $ 6,950

Short-term Revolving and Other Facilities 446

Total $ 7,396

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Pursuant to the Treasury Loan Agreement, at December 31, 2020, American had a $ 7.5 billion Treasury Term Loan Facility of which it has drawn $ 550 million.

In addition, American has an undrawn $ 400 million short-term revolving credit facility it entered into in December 2019, which was set to expire at the end of December 2020 but which has been extended through the beginning of July 2021.

American also currently has approximately $ 46 million of available borrowing base under a cargo receivables facility that was entered into in December 2020.

The December 2016 Credit Facilities provide for a revolving credit facility that may be established thereunder in the future.

Secured financings are collateralized by assets, consisting primarily of aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots and certain pre-delivery payments, as well as certain intellectual property and loyalty program assets.

At December 31, 2020, the maturities of long-term debt are as follows (in millions):

2026 and thereafter 11,104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Total $ 32,770

(a) 2013, 2014, April 2016 and December 2016 Credit Facilities

5 unchanged sentences

In addition, certain lenders party to the 2013 Credit Agreement extended the maturity date of their commitments under the 2013 Revolving Facility to October 2024 from October 2023.

In April 2020, American borrowed $ 750 million under the 2013 Revolving Facility.

The 2013 Revolving Facility bears interest at LIBOR plus a margin of 2.00 % and has a final maturity date of October 2024.

Following the April draw, American had no remaining borrowing capacity available under the 2013 Revolving Facility.

2014 Credit Facilities

4 unchanged sentences

In addition, certain lenders party to the 2014 Credit Agreement extended the maturity date of their commitments under the 2014 Revolving Facility to October 2024 from October 2023.

In January 2020, American and AAG entered into the Eighth Amendment to the 2014 Credit Agreement, pursuant to which American refinanced the 2014 Term Loan Facility, increasing the total aggregate principal amount outstanding to $ 1.2 billion, reducing the LIBOR margin from 2.00 % to 1.75 %, with a LIBOR floor of 0 %, and reducing the base rate margin from 1.00 % to 0.75 %.

In addition, the maturity date for the 2014 Term Loan Facility was extended to January 2027 from October 2021.

In April and May 2020, American borrowed, in aggregate, $ 1.6 billion under the 2014 Revolving Facility.

The 2014 Revolving Facility bears interest at LIBOR plus a margin of 2.00 % and has a final maturity date of October 2024.

Following the April and May draws, American had no remaining borrowing capacity available under the 2014 Revolving Facility.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

April 2016 Credit Facilities

In November 2019, American and AAG entered into the Fifth Amendment to Credit and Guaranty Agreement, amending the Credit and Guaranty Agreement dated as of April 29, 2016 (as previously amended, April 2016 Credit Agreement;

the revolving credit facility established thereunder, the April 2016 Revolving Facility;

2 unchanged sentences

In addition, certain lenders party to the April 2016 Credit Agreement extended the maturity date of their commitments under the April 2016 Revolving Facility to October 2024 from October 2023.

In April 2020, American borrowed $ 450 million under the April 2016 Revolving Facility.

The April 2016 Revolving Facility bears interest at LIBOR plus a margin of 2.00 % and has a final maturity date of October 2024.

Following the April draw, American had no remaining borrowing capacity available under the April 2016 Revolving Facility.

December 2016 Credit Facilities

3 unchanged sentences

Certain details of our 2013 Credit Facilities, 2014 Credit Facilities, April 2016 Credit Facilities and December 2016 Credit Facilities (collectively referred to as the Credit Facilities) are shown in the table below as of December 31, 2020:

2013 Credit Facilities

2014 Credit Facilities

April 2016 Credit Facilities

December 2016 Credit Facilities

2013 Replacement Term Loan

Revolving Facility

2013 Credit Facilities 2014 Credit Facilities April 2016 Credit Facilities December 2016 Credit Facilities

2013 Term Loan 2013

April 2016 Term Loan

December 2016 Term Loan

Revolving Facility 2014 Term Loan 2014

Facility April 2016 Term Loan April 2016

Facility December 2016 Term Loan

Aggregate principal issued

3 unchanged sentences

drawn (in millions) $ 1,788 $ 750 $ 1,220 $ 1,643 $ 960 $ 450 $ 1,200

Maturity date

December 2023

Maturity date June 2025 October 2024 January 2027 October 2024 April 2023 October 2024 December 2023

LIBOR margin 1.75 % 2.00 % 1.75 % 2.00 % 2.00 % 2.00 % 2.00 %

The term loans under each of the Credit Facilities are repayable in annual installments in an amount equal to 1.00 % of the aggregate principal amount issued, with any unpaid balance due on the respective maturity dates.

Voluntary prepayments may be made by American at any time.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility provide that American may from time to time borrow, repay and reborrow loans thereunder.

1 unchanged sentence

The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility are each subject to an undrawn annual fee of 0.63 %.

As of December 31, 2019 , there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility, 2014 Revolving Facility or April 2016 Revolving Facility.

The December 2016 Credit Facilities provide for a revolving credit facility that may be established thereunder in the future.

Subject to certain limitations and exceptions, the Credit Facilities are secured by collateral, including certain spare parts, slots, route authorities, simulators and leasehold rights.

1 unchanged sentence

American’s obligations under the Credit Facilities are guaranteed by AAG.

American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans as further described below in “Collateral-Related Covenants.”

American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans as further described below in “Certain Covenants.”

The Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness.

Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become due and payable immediately.

In addition, if a “change of control” occurs, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the Credit Facilities and terminate the 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility and any revolving credit facility established under the December 2016 Credit Facilities.

The Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the Credit Facilities) of not less than $ 2.0 billion and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.

In December 2019, due to uncertainty surrounding the timing of the Boeing 737 MAX aircraft return to service, American entered into an additional short-term revolving line of credit to provide us with incremental borrowing capacity of up to $ 400 million .

We have no present intention to borrow any amounts under this facility, which matures in September 2020 with an optional extension to December 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

2016 Credit Facilities.

The Credit Facilities also include covenants that, among other things, require AAG to maintain an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.

Delayed Draw Term Loan Credit Facility

In March 2020, American and AAG entered into a Credit and Guaranty Agreement which provided for a $ 1.0 billion senior secured delayed draw term loan credit facility (the Delayed Draw Term Loan Credit Facility), which was scheduled to be due and payable in a single installment on the maturity date in March 2021.

In connection with the issuance of the 11.75 % senior secured notes due 2025, as described below, the Delayed Draw Term Loan Credit Facility was repaid and the Delayed Draw Term Loan Credit Facility and all of the security documents and other loan documents related thereto were terminated as of June 30, 2020.

(b) Senior Secured Notes

11.75 % Senior Secured Notes

In June 2020, American issued $ 2.5 billion aggregate principal amount of 11.75 % senior secured notes due 2025 (the 11.75 % Senior Secured Notes) at a price equal to 99 % of their aggregate principal amount.

The 11.75 % Senior Secured Notes bear interest at a rate of 11.75 % per annum (subject to increase if the collateral coverage ratio described below is not met).

Interest on the 11.75 % Senior Secured Notes is payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2021.

The 11.75 % Senior Secured Notes will mature on July 15, 2025.

The obligations of American under the 11.75 % Senior Secured Notes are fully and unconditionally guaranteed on a senior unsecured basis by AAG.

The proceeds from the 11.75 % Senior Secured Notes were used to repay and terminate the Delayed Draw Term Loan Credit Facility (and to terminate all security documents and all other loan documents related thereto) with the remaining amount for general corporate purposes and to enhance our liquidity position.

The 11.75 % Senior Secured Notes were issued pursuant to an indenture, dated as of June 30, 2020 (the 11.75 % Senior Secured Notes Indenture), by and among American, AAG and Wilmington Trust, National Association, as trustee (the 11.75 % Senior Secured Notes Trustee).

The 11.75 % Senior Secured Notes are American’s senior secured obligations.

Subject to certain limitations and exceptions, the 11.75 % Senior Secured Notes are secured on a first-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in Australia, Canada, the Caribbean, Central America, China, Hong Kong, Japan, Mexico, South Korea, and Switzerland (collectively, the First Lien 11.75 % Senior Secured Notes Collateral).

American’s obligations with respect to the 11.75 % Senior Secured Notes are also secured on a second-lien basis by security interests in certain assets, rights and properties utilized by American in providing its scheduled air carrier services to and from certain airports in the United States and certain airports in the European Union and the United Kingdom (collectively, the Second Lien 11.75 % Senior Secured Notes Collateral and together with the First Lien 11.75 % Senior Secured Notes Collateral, the 11.75 % Senior Secured Notes Collateral).

American may be required to pledge additional collateral in the future under the terms of the 11.75 % Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral as a replacement for existing collateral.

The Second Lien 11.75 % Senior Secured Notes Collateral also secures the 2014 Credit Facilities on a first-lien basis.

American may redeem the 11.75 % Senior Secured Notes, in whole at any time or in part from time to time, at a redemption price equal to 100 % of the principal amount of the 11.75 % Senior Secured Notes being redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any, to (but not including) the redemption date.

In the event of a specified change of control, each holder of 11.75 % Senior Secured Notes may require American to repurchase its 11.75 % Senior Secured Notes in whole or in part at a repurchase price of 101 % of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to (but not including) the repurchase date.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

American is required to deliver an appraisal of the First Lien 11.75 % Senior Secured Notes Collateral and officer’s certificate on a semi-annual basis demonstrating the calculation of a collateral coverage ratio in relation to the First Lien 11.75 % Senior Secured Notes Collateral as of the end of each semi-annual period based on such appraisal.

If American fails to deliver the officer’s certificate in a timely manner or the collateral coverage ratio is less than 1.6 to 1.0 as of the end of the semi-annual period, then, subject to an opportunity to cure the deficiency in the collateral coverage ratio, American will be required to pay special interest in an additional amount equal to 2.0 % per annum of the outstanding principal amount of the 11.75 % Senior Secured Notes until the collateral coverage ratio is established to be at least 1.6 to 1.0.

The 11.75 % Senior Secured Notes Indenture contains covenants that, among other things, restrict the ability of AAG and the ability of its restricted subsidiaries (including American) to:

(i) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (ii) incur liens on the 11.75 % Senior Secured Notes Collateral and dispose of or release the 11.75 % Senior Secured Notes Collateral, (iii) repay subordinated indebtedness, (iv) make certain loans and investments, (v) incur indebtedness or issue preferred stock, (vi) merge, consolidate or sell assets, (vii) undergo certain change of control transactions, and (viii) designate subsidiaries as unrestricted.

These covenants are subject to a number of important exceptions and qualifications set forth in the 11.75 % Senior Secured Notes Indenture.

Upon the occurrence of any event of default (other than certain bankruptcy or insolvency or reorganization events affecting AAG or certain of its subsidiaries, including American), the 11.75 % Senior Secured Notes may be declared to be due and payable immediately.

Upon the occurrence of certain bankruptcy, insolvency or reorganization events affecting American or certain of its subsidiaries (including American), all outstanding 11.75 % Senior Secured Notes will become due and payable immediately without further action or notice on the part of the 11.75 % Senior Secured Notes Trustee or any holder of the 11.75 % Senior Secured Notes.

10.75 % Senior Secured Notes

On September 25, 2020 (the 10.75 % Senior Secured Notes Closing Date), American issued $ 1.0 billion in initial principal amount of senior secured IP notes (the IP Notes) and $ 200 million in initial principal amount of senior secured LGA/DCA notes (the LGA/DCA Notes and together with the IP Notes, the 10.75 % Senior Secured Notes).

The obligations of American under the 10.75 % Senior Secured Notes are fully and unconditionally guaranteed (the 10.75 % Senior Secured Notes Guarantees) on a senior unsecured basis by AAG.

The 10.75 % Senior Secured Notes bear interest at a rate of 10.75 % per annum in cash.

For any interest period on or prior to September 1, 2022, American may, at its election, pay interest at a rate of 12.00 % per annum payable one-half in cash and one-half in kind.

Interest on the 10.75 % Senior Secured Notes is payable semiannually in arrears on September 1 and March 1 of each year, beginning on March 1, 2021.

The 10.75 % Senior Secured Notes will mature on February 15, 2026.

The proceeds from the 10.75 % Senior Secured Notes were used to pay transaction-related fees and expenses and for general corporate purposes.

The 10.75 % Senior Secured Notes were each issued pursuant to a separate indenture, dated as of September 25, 2020 (individually, the IP Notes Indenture and the LGA/DCA Notes Indenture and collectively, the 10.75 % Senior Secured Notes Indentures), by and among American, AAG and Wilmington Trust, National Association, as trustee and as collateral trustee (the 10.75 % Senior Secured Notes Trustee).

The IP Notes are secured by a first lien security interest on certain intellectual property of American, including the “American Airlines” trademark and the “aa.com” domain name in the United States and certain foreign jurisdictions (the IP Collateral), and a second lien on certain slots related to American’s operations at New York LaGuardia and Ronald Reagan Washington National airports and certain other assets (the LGA/DCA Collateral and together with the IP Collateral, the 10.75 % Senior Secured Notes Collateral).

Subject to certain conditions, American will be permitted to incur up to $ 4.0 billion of additional pari passu debt and unlimited second lien debt secured by the IP Collateral securing the IP Notes.

The LGA/DCA Notes are secured by a first lien security interest in the LGA/DCA Collateral.

American may be required to pledge additional collateral in the future under the terms of the 10.75 % Senior Secured Notes, and in certain circumstances may elect to pledge additional collateral including as a replacement for existing collateral.

The LGA/DCA Collateral also secures on a first-lien basis the December 2016 Credit Facilities.

On or prior to the fourth anniversary of the 10.75 % Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75 % Senior Secured Notes, at its option, at a redemption price equal to 100 % of the principal amount of the 10.75 % Senior Secured Notes redeemed plus a make whole premium, together with accrued and unpaid interest thereon, if any.

After the fourth anniversary of the 10.75 % Senior Secured Notes Closing Date and on or prior to the fifth anniversary of the 10.75 % Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75 % Senior Secured Notes, at its option, at a redemption price equal to 105.375 % of the principal amount of the 10.75 % Senior

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Secured Notes redeemed, together with accrued and unpaid interest thereon, if any.

After the fifth anniversary of the 10.75 % Senior Secured Notes Closing Date, American may redeem all or any part of the 10.75 % Senior Secured Notes, at its option, at par, together with accrued and unpaid interest thereon, if any.

In the event of a specified change of control, each holder of 10.75 % Senior Secured Notes may require American to repurchase its 10.75 % Senior Secured Notes, in whole or in part, at a repurchase price of 101 % of the aggregate principal amount of the 10.75 % Senior Secured Notes so repurchased, plus accrued and unpaid interest thereon, if any, to (but not including) the repurchase date.

The 10.75 % Senior Secured Notes Indentures contain covenants that, among other things, restrict the ability of AAG and the ability of its restricted subsidiaries (including American) to:

(i) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (ii) incur liens on the 10.75 % Senior Secured Notes Collateral and dispose of or release the 10.75 % Senior Secured Notes Collateral, (iii) repay subordinated indebtedness, (iv) make certain loans and investments, (v) incur indebtedness or issue preferred stock, (vi) merge, consolidate or sell assets, and (vii) designate subsidiaries as unrestricted.

In addition, the 10.75 % Senior Secured Notes Indentures include covenants that require AAG to maintain (a) an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and (b) a certain minimum ratio of appraised value of the collateral to outstanding debt secured thereby on a first lien basis as further described below in “Certain Covenants.” These covenants are subject to a number of important exceptions and qualifications set forth in the 10.75 % Senior Secured Notes Indentures.

Upon the occurrence of any event of default (other than certain bankruptcy or insolvency or reorganization events affecting AAG or certain of its subsidiaries, including American), the 10.75 % Senior Secured Notes may be declared to be due and payable immediately.

Upon the occurrence of certain bankruptcy, insolvency or reorganization events affecting AAG or certain of its subsidiaries (including American), all outstanding 10.75 % Senior Secured Notes will become due and payable immediately without further action or notice on the part of the 10.75 % Senior Secured Notes Trustee or any holder of the 10.75 % Senior Secured Notes.

On September 25, 2020, American and AAG entered into a Loan and Guarantee Agreement (the Treasury Loan Agreement) with Treasury, which provided for a secured term loan facility (the Treasury Term Loan Facility) that permitted American to borrow up to $ 5.5 billion.

Subsequently, on October 21, 2020, American and AAG entered into an amendment to the Treasury Loan Agreement, which increased the borrowing amount to up to $ 7.5 billion.

As of December 31, 2020, American had borrowed $ 550 million under the Treasury Term Loan Facility and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 26, 2021.

Subsequently, on January 15, 2021, American and AAG entered into an amendment to the Treasury Loan Agreement, which extended this deadline to May 28, 2021.

The proceeds from the Treasury Term Loan Facility were, and will be, used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the Treasury Loan Agreement and the applicable provisions of the CARES Act.

The Treasury Term Loan Facility bears interest at a variable rate per annum equal to (a)(i) the LIBOR rate divided by (ii) one minus the Eurodollar Reserve Percentage plus (b) 3.50 %.

Accrued interest on the loans will be payable in arrears on the first business day following the 14 th day of each March, June, September and December, beginning with September 15, 2021, and on June 30, 2025 (the Treasury Term Loan Maturity Date).

As of December 31, 2020, the applicable interest rate for the $ 550 million loan drawn under the Treasury Term Loan Facility was 3.73 % per annum through September 15, 2021, at which time the interest rate will reset.

All advances under the Treasury Term Loan Facility will be in the form of term loans, all of which will mature and be due and payable in a single installment on the Treasury Term Loan Maturity Date.

American may, at any time and from time to time, voluntarily prepay amounts outstanding under the Treasury Loan Agreement, in whole or in part, without penalty or premium.

Amounts prepaid may not be reborrowed.

Mandatory prepayments of loans under the Treasury Term Loan Facility are required, without penalty or premium, to the extent necessary to comply with American's covenants regarding the expiry of certain agreements constituting Treasury Collateral (as defined below), the debt service coverage ratio, certain dispositions of Treasury Collateral, certain debt issuances secured by liens on the Treasury Collateral and certain indemnity, termination, liquidated damages or insurance payments related to the Treasury Collateral, in addition to the occurrence of a change in control of AAG.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

American's obligations under the Treasury Loan Agreement are secured by a first priority security interest on American's rights under U.S.

co-branded credit card agreements and certain other loyalty program partner participation agreements (including rights to receive cash flows thereunder), documents, deposit accounts, securities accounts, books and records and intellectual property related to American's AAdvantage loyalty program and all proceeds, accessions, rents or profits related to the foregoing (collectively, the Treasury Collateral).

American is permitted under the Treasury Loan Agreement to add certain types of assets to the Treasury Collateral and, subject to certain conditions, release Treasury Collateral, in each case from time to time at its discretion.

The Treasury Loan Agreement requires American, under certain circumstances, including within 10 business days prior to the last business day of March and September of each year, beginning March 2021, to appraise the value of the Treasury Collateral and recalculate the collateral coverage ratio.

If the calculated collateral coverage ratio is less than 1.6 to 1.0, American will be required either to provide additional Treasury Collateral (which may include cash collateral) to secure its obligations under the Treasury Loan Agreement or repay the term loans under the Treasury Term Loan Facility, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Treasury Collateral or repayment, is at least 1.6 to 1.0.

The Treasury Loan Agreement also requires American to calculate the debt service coverage ratio on a quarterly basis.

If the calculated debt service coverage ratio is less than 1.75 to 1.00, then AAG and its subsidiaries will be required to place an amount equal to at least 50 % of certain revenues received from the AAdvantage loyalty program (the Loyalty Program Revenues) into a blocked account to be held for the benefit of the lenders who may choose to use such funds to prepay the outstanding term loans until the debt service coverage ratio is recalculated to be greater than or equal to 1.75 to 1.00.

If the calculated debt service coverage ratio is less than or equal to 1.50 to 1.00, but greater than 1.25 to 1.00, then all amounts previously deposited into the blocked account will be used to prepay outstanding term loans and an amount equal to at least 50 % of all future Loyalty Program Revenues will be transferred into the payment account and used to prepay outstanding term loans until the debt service coverage ratio is recalculated to be greater than 1.50 to 1.00.

If the calculated debt service coverage ratio is less than or equal to 1.25 to 1.00, then all amounts previously deposited into the blocked account will be used to prepay outstanding term loans and an amount equal to at least 75 % of all future Loyalty Program Revenues will be transferred into the payment account and used to prepay outstanding term loans until the debt service coverage ratio is recalculated to be greater than 1.25 to 1.00.

The Treasury Loan Agreement also includes affirmative, negative and financial covenants that, among other things, limit AAG's ability to pay dividends, repurchase common stock of AAG or make certain other payments, make certain investments, incur liens on the Treasury Collateral, dispose of the Treasury Collateral, amend material AAdvantage loyalty program agreements, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions.

In addition, under the Treasury Loan Agreement, AAG must maintain a minimum aggregate liquidity of $ 2.0 billion.

The Treasury Loan Agreement requires AAG and American to comply with the relevant provisions of the CARES Act and the Treasury Loan Agreement, including, but not limited to, the provisions that prohibit the repurchase of AAG’s common stock, the payment of common stock dividends and those that restrict the payment of certain executive compensation, in each case, through the date that is 12 months after the date on which all amounts of loan outstanding under the Treasury Term Loan Facility have been repaid in full.

The Treasury Loan Agreement contains events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness.

Upon the occurrence of an event of default and subject to certain grace periods, the outstanding obligations under the Treasury Loan Agreement may be accelerated and become due and payable immediately.

2019-1 Aircraft EETCs

In August 2019, American created three pass-through trusts which issued approximately $ 1.1 billion aggregate face amount of Series 2019-1 Class AA, Class A and Class B EETCs (the 2019-1 Aircraft EETCs) in connection with the financing of 35 aircraft previously delivered or to be delivered to American through September 2020 (the 2019-1 Aircraft).

As of December 31, 2019 , approximately $ 804 million of the proceeds had been used to purchase equipment notes issued by American in connection with financing 28 aircraft under the 2019-1 Aircraft EETCs, of which $ 608 million was used to repay existing indebtedness.

Interest and principal payments on equipment notes issued in connection with the 2019-1 Aircraft EETCs are payable semi-annually in February and August of each year, with interest payments scheduled to begin in February 2020 and with principal payments scheduled to begin (i) in the case of equipment notes with respect to any 2019-1 Aircraft owned by American at the time of issuance of the 2019-1 Aircraft EETCs, in February 2020 and (ii) in the case of equipment notes with respect to the Embraer E175 aircraft and the Airbus A321neo aircraft scheduled to be delivered after the issuance of the 2019-1 Aircraft EETCs, in August 2020 and August 2021, respectively.

The remaining proceeds of approximately $ 293 million as of December 31, 2019 were being held in escrow with a depositary for the benefit of the holders of the 2019-1 Aircraft EETCs until such time as American issues additional equipment notes with respect to the remaining 2019-1 Aircraft to the pass-through trusts, which will purchase such additional equipment notes with the escrowed funds.

These escrowed funds are not guaranteed by American and are not reported as debt on its condensed consolidated balance sheet because the proceeds held by the depositary for the benefit of the holders of the 2019-1 Aircraft EETCs are not American’s assets.

In 2019, $ 804 million of the proceeds had been used to purchase equipment notes issued by American in connection with the financing of 28 aircraft under the 2019-1 Aircraft EETCs, of which $ 608 million was used to repay existing indebtedness.

In 2020, the remaining $ 293 million of the proceeds had been used to purchase equipment notes issued by American in connection with the financing of seven aircraft under the 2019-1 Aircraft EETCs.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Certain information regarding the 2019-1 Aircraft EETC equipment notes and remaining escrowed proceeds, as of December 31, 2019 , is set forth in the table below.

principal payments began or are scheduled to begin (i) in the case of equipment notes with respect to any 2019-1 Aircraft owned by American at the time of issuance of the 2019-1 Aircraft EETCs, in February 2020 and (ii) in the case of equipment notes with respect to the Embraer 175 aircraft and the Airbus A321neo aircraft scheduled to be delivered after the issuance of the 2019-1 Aircraft EETCs, in August 2020 and August 2021, respectively.

Certain information regarding the 2019-1 Aircraft EETC equipment notes, as of December 31, 2020, is set forth in the table below.

2019-1 Aircraft EETCs

Aggregate principal issued

$ 579 million

$ 289 million

$ 229 million

Remaining escrowed proceeds

$ 155 million

Series AA Series A Series B

Aggregate principal issued $ 579 million $ 289 million $ 229 million

Fixed interest rate per annum 3.15 % 3.50 % 3.85 %

Maturity date

February 2032

February 2028

2019-1 Engine EETCs

In June 2019 , American created pass-through trusts which issued $ 650 million in aggregate face amount of 2019-1 Engine EETCs (the 2019-1 Engine EETCs), with maturities from June 2022 to June 2026.

All of the proceeds received by such pass-through trusts from the sale of the 2019-1 Engine EETCs have been used to acquire equipment notes issued by American to the pass-through trusts.

The pass-through trust certificates represent the right to payment under the equipment notes that are full-recourse obligations of American and such equipment notes are secured by spare aircraft engines currently owned and operated by American.

In 2019 , American entered into agreements under which it borrowed $ 1.7 billion in connection with the financing or refinancing, as the case may be, of certain aircraft and other flight equipment, of which $ 643 million was used to repay existing indebtedness.

Maturity date February 2032 February 2032 February 2028

(e) Equipment Loans and Other Notes Payable Issued in 2020

In 2020, American entered into agreements under which it borrowed $ 307 million in connection with the financing or refinancing, as the case may be, of certain aircraft and other flight equipment, of which $ 17 million was used to repay existing indebtedness.

Debt incurred under these agreements matures in 2029 through 2032 and bears interest at variable rates (comprised of LIBOR plus an applicable margin) averaging 2.28 % at December 31, 2020.

(d) Senior Notes

In May 2019, AAG issued $ 750 million aggregate principal amount of 5.000 % senior notes due 2022 (the 5.000 % senior notes).

These notes bear interest at a rate of 5.000 % per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2019.

The 5.000 % senior notes mature on June 1, 2022.

The details of our 4.625 % and 5.000 % senior notes are shown in the table below as of December 31, 2019 :

(f) Special Facility Revenue Bonds Issued in 2020

In January 2020, American and British Airways announced the start of construction on a $ 344 million investment to upgrade New York's John F.

Kennedy International Airport (JFK) Terminal 8.

In June 2020, the New York Transportation Development Corporation (NYTDC) issued approximately $ 360 million of special facility revenue bonds (the 2020 JFK Bonds) on behalf of American.

A portion of the net proceeds from the 2020 JFK Bonds have been or will be used to fund costs of issuance of the 2020 JFK Bonds, to fund a substantial portion of the cost of the renovation and expansion of a passenger terminal facility (the Terminal) leased and utilized by American at JFK and to fund the August 2020 maturity of the outstanding bonds issued by NYTDC on behalf of American in 2016 (the 2016 JFK Bonds).

American is required to pay debt service on the 2020 JFK Bonds through payments under a loan agreement with NYTDC (as amended), and American and AAG guarantee the 2020 JFK Bonds.

American continues to pay debt service on the outstanding 2016 JFK Bonds and American and AAG continue to guarantee the 2016 JFK Bonds.

American’s and AAG’s obligations under these guarantees are secured by a leasehold mortgage on American’s lease of the Terminal and related property from the Port Authority of New York and New Jersey.

The 2020 JFK Bonds, in aggregate, were priced at approximately 98 % of par value.

The gross proceeds from the issuance of the 2020 JFK Bonds were approximately $ 353 million.

Of this amount, approximately $ 8 million was used to fund the costs of issuance of the 2020 JFK Bonds, approximately $ 47 million was used to fund the redemption of the 2016 JFK Bonds due August 2020 and approximately $ 17 million was reimbursed to American for the Terminal construction costs incurred, with the remaining amount of proceeds received to be held in restricted cash and short-term investments on the consolidated balance sheet and to be used to finance a substantial portion of the cost of the renovation and expansion of the Terminal.

The 2020 JFK Bonds are comprised of term bonds, $ 214 million of which bear interest at 5.25 % per annum and mature on August 1, 2031, and $ 146 million of which bear interest at 5.375 % per annum and mature on August 1, 2036.

(g) PSP1 Promissory Note

In April 2020, as partial compensation to the U.S.

Government for the provision of financial assistance under the PSP1 Agreement, AAG issued the PSP1 Promissory Note to Treasury, which provides for our unconditional promise to pay to Treasury 30 % of the total amount of financial assistance disbursed under the PSP1 Agreement, and the guarantee of our obligations by the Subsidiaries.

The total financial assistance we received pursuant to the PSP1 Agreement is approximately $ 6.0 billion.

As of December 31, 2020, the principal amount of the PSP1 Promissory Note was approximately $ 1.8 billion.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

The PSP1 Promissory Note bears interest on the outstanding principal amount at a rate equal to 1.00 % per annum until the fifth anniversary of the PSP1 Closing Date and 2.00 % plus an interest rate based on the secured overnight financing rate per annum or other benchmark replacement rate consistent with customary market conventions (but not to be less than 0.00 %) thereafter until the tenth anniversary of the PSP1 Closing Date (the PSP1 Maturity Date), and interest accrued thereon will be payable in arrears on the last business day of March and September of each year, which began on September 30, 2020.

The aggregate principal amount outstanding under the PSP1 Promissory Note, together with all accrued and unpaid interest thereon and all other amounts payable under the PSP1 Promissory Note, will be due and payable on the PSP1 Maturity Date.

We may, at any time and from time to time, voluntarily prepay amounts outstanding under the PSP1 Promissory Note, in whole or in part, without penalty or premium.

Within 30 days of the occurrence of certain change of control triggering events, we are required to prepay the aggregate outstanding principal amount of the PSP1 Promissory Note at such time, together with any accrued interest or other amounts owing under the PSP1 Promissory Note at such time.

The PSP1 Promissory Note is our senior unsecured obligation and each guarantee of the PSP1 Promissory Note is the senior unsecured obligation of each of the Subsidiaries, respectively.

The PSP1 Promissory Note contains events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness.

Upon the occurrence of an event of default and subject to certain grace periods, the outstanding obligations under the PSP1 Promissory Note may, and in certain circumstances will automatically, be accelerated and become due and payable immediately.

(h) 6.50 % Convertible Senior Notes

In June 2020, AAG completed the public offering of $ 1.0 billion aggregate principal amount of AAG’s 6.50 % convertible senior notes due 2025 (the Convertible Notes).

The Convertible Notes are fully and unconditionally guaranteed by American on a senior unsecured basis (the Convertible Notes Guarantee).

The net proceeds to us from the Convertible Notes were approximately $ 970 million, after deducting the underwriters’ discounts and commissions and our estimated offering expenses.

The net proceeds from the Convertible Notes are being used for general corporate purposes and to enhance our liquidity position.

The Convertible Notes were priced to investors in the offering at 100 % of their principal amount.

The Convertible Notes were issued pursuant to an indenture, dated as of June 25, 2020 (the Base Indenture), between AAG and Wilmington Trust, National Association as trustee (the Convertible Notes Trustee), as supplemented by that certain first supplemental indenture, dated as of June 25, 2020, among AAG, American and the Convertible Notes Trustee (the Convertible Notes Supplemental Indenture and, together with the Base Indenture, the Convertible Notes Indenture).

The Convertible Notes bear interest at a rate of 6.50 % per annum.

Interest on the Convertible Notes is payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2021.

The Convertible Notes will mature on July 1, 2025, unless earlier converted or redeemed or repurchased by us.

Upon conversion, AAG will pay or deliver, as the case may be, cash, shares of AAG common stock or a combination of cash and shares of AAG common stock, at AAG’s election.

The initial conversion rate is 61.7284 shares of AAG common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $ 16.20 per share of AAG common stock).

The conversion rate is subject to adjustment in some events as described in the Convertible Notes Indenture.

Holders may convert their Convertible Notes at their option only in the following circumstances:

(1) during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on September 30, 2020, if the last reported sale price per share of AAG common stock exceeds 130 % of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;

(2) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the measurement period) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price per share of AAG common stock on such trading day and the conversion rate on such trading day;

(3) upon the occurrence of certain corporate events or distributions on AAG common stock;

(4) if AAG calls such Convertible Notes for redemption;

and (5) at any time from, and including, April 1, 2025 until the close of business on the scheduled trading day immediately before the maturity date of the Convertible Notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

In addition, following certain corporate events that occur prior to the maturity date or upon AAG’s issuance of a notice of redemption, AAG will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or during the related redemption period in certain circumstances by a specified number of shares of AAG common stock as described in the Convertible Notes Indenture.

AAG will not have the right to redeem the Convertible Notes prior to July 5, 2023.

On or after July 5, 2023 and on or before the 20th scheduled trading day immediately before the maturity date, AAG may redeem the Convertible Notes, in whole or in part, if the last reported sale price of AAG common stock has been at least 130 % of the conversion price then in effect on (1) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately before the date AAG sends the related redemption notice;

and (2) the trading day immediately before the date AAG sends such notice.

In the case of any optional redemption, AAG will redeem the Convertible Notes at a redemption price equal to 100 % of the principal amount of such Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

If AAG undergoes a fundamental change described in the Convertible Notes Indenture prior to the maturity date of the Convertible Notes, except as described in the Convertible Notes Indenture, holders of the Convertible Notes may require AAG to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100 % of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Convertible Notes Indenture provides for customary terms and covenants, including that upon certain events of default, either the Convertible Notes Trustee or the holders of not less than 25 % in aggregate principal amount of the Convertible Notes then outstanding may declare the unpaid principal amount of the Convertible Notes and accrued and unpaid interest, if any, thereon immediately due and payable.

In the case of certain events of bankruptcy, insolvency or reorganization, the principal amount of the Convertible Notes together with accrued and unpaid interest thereon, if any, will automatically become and be immediately due and payable.

As the Convertible Notes can be settled in cash upon conversion, for accounting purposes, the Convertible Notes were bifurcated into a debt component that was recorded at fair value and an equity component.

The following table details the debt and equity components recognized related to the Convertible Notes as of December 31, 2020 (in millions):

December 31, 2020

Principal amount of 6.50% convertible senior notes $ 1,000

Unamortized debt discount ( 417 )

Net carrying amount of 6.50% convertible senior notes 583

Additional paid-in capital 415

The effective interest rate on the liability component approximates 20 %.

We recognized $ 61 million of interest expense in 2020 including $ 28 million of non-cash amortization of the debt discount and $ 33 million of contractual coupon interest.

The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is five years as follows:

$ 63 million in 2021, $ 77 million in 2022, $ 95 million in 2023, $ 116 million in 2024 and $ 66 million in 2025.

As previously discussed in Note 1(c), as of January 1, 2021, we early adopted the New Convertible Debt Standard.

Accordingly, our unamortized debt discount as of January 1, 2021 was reduced by $ 389 million and the adjusted non-cash interest expense to be recognized over the next five years is as follows:

$ 5 million in 2021, $ 6 million in 2022, $ 6 million in 2023, $ 7 million in 2024 and $ 4 million in 2025.

At December 31, 2020, the if-converted value of the Convertible Notes did not exceed the principal amount.

(i) Unsecured Senior Notes

5.000 % Senior Notes

In May 2019, AAG issued $ 750 million aggregate principal amount of 5.000 % senior notes due 2022 (the 5.000 % Senior Notes).

The 5.000 % Senior Notes bear interest at a rate of 5.000 % per annum, payable semi-annually in arrears on June 1 and December 1 of each year, which began on December 1, 2019.

The 5.000 % Senior Notes mature in June 2022.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

3.75 % Senior Notes

Aggregate principal issued and outstanding

$ 500 million

$ 750 million

Maturity date

In February 2020, AAG issued $ 500 million aggregate principal amount of 3.75 % senior notes due 2025 (the 3.75 % Senior Notes).

The 3.75 % Senior Notes bear interest at a rate of 3.75 % per annum, payable semiannually in arrears in March and September of each year, which began in September 2020.

The 3.75 % Senior Notes mature in March 2025.

The details of our 5.000 % and 3.75 % Senior Notes are shown in the table below as of December 31, 2020:

5.000% Senior Notes 3.75% Senior Notes

Aggregate principal issued and outstanding $ 750 million $ 500 million

Maturity date June 2022 March 2025

Fixed interest rate per annum 5.000 % 3.75 %

Interest payments

Semi-annually in arrears in March and September

Semi-annually in arrears in June and December

Interest payments Semi-annually in arrears in June and December Semi-annually in arrears in March and September

The 5.000 % and 3.75 % Senior Notes are senior unsecured obligations of AAG.

1 unchanged sentence

The indentures for these Senior Notes contain covenants and events of default generally customary for similar financings.

In addition, if we experience specific kinds of changes of control, we must offer to repurchase these senior notes in whole or in part at a price of 101 % of the principal amount plus accrued and unpaid interest, if any, to (but not including) the repurchase date.

In addition, if we experience specific kinds of changes of control, we must offer to repurchase these Senior Notes in whole or in part at a price of 101 % of the principal amount plus accrued and unpaid interest thereon, if any, to (but not including) the repurchase date.

Upon the occurrence of certain events of default, these Senior Notes may be accelerated and become due and payable.

As of December 31, 2019 , AAG had issued guarantees covering approximately $ 725 million of American’s special facility revenue bonds (and interest thereon) and $ 8.1 billion of American’s secured debt (and interest thereon), including the Credit Facilities and certain EETC financings.

As of December 31, 2020, AAG had issued guarantees covering approximately $ 15.0 billion of American’s secured debt (and interest thereon), including the Credit Facilities and certain EETC financings and $ 1.0 billion of American’s special facility revenue bonds (and interest thereon).

Certain Covenants

Certain of our debt financing agreements (including our secured notes, term loans, revolving credit facilities and spare engine EETCs) contain loan to value (LTV) or collateral coverage ratio covenants and require us to appraise the related collateral annually or semiannually.

Pursuant to such agreements, if the LTV or collateral coverage ratio exceeds a specified threshold or if the value of the appraised collateral fails to meet a specified threshold, as the case may be, we are required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash or investment securities), or pay down such financing, in whole or in part, or the interest rate for the financing under such agreements will be increased.

Additionally, a significant portion of our debt financing agreements contain covenants requiring us to maintain an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities, and our Treasury Term Loan Facility contains a debt service coverage ratio, pursuant to which failure to comply with a certain threshold may result in mandatory prepayment of the Treasury Term Loan Facility.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Collateral-Related Covenants

Certain of our debt financing agreements (including our term loans, revolving credit facilities and spare engine EETCs) contain loan to value (LTV) ratio covenants and require us to appraise the related collateral annually.

Pursuant to such agreements, if the LTV ratio exceeds a specified threshold or if the value of the appraised collateral fails to meet a specified threshold, as the case may be, we are required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash or investment securities), or pay down such financing, in whole or in part.

Specifically, we are required to meet certain collateral coverage tests on an annual basis for our Credit Facilities, as described below:

2013 Credit Facilities

2014 Credit Facilities

Credit Facilities

December 2016

Credit Facilities

Frequency of Appraisals of

Appraised Collateral

LTV Requirement

1.6x Collateral valuation to amount of debt outstanding (62.5% LTV)

LTV as of Last Measurement

Collateral Description

Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate all services between the U.S.

and South America

Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S.

and European Union (including London Heathrow)

Generally, certain spare parts

Generally, certain Ronald Reagan Washington National Airport (DCA) slots, certain La Guardia Airport (LGA) slots, certain simulators and certain leasehold rights

Specifically, we are required to meet certain collateral coverage tests for our Credit Facilities, 10.75 % Senior Secured Notes, 11.75 % Senior Secured Notes and Treasury Loan Agreement, as described below:

Facilities 2014 Credit

Facilities April 2016

Credit Facilities December 2016

Credit Facilities 10.75% Senior Secured Notes 11.75% Senior Secured Notes Treasury Loan Agreement

Frequency of Appraisals of Appraised Collateral Annual Annual Annual Annual Annual Semi-Annual Semi-Annual

LTV Requirement 1.6 x Collateral valuation to amount of debt outstanding ( 62.5 % LTV)

LTV as of Last Measurement Date 53.1 % 44.3 % 48.0 % 61.2 % 61.2 % 35.2 % De Minimis

Collateral Description Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate all services between the U.S.

and South America Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S.

and European Union (including London Heathrow) Generally, certain spare parts Generally, certain Ronald Reagan Washington National Airport (DCA) slots, certain La Guardia Airport (LGA) slots, certain simulators and certain leasehold rights Generally, certain DCA slots, certain LGA slots, certain simulators and certain leasehold rights and, in the case of the IP Notes, certain intellectual property of American Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U.S.

and the Caribbean, Central America and various other countries Generally, certain rights under U.S.

co-branded credit card agreements and certain other loyalty program agreements and intellectual property related to AAdvantage

At December 31, 2020, we were in compliance with the applicable collateral coverage tests as of the most recent measurement dates.

6 unchanged sentences

Additionally, at our hub locations and in certain other cities we serve, we lease administrative offices, catering, cargo, training, maintenance and other facilities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

The components of lease expense were as follows (in millions):

Year Ended December 31,

2020 2019 2018

Operating lease cost $ 1,957 $ 2,027 $ 1,907

4 unchanged sentences

Total net lease cost $ 3,888 $ 4,707 $ 4,386

Included in the table above is $ 236 million and $ 226 million of operating lease cost under our capacity purchase agreement with Republic for the years ended December 31, 2019 and 2018 , respectively.

Included in the table above is $ 172 million, $ 236 million and $ 226 million of operating lease cost under our capacity purchase agreement with Republic for the years ended December 31, 2020, 2019 and 2018, respectively.

We hold a 25 % equity interest in Republic Holdings, the parent company of Republic.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Additionally, not included in the table above, we recognized $ 109 million in cash special charges in 2020 related to the impairment of ROU assets and lease return costs resulting from our decision to retire certain leased aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic.

Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):

17 unchanged sentences

Finance leases 6.3 % 6.2 %

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Supplemental cash flow and other information related to leases was as follows (in millions):

Year Ended December 31,

2020 2019 2018

Cash paid for amounts included in the measurement of lease liabilities:

7 unchanged sentences

Gain on sale leaseback transactions, net 107 107 59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Maturities of lease liabilities were as follows (in millions):

December 31, 2020

Operating Leases

Finance Leases

Operating Leases Finance Leases

2021 $ 1,946 $ 131

2022 1,777 136

2023 1,586 114

2024 1,192 120

2026 and thereafter 3,307 89

4 unchanged sentences

Long-term lease obligations $ 6,777 $ 472

As of December 31, 2019 , we have additional operating lease commitments that have not yet commenced of approximately $ 2.0 billion for 22 787-8 aircraft to be delivered in 2020 and 2021 with lease terms of 10 years .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

The significant components of the income tax provision were (in millions):

As of December 31, 2020, we have additional operating lease commitments that have not yet commenced of approximately $ 1.7 billion for 19 Boeing 787-8 aircraft to be delivered in 2021 with lease terms of 10 years.

The significant components of the income tax provision (benefit) were (in millions):

Year Ended December 31,

Current income tax provision:

2020 2019 2018

Current income tax provision (benefit):

State and Local $ — $ 2 $ 3

Current income tax provision

Deferred income tax provision:

Foreign — 8 29

Current income tax provision (benefit) — 10 32

Deferred income tax provision (benefit):

Federal ( 2,335 ) 498 390

State and Local ( 233 ) 62 50

Deferred income tax provision

Total income tax provision

The income tax provision differed from amounts computed at the statutory federal income tax rate as follows (in millions):

Deferred income tax provision (benefit) ( 2,568 ) 560 440

Total income tax provision (benefit) $ ( 2,568 ) $ 570 $ 472

The income tax provision (benefit) differed from amounts computed at the statutory federal income tax rate as follows (in millions):

Year Ended December 31,

Statutory income tax provision

State income tax provision, net of federal tax effect

2020 2019 2018

Statutory income tax provision (benefit) $ ( 2,405 ) $ 474 $ 396

State income tax provision (benefit), net of federal tax effect ( 183 ) 47 44

Book expenses not deductible for tax purposes 22 31 12

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Change in valuation allowance — 4 ( 6 )

Income tax provision

We provide a valuation allowance for our deferred tax assets, which include our net operating losses (NOLs), when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.

We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets.

Other, net ( 2 ) 6 3

Income tax provision (benefit) $ ( 2,568 ) $ 570 $ 472

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

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Deferred tax assets:

Operating loss carryforwards

Operating loss carryforwards and other credits $ 4,027 $ 2,103

Loyalty program liability 1,977 1,755

Leases 1,913 2,077

Pensions 1,405 1,229

Postretirement benefits other than pensions 203 145

Alternative minimum tax (AMT) credit carryforwards

Rent expense 96 126

Reorganization items 28 30

Alternative minimum tax (AMT) credit carryforwards — 90

Other 847 613

Total deferred tax assets 10,496 8,168

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Accelerated depreciation and amortization ( 5,028 ) ( 5,196 )

Leases ( 1,818 ) ( 1,979 )

Other ( 386 ) ( 343 )

Total deferred tax liabilities ( 7,232 ) ( 7,518 )

Net deferred tax asset $ 3,230 $ 616

At December 31, 2019 , we had approximately $ 9.1 billion of federal NOLs carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which we expect to be available for use in 2020.

The federal NOL Carryforwards will expire beginning in 2023 if unused.

We also had approximately $ 3.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2019 , which will expire in years 2020 through 2039 if unused.

At December 31, 2020, we had approximately $ 16.5 billion of federal net operating losses (NOLs) available to reduce future federal taxable income, of which $ 8.5 billion will expire beginning in 2023 if unused and $ 8.0 billion can be carried forward indefinitely (NOL Carryforwards).

We also had approximately $ 5.0 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2020, which will expire in taxable years 2020 through 2040 if unused.

Our ability to use our NOL Carryforwards depends on the amount of taxable income generated in future periods.

We provide a valuation allowance for our deferred tax assets, which include our NOLs, when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized.

We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets.

We presently have a $ 34 million valuation allowance on certain net deferred tax assets related to state NOL Carryforwards.

There can be no assurance that an additional valuation allowance on our net deferred tax assets will not be required.

Such valuation allowance could be material.

Our ability to deduct our NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred.

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however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation.

We elected to be covered by certain special rules for federal income tax purposes that permitted approximately $ 9.0 billion (with $ 7.3 billion of unlimited NOL still remaining at December 31, 2019 ) of our federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382.

Similar limitations may apply for state income tax purposes.

Our ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another future ownership change occurs.

Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit a company’s future use of NOLs and tax credits.

At December 31, 2019 , we had an AMT credit carryforward of approximately $ 170 million available for federal income tax purposes, which is presently expected to be fully refundable over the next several years as a result of the repeal of corporate AMT as part of the 2017 Tax Act.

In 2019 , we recorded an income tax provision of $ 570 million , with an effective rate of approximately 25 % , which was substantially non-cash due to utilization of our NOLs as described above.

Our ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another ownership change occurs.

Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit our future use of NOLs and tax credits.

At December 31, 2019, we had an AMT credit carryforward of approximately $ 170 million available for federal income tax purposes, which was fully refunded in 2020 as a result of the CARES Act.

In 2020, we recorded an income tax benefit of $ 2.6 billion, with an effective rate of approximately 22 %, which was substantially non-cash.

Substantially all of our income before income taxes is attributable to the United States.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate.

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We believe that the effect of any assessments will not be material to our consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

The amount of, and changes to, our uncertain tax positions were not material in any of the years presented.

We accrue interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively.

The 2017 Tax Act was enacted on December 22, 2017 and is the most comprehensive tax change in more than 30 years.

We completed our evaluation of the 2017 Tax Act and we reflected the impact of its effects, including the impact of a lower corporate income tax rate (21% vs.

35%) on our deferred tax assets and liabilities and the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.

For the year ended December 31 2017, we recognized a special income tax provision of $ 823 million to reflect these impacts of the 2017 Tax Act.

Risk Management

Our economic prospects are heavily dependent upon two variables we cannot control:

the health of the economy and the price of fuel.

general economic conditions and the price of fuel.

Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, our revenues are heavily influenced by the condition of the U.S.

economy and economies in other regions of the world.

Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by our competitors, all of which in turn have had, and may have in the future, a negative effect on our business.

In particular, the ongoing COVID-19 pandemic and associated decline in economic activity and increase in unemployment levels are expected to have a severe and prolonged effect on the global economy generally and, in turn, is expected to depress demand for air travel into the foreseeable future.

Due to the uncertainty surrounding the duration and severity of this pandemic, we can provide no assurance as to when and at what pace demand for air travel will return to pre-COVID-19 pandemic levels, if at all.

Accordingly, we cannot predict the ultimate impact of the COVID-19 pandemic on our business, financial condition and results of operations.

In addition, during challenging economic times, actions by our competitors to increase their revenues can have an adverse impact on our revenues.

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(a) Credit Risk

Most of our receivables relate to tickets sold to individual passengers through the use of major credit cards or to tickets sold by other airlines and used by passengers on American.

These receivables are short-term, mostly settled within seven days after sale.

Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.

Our accounts receivable relate primarily to our contracts with airline and non-airline business partners, including our co-branded credit card partners, and to tickets sold to individual passengers primarily through the use of major credit cards.

Receivables from our business partners are typically settled within 30 days.

Receivables from ticket sales are short-term, mostly settled within seven days after sale.

All accounts receivable are reported net of an allowance for credit losses, which have been minimal in the past.

We consider past and future financial and qualitative factors when establishing the allowance for credit losses.

We do not believe we are subject to any significant concentration of credit risk.

(b) Interest Rate Risk

We have exposure to market risk associated with changes in interest rates related primarily to our variable-rate debt obligations.

We have exposure to market risk associated with changes in interest rates related primarily to our LIBOR variable-rate debt obligations.

Interest rates on $ 12.8 billion principal amount of long-term debt as of December 31, 2020 are subject to adjustment to reflect changes in floating interest rates.

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We currently do not have an interest rate hedge program to hedge our exposure to floating interest rates on our variable-rate debt obligations.

On July 27, 2017, the U.K.

Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021.

It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021.

Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

have on financial markets for LIBOR-linked financial instruments.

The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long-term debt to be different or higher than expected.

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dollar value of foreign currency-denominated transactions.

Our largest exposure comes from the British pound, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real.

Our largest exposure comes from the British pound sterling, Euro, Canadian dollar and various Latin American currencies, primarily the Brazilian real.

We do not currently have a foreign currency hedge program.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Fair Value Measurements and Other Investments

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Fair Value Measurements as of December 31, 2020

Total Level 1 Level 2 Level 3

Short-term investments (1), (2) :

Money market funds $ 247 $ 247 $ — $ —

Bank notes/certificates of deposit/time deposits

Corporate obligations 3,449 — 3,449 —

Bank notes/certificates of deposit/time deposits 2,168 — 2,168 —

Repurchase agreements 755 — 755 —

6,619 247 6,372 —

Restricted cash and short-term investments (1), (3)

609 448 161 —

Long-term investments (4)

Total $ 7,389 $ 856 $ 6,533 $ —

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Fair Value Measurements as of December 31, 2019

Total Level 1 Level 2 Level 3

Short-term investments (1) :

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Repurchase agreements 85 — 85 —

3,546 333 3,213 —

Restricted cash and short-term investments (1)

Long-term investments (4)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Unrealized gains and losses on short-term investments are recorded in accumulated other comprehensive loss at each measurement date.

Total $ 3,908 $ 547 $ 3,361 $ —

(1) All short-term investments are classified as available-for-sale and stated at fair value.

Our short-term investments as of December 31, 2019 mature in one year or less except for $ 1.1 billion of bank notes/certificates of deposit/time deposits and $ 95 million of corporate obligations.

Unrealized gains and losses are recorded in accumulated other comprehensive loss at each reporting period.

There were no credit losses.

(2) Our short-term investments as of December 31, 2020 mature in one year or less except for $ 235 million of bank notes/certificates of deposit/time deposits.

(3) Restricted cash and short-term investments primarily include money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at JFK and collateral held to support workers' compensation obligations.

(4) Long-term investments primarily include our equity investment in China Southern Airlines, in which we presently own a 1.8 % equity interest, and are classified in other assets on the consolidated balance sheets.

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The fair value of our long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on our current estimated incremental borrowing rates for similar types of borrowing arrangements.

If our long-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.

If our long-term debt was measured at fair value, it would have been classified as Level 2 except for $ 2.3 billion which would have been classified as Level 3 in the fair value hierarchy.

The carrying value and estimated fair value of our long-term debt, including current maturities, were as follows (in millions):

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Value Carrying

Long-term debt, including current maturities $ 32,021 $ 30,454 $ 23,645 $ 24,508

Other Investments

We have an approximate 25 % ownership interest in Republic Holdings, which we received in 2017 in consideration for our unsecured claim in the Republic Holdings bankruptcy case.

This ownership interest is accounted for under the equity method and our portion of Republic Holdings’ financial results is recognized within other, net on the consolidated statements of operations and the investment is reflected within other assets on our consolidated balance sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Employee Benefit Plans

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Effective November 1, 2012, we modified our retiree medical and other postretirement benefits plans to eliminate the company subsidy for employees who retire on or after November 1, 2012.

As a result of modifications to our retiree medical and other postretirement benefits plans in 2012, we recognized a negative plan amendment of $ 1.9 billion , which is included as a component of prior service benefit in accumulated other comprehensive income (loss) (AOCI) and will be amortized over the future service life of the active plan participants for whom the benefit was eliminated, or approximately eight years .

As of December 31, 2019 , $ 150 million of prior service benefit remains, which will be fully amortized in 2020.

As a result of modifications to our retiree medical and other postretirement benefits plans in 2012, we recognized a negative plan amendment of $ 1.9 billion, which was included as a component of prior service benefit in accumulated other comprehensive income (loss) (AOCI) and was amortized over the future service life of the active plan participants for whom the benefit was eliminated.

As of December 31, 2020, this prior service benefit was fully amortized.

Effective January 1, 2021, health coverage under our retiree medical benefit program that is currently provided to certain retirees age 65 and over who retired prior to November 1, 2012, transitioned from a self-insured plan to a fully-insured Medicare Advantage plan.

Benefits coverage has not been reduced and cost shared has not changed as a result of this transition.

Due to this transition, as of December 31, 2020, we recognized a negative plan amendment of $ 313 million to reduce our benefit obligation, which was included as a component of prior service cost in accumulated other comprehensive loss and will be amortized over the average remaining life expectancy of all retirees, or approximately 13.3 years.

Benefit Obligations, Fair Value of Plan Assets and Funded Status

The following tables provide a reconciliation of the changes in the pension and retiree medical and other postretirement benefits obligations, fair value of plan assets and a statement of funded status as of December 31, 2020 and 2019:

Pension Benefits

Retiree Medical and

Pension Benefits Retiree Medical and

Other Postretirement Benefits

2020 2019 2020 2019

(In millions)

Benefit obligation at beginning of period $ 18,358 $ 16,378 $ 824 $ 837

Service cost 2 2 8 3

Interest cost 615 703 30 33

Actuarial (gain) loss (1), (2)

Actuarial loss (1), (2)

1,613 1,965 46 20

Special termination benefits (3)

Plan amendments (4)

— — ( 195 ) —

Settlements ( 36 ) ( 2 ) — —

Benefit payments ( 740 ) ( 689 ) ( 77 ) ( 74 )

Other — 1 — 5

Benefit obligation at end of period $ 19,812 $ 18,358 $ 1,046 $ 824

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Pension Benefits

Retiree Medical and

Other Postretirement Benefits

(In millions)

Fair value of plan assets at beginning of period $ 12,897 $ 10,053 $ 204 $ 225

Actual return (loss) on plan assets

Actual return on plan assets 1,427 2,305 13 41

Employer contributions (5)

9 1,230 30 12

Settlements ( 36 ) ( 2 ) — —

Benefit payments ( 740 ) ( 689 ) ( 77 ) ( 74 )

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Funded status at end of period $ ( 6,255 ) $ ( 5,461 ) $ ( 876 ) $ ( 620 )

The 2019 and 2018 pension actuarial (gain) loss primarily relates to changes in our weighted average discount rate and mortality assumption and, in 2018 , changes to our retirement rate assumptions.

(1) The 2020 and 2019 pension actuarial loss primarily relates to the change in our weighted average discount rate assumption and, additionally, in 2019, the change to our mortality assumption.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

(2) The 2020 retiree medical and other postretirement benefits actuarial loss primarily relates to the change in our weighted average discount rate assumption.

The 2019 retiree medical and other postretirement benefits actuarial loss primarily relates to changes in our weighted average discount rate assumption and plan experience adjustments.

The 2018 retiree medical and other postretirement benefits actuarial gain primarily relates to changes in our weighted average discount rate, medical trend and per capita claims assumptions.

During 2019 , we contributed $ 1.2 billion to our defined benefit pension plans, including supplemental contributions of $ 444 million and a $ 786 million minimum required contribution.

During 2018 , we contributed $ 475 million to our defined benefit pension plans, including supplemental contributions of $ 433 million and a $ 42 million minimum required contribution.

(3) During the third quarter of 2020, we remeasured our retiree medical and other postretirement benefits to account for enhanced healthcare benefits provided to eligible team members who opted in to voluntary early retirement programs offered as a result of reductions to our operation due to the COVID-19 pandemic.

During the third quarter of 2020, we recognized a $ 410 million special charge for these enhanced healthcare benefits and increased our postretirement benefits obligation by $ 410 million.

(4) Principally relates to the transition of our retiree medical benefit program from a self-insured plan to a fully-insured Medicare Advantage plan as discussed above.

(5) Pursuant to the CARES Act, minimum required contributions to be made in the calendar year 2020 can be deferred to January 1, 2021, with interest accruing from the original due date to the new payment date.

During 2019, we contributed $ 1.2 billion to our defined benefit pension plans, including a $ 786 million minimum required contribution and supplemental contributions of $ 444 million.

Balance Sheet Position

Pension Benefits

Retiree Medical and

Pension Benefits Retiree Medical and

Other Postretirement Benefits

2020 2019 2020 2019

(In millions)

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Total accumulated other comprehensive loss (income), pre-tax

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Plans with Accumulated Benefit Obligations Exceeding Fair Value of Plan Assets

$ 6,775 $ 5,784 $ ( 539 ) $ ( 546 )

Plans with Projected Benefit Obligations Exceeding Fair Value of Plan Assets

Pension Benefits

Retiree Medical and

Other Postretirement Benefits

(In millions)

Projected benefit obligation $ 19,812 $ 18,327

Fair value of plan assets 13,557 12,862

Plans with Accumulated Benefit Obligations Exceeding Fair Value of Plan Assets

Pension Benefits Retiree Medical and

Other Postretirement Benefits

2020 2019 2020 2019

(In millions)

Accumulated benefit obligation (ABO) $ 19,799 $ 18,315 $ — $ —

Accumulated postretirement benefit obligation

— — 1,046 824

Fair value of plan assets 13,557 12,862 170 204

ABO less fair value of plan assets

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Net Periodic Benefit Cost (Income)

Pension Benefits

Retiree Medical and

Pension Benefits Retiree Medical and

Other Postretirement Benefits

2020 2019 2018 2020 2019 2018

(In millions)

Defined benefit plans:

Service cost $ 2 $ 2 $ 3 $ 8 $ 3 $ 5

Interest cost 615 703 674 30 33 35

Expected return on assets ( 1,010 ) ( 815 ) ( 905 ) ( 11 ) ( 15 ) ( 24 )

Special termination benefits — — — 410 — —

Settlements 12 — — — — —

Amortization of:

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Net periodic benefit cost (income) $ ( 187 ) $ 68 $ ( 59 ) $ 278 $ ( 246 ) $ ( 241 )

The components of net periodic benefit cost (income) other than the service cost component are included in nonoperating other income, net in our consolidated statements of operations.

The estimated amount of unrecognized actuarial net loss and prior service cost for the defined benefit pension plans that will be amortized from AOCI into net periodic benefit cost over the next fiscal year is $ 194 million .

The estimated amount of unrecognized actuarial net gain and prior service benefit for the retiree medical and other postretirement benefits plans that will be amortized from AOCI into net periodic benefit cost over the next fiscal year is $ 167 million .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

The service cost component of net periodic benefit cost (income) is included in operating expenses, the cost for the special termination benefits is included in special items, net and the other components of net periodic benefit cost (income) are included in nonoperating other income (expense), net in our consolidated statements of operations.

The following actuarial assumptions were used to determine our benefit obligations and net periodic benefit cost (income) for the periods presented:

Pension Benefits

Retiree Medical and

Pension Benefits Retiree Medical and

Other Postretirement Benefits

2020 2019 2020 2019

Benefit obligations:

Weighted average discount rate 2.7 % 3.4 % 2.4 % 3.3 %

Pension Benefits

Retiree Medical and

Pension Benefits Retiree Medical and

Other Postretirement Benefits

2020 2019 2018 2020 2019 2018

Net periodic benefit cost (income):

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Weighted average expected rate of return on plan assets

8.0 % 8.0 % 8.0 % 8.0 % 8.0 % 8.0 %

Weighted average health care cost trend rate assumed for next year (1)

N/A N/A N/A 4.0 % 3.7 % 3.9 %

(1) The weighted average health care cost trend rate at December 31, 2020 is assumed to decline gradually to 3.4 % by 2027 and remain level thereafter.

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Expected returns on other assets are based on a combination of long-term historical returns, actual returns on plan assets achieved over the last ten years, current and expected market conditions, and expected value to be generated through active management and securities lending programs.

A one percentage point change in the assumed health care cost trend rates would have the following approximate effects on our retiree medical and other postretirement benefits plans (in millions):

Increase (decrease) on 2019 service and interest cost

Increase (decrease) on benefit obligation as of December 31, 2019

Minimum Contributions

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based plans as well as underfunding rules specific to countries where we maintain defined benefit plans.

Based on current funding assumptions, we have minimum required contributions of $ 196 million for 2020 including contributions to defined benefit plans for our wholly-owned regional subsidiaries.

Based on current

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

funding assumptions, we have minimum required contributions of $ 697 million for 2021 including contributions to defined benefit plans for our wholly-owned regional subsidiaries and $ 130 million of minimum contributions required for 2020 that were deferred pursuant to the CARES Act as discussed above.

In January 2021, we made $ 241 million of required pension contributions, including the $ 130 million minimum contributions required for 2020.

Our funding obligations will depend on the performance of our investments held in trust by the pension plans, interest rates for determining liabilities, the amount of and timing of any supplemental contributions and our actuarial experience.

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The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (approximately, in millions):

2021 2022 2023 2024 2025 2026-2030

Pension benefits $ 790 $ 830 $ 872 $ 914 $ 952 $ 5,150

Retiree medical and other postretirement benefits 102 93 89 86 82 356

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

The objectives of our investment policies are to:

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The current strategic target asset allocation is as follows:

Asset Class/Sub-Class

Allowed Range

Asset Class/Sub-Class Allowed Range

Equity 45 % - 80 %

Large 10 % - 40 %

Small/Mid 2 % - 10 %

International 10 % - 25 %

International Small/Mid 0 % - 10 %

Emerging Markets 2 % - 15 %

Alternative Investments 5 % - 30 %

Fixed Income 20 % - 55 %

Long Duration 15 % - 45 %

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Private Income 0 % - 15 %

Other 0 % - 5 %

Cash Equivalents 0 % - 20 %

Public equity as well as high yield and emerging market fixed income securities are used to provide diversification and are expected to generate higher returns over the long-term than U.S.

long duration bonds.

Public stocks are managed using a value investment approach in order to participate in the returns generated by stocks in the long-term, while reducing year-over-year volatility.

long duration bonds are used to partially hedge the assets from declines in interest rates.

Public equity as well as high yield fixed income securities are used to provide diversification and are expected to generate higher returns over the long-term than U.S.

long duration bonds.

Alternative (private) investments are used to provide expected returns in excess of the public markets over the long-term.

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These programs are subject to market risk.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year.

Securities traded in the over-the-counter market are valued at the last bid price.

The money market fund is valued at fair value which represents the net asset value of the shares of such fund as of the close of business at the end of the period.

Investments in limited partnerships are carried at estimated net asset value as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships.

Common/collective trusts are valued at net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts.

The pension plan’s master trust also invests in a 103-12 investment entity (the 103-12 Investment Trust) which is designed to invest plan assets of more than one unrelated employer.

The 103-12 Investment Trust is valued at net asset value which is determined by the issuer daily and is based on the aggregate fair value of trust assets less liabilities, divided by the number of units outstanding.

No changes in valuation techniques or inputs occurred during the year.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Benefit Plan Assets Measured at Fair Value on a Recurring Basis

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Fair Value Measurements as of December 31, 2020

Asset Category

Quoted Prices in

Asset Category Quoted Prices in

Active Markets

for Identical

(Level 1) Significant

(Level 2) Significant

(Level 3) Total

Cash and cash equivalents $ 40 $ — $ — $ 40

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International markets (a), (b)

2,282 — — 2,282

Large-cap companies (b)

2,085 — — 2,085

Mid-cap companies (b)

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Corporate debt (d)

— 3,026 — 3,026

Government securities (e)

— 1,010 — 1,010

municipal securities — 30 — 30

Mortgage backed securities

Alternative instruments:

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Common/collective trusts (h)

Common/collective trusts and 103-12 Investment Trust measured at net asset value (g), (h)

Common/collective trusts measured at net asset value (g), (h)

Insurance group annuity contracts — — 2 2

Dividend and interest receivable 49 — — 49

Due to/from brokers for sale of securities – net

Holdings are diversified as follows:

14 % United Kingdom, 8 % Switzerland, 8 % Ireland, 7 % Japan, 7 % France, 6 % South Korea, 6 % Canada, 18 % emerging markets and the remaining 26 % with no concentration greater than 5% in any one country.

There are no significant concentrations of holdings by company or industry.

Investment includes mutual funds invested 40 % in equity securities of large-cap, mid-cap and small-cap U.S.

Due from brokers for sale of securities – net 1 — — 1

Other receivables – net 1 — — 1

Total $ 5,039 $ 4,326 $ 17 $ 13,557

(a) Holdings are diversified as follows:

11 % Switzerland, 11 % Ireland, 10 % United Kingdom, 9 % France, 8 % Japan, 7 % Germany, 6 % Netherlands, 13 % emerging markets and the remaining 25 % with no concentration greater than 5% in any one country.

(b) There are no significant concentrations of holdings by company or industry.

companies, 35 % in U.S.

treasuries and corporate bonds and 26 % in equity securities of international companies.

Includes approximately 76 % investments in corporate debt with a S&P rating lower than A and 24 % investments in corporate debt with a S&P rating A or higher.

(d) Includes approximately 77 % investments in corporate debt with a S&P rating lower than A and 23 % investments in corporate debt with a S&P rating A or higher.

Holdings include 89 % U.S.

companies, 9 % international companies and 2 % emerging market companies.

Includes approximately 79 % investments in U.S.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

(e) Includes approximately 89 % investments in U.S.

domestic government securities, 9 % in emerging market government securities and 2 % in international government securities.

There are no significant foreign currency risks within this classification.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Includes limited partnerships that invest primarily in domestic private equity and private income opportunities.

(f) Includes limited partnerships that invest primarily in domestic private equity and private income opportunities.

The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated.

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Additionally, the pension plan’s master trust has future funding commitments of approximately $ 1.6 billion over the next ten years .

Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy.

(g) Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy.

The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements.

Investment includes 36 % in a common/collective trust investing in securities of larger companies within the U.S., 29 % in a common/collective trust investing in securities of smaller companies located outside the U.S., 16 % in a collective interest trust investing primarily in short-term securities, 15 % in an emerging market 103-12 Investment Trust with investments in emerging country equity securities and 4 % in Canadian segregated balanced value, income growth and diversified pooled funds.

(h) Investment includes 34 % in a common/collective trust investing in large market capitalization equity securities within the U.S., 30 % in three common/collective trusts investing in emerging country equity securities, 21 % in a common/collective trust investing in equity securities of companies located outside the U.S., 9 % in a collective interest trust investing primarily in short-term securities, 5 % in a common/collective trust investing in smaller market capitalization equity securities within the U.S.

and 1 % in Canadian segregated balanced value, income growth and diversified pooled funds.

For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred.

Fair Value Measurements as of December 31, 2019

Asset Category

Quoted Prices in

Asset Category Quoted Prices in

Active Markets

for Identical

(Level 1) Significant

(Level 2) Significant

(Level 3) Total

Cash and cash equivalents $ 20 $ — $ — $ 20

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International markets (a), (b)

2,769 — — 2,769

Large-cap companies (b)

2,312 — — 2,312

Mid-cap companies (b)

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Corporate debt (d)

— 2,804 — 2,804

Government securities (e)

municipal securities — 51 — 51

Mortgage backed securities — 4 — 4

Alternative instruments:

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Dividend and interest receivable 53 — — 53

Due to/from brokers for sale of securities – net

Other liabilities – net

Holdings are diversified as follows:

17 % United Kingdom, 10 % Japan, 8 % France, 7 % Switzerland, 6 % Ireland, 17 % emerging markets and the remaining 35 % with no concentration greater than 5% in any one country.

There are no significant concentrations of holdings by company or industry.

Investment includes mutual funds invested 37 % in equity securities of large-cap, mid-cap and small-cap U.S.

Due to brokers for sale of securities – net ( 4 ) — — ( 4 )

Total $ 5,858 $ 4,140 $ 12 $ 12,897

(a) Holdings are diversified as follows:

14 % United Kingdom, 8 % Switzerland, 8 % Ireland, 7 % Japan, 7 % France, 6 %

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

South Korea, 6 % Canada, 18 % emerging markets and the remaining 26 % with no concentration greater than 5% in any one country.

(b) There are no significant concentrations of holdings by company or industry.

companies, 33 % in U.S.

treasuries and corporate bonds and 27 % in equity securities of international companies.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Includes approximately 77 % investments in corporate debt with a S&P rating lower than A and 23 % investments in corporate debt with a S&P rating A or higher.

(d) Includes approximately 76 % investments in corporate debt with a S&P rating lower than A and 24 % investments in corporate debt with a S&P rating A or higher.

Holdings include 86 % U.S.

companies, 11 % international companies and 3 % emerging market companies.

Includes approximately 32 % investments in U.S.

(e) Includes approximately 79 % investments in U.S.

domestic government securities, 13 % in emerging market government securities and 8 % in international government securities.

There are no significant foreign currency risks within this classification.

Includes limited partnerships that invest primarily in U.S.

( 94 % ) and European ( 6 % ) buyout opportunities of a range of privately held companies.

(f) Includes limited partnerships that invest primarily in domestic private equity and private income opportunities.

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Additionally, the pension plan’s master trust has future funding commitments of approximately $ 1.4 billion over the next ten years .

Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy.

(g) Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy.

The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements.

Investment includes 45 % in an emerging market 103-12 Investment Trust with investments in emerging country equity securities, 37 % in a collective interest trust investing primarily in short-term securities, 12 % in Canadian segregated balanced value, income growth and diversified pooled funds and 6 % in a common/collective trust investing in securities of smaller companies located outside the U.S., including developing markets.

(h) Investment includes 36 % in a common/collective trust investing in securities of larger companies within the U.S., 29 % in a common/collective trust investing in securities of smaller companies located outside the U.S., 16 % in a collective interest trust investing primarily in short-term securities, 15 % in an emerging market 103-12 Investment Trust with investments in emerging country equity securities and 4 % in Canadian segregated balanced value, income growth and diversified pooled funds.

For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred.

Changes in fair value measurements of Level 3 investments during the year ended December 31, 2020, were as follows (in millions):

Private Market Partnerships

Insurance Group

Private Market Partnerships Insurance Group

Annuity Contracts

Beginning balance at December 31, 2019 $ 10 $ 2

Actual gain on plan assets:

Relating to assets still held at the reporting date 1 —

Purchases 4 —

Ending balance at December 31, 2020 $ 15 $ 2

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Private Market

Insurance Group

Partnerships Insurance Group

Annuity Contracts

Beginning balance at December 31, 2018 $ 7 $ 2

Actual loss on plan assets:

Relating to assets still held at the reporting date

Purchases 3 —

Ending balance at December 31, 2019 $ 10 $ 2

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Fair Value Measurements as of December 31, 2020

Asset Category

Quoted Prices in

Asset Category Quoted Prices in

Active Markets for Identical Assets

(Level 1) Significant

(Level 2) Significant

(Level 3) Total

Money market fund $ 4 $ — $ — $ 4

Mutual funds – AAL Class — 166 — 166

Total $ 4 $ 166 $ — $ 170

Fair Value Measurements as of December 31, 2019

Asset Category

Quoted Prices in

Asset Category Quoted Prices in

Active Markets for Identical Assets

(Level 1) Significant

(Level 2) Significant

(Level 3) Total

Money market fund $ 4 $ — $ — $ 4

Mutual funds – AAL Class — 200 — 200

Total $ 4 $ 200 $ — $ 204

Investments in the retiree medical and other postretirement benefits plans’ mutual funds are valued by quoted prices on the active market, which is fair value, and represents the net asset value of the shares of such funds as of the close of business at the end of the period.

Net asset value is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination.

The AAL Class mutual funds are offered only to benefit plans of American, therefore, trading is restricted only to American, resulting in a fair value classification of Level 2.

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common stocks in 2020 and 2019, respectively.

Net asset value is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination.

Defined Contribution and Multiemployer Plans

The costs associated with our defined contribution plans were $ 860 million , $ 846 million and $ 820 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

The costs associated with our defined contribution plans were $ 860 million for each of the years ended December 31, 2020 and 2019 and $ 846 million for the year ended December 31, 2018.

We participate in the International Association of Machinists & Aerospace Workers (IAM) National Pension Fund, Employer Identification No.

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Additionally, the IAM Pension Fund’s Board voluntarily elected to enter into “critical” status on April 17, 2019.

In connection with the entry into critical status, the IAM Pension Fund adopted a rehabilitation plan on April 17, 2019 (the Rehabilitation Plan).

Under the Rehabilitation Plan, we were subject to an immaterial contribution surcharge, which ceased to apply June 14, 2019 upon our adoption of a contribution schedule under the Rehabilitation Plan.

The contribution schedule we adopted provides for 2.5 % annual increases to our contribution rate.

Upon entry into critical status, the IAM Pension Fund was required by law to adopt a rehabilitation plan aimed at restoring the financial health of the pension plan and did so on April 17, 2019 (the Rehabilitation Plan).

Under the Rehabilitation Plan, we were subject to an immaterial contribution surcharge, which ceased to apply June 14, 2019 upon our mandatory adoption of a contribution schedule under the Rehabilitation Plan.

The contribution schedule requires 2.5 % annual increases to our contribution rate.

This contribution schedule will remain in effect through the earlier of December 31, 2031 or the date the IAM Pension Fund emerges from critical status.

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We accrue 5 % of our pre-tax income excluding net special items for our profit sharing program.

For the year ended December 31, 2019 , we accrued $ 213 million for this program, which will be distributed to employees in the first quarter of 2020 .

As a result of our pre-tax loss excluding net special items, there will not be a payout for 2020 under our profit sharing program.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

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Postretirement

Unrealized Gain (Loss) on Investments

Benefits Unrealized Gain on Investments Income Tax

(Provision) (1)

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Balance at December 31, 2020 $ ( 6,236 ) $ ( 2 ) $ ( 865 ) $ ( 7,103 )

Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income until the obligations are fully extinguished.

Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision on our consolidated statements of operations.

(1) Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income (loss) until the obligations are fully extinguished.

(2) Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision (benefit) on our consolidated statements of operations.

Reclassifications out of AOCI for the years ended December 31, 2020 and 2019 are as follows (in millions):

Amounts reclassified from AOCI

Affected line items on the

Amounts reclassified from AOCI Affected line items on the

consolidated statements of

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Amortization of pension, retiree medical and other postretirement benefits:

Prior service benefit

Nonoperating other income, net

Actuarial loss

Nonoperating other income, net

Prior service benefit $ ( 81 ) $ ( 162 ) Nonoperating other income, net

Actuarial loss 118 93 Nonoperating other income, net

Total reclassifications for the period, net of tax $ 37 $ ( 69 )

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Under all of our aircraft and engine purchase agreements, our total future commitments as of December 31, 2020 are expected to be as follows (approximately, in millions):

2025 and Thereafter

2021 2022 2023 2024 2025 2026 and Thereafter Total

Payments for aircraft commitments and certain engines (1)

$ 527 $ 1,661 $ 1,592 $ 2,377 $ 3,381 $ 1,742 $ 11,280

(1) These amounts are net of purchase deposits currently held by the manufacturers.

We have granted a security interest in certain of our purchase deposits with Boeing.

We have granted a security interest in certain of our purchase deposits with Boeing to secure certain obligations to Boeing and third-party financing sources.

Our purchase deposits held by all manufacturers totaled $ 1.4 billion as of December 31, 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

On March 13, 2019, a directive from the Federal Aviation Administration (FAA) grounded all U.S.-registered Boeing 737 MAX aircraft.

We currently have 76 Boeing 737 MAX Family aircraft on order and we have not taken delivery of any Boeing 737 MAX Family aircraft since the grounding.

The extent of the delay to the scheduled deliveries of the Boeing 737 MAX aircraft is expected to be impacted by the length of time the FAA order remains in place, Boeing's production rate and the pace at which Boeing can deliver aircraft following the lifting of the FAA order, among other factors.

Due to uncertainty surrounding the timing of delivery of certain aircraft, the amounts in the table represent our current best estimate, including with respect to the delivery of Boeing 737 MAX aircraft;

On March 13, 2019, a directive from the Federal Aviation Administration (FAA) grounded all U.S.-registered Boeing 737 MAX Family aircraft and, as a result, all deliveries of Boeing 737 MAX Family aircraft were suspended.

Since the time of the FAA recertification of the Boeing 737 MAX Family aircraft on November 18, 2020, deliveries have resumed and we accepted delivery of 10 Boeing 737 MAX Family aircraft during the period between the date of recertification and December 31, 2020.

We have rights to defer one Boeing 737 MAX Family aircraft from delivery in 2021 to 2023 and rights to defer 10 Boeing 737 MAX Family aircraft from delivery in 2022 to 2023-2024.

Due to the uncertainty surrounding the timing of delivery of certain aircraft, the amounts in the table represent our current best estimate;

however, the actual delivery schedule may differ from the table above, potentially materially.

The amounts in the table exclude 22 787-8 aircraft to be delivered in 2020 and 2021 for which Boeing has committed to provide sale-leaseback financing (in the form of operating leases).

The amounts in the table exclude 19 Boeing 787-8 aircraft to be delivered in 2021 for which we have obtained committed lease financing.

See Note 6 for information regarding this operating lease commitment.

Additionally, we have purchase commitments related to aircraft fuel, construction projects and information technology support as follows (approximately):

$ 3.5 billion in 2020 , $ 3.5 billion in 2021 , $ 1.3 billion in 2022 , $ 130 million in 2023 , $ 81 million in 2024 and $ 77 million in 2025 and thereafter .

Additionally, we have purchase commitments related to aircraft fuel, flight equipment maintenance, construction projects and information technology support as follows (approximately):

$ 2.3 billion in 2021, $ 1.3 billion in 2022, $ 1.2 billion in 2023, $ 242 million in 2024, $ 163 million in 2025 and $ 1.0 billion in 2026 and thereafter.

(b) Capacity Purchase Agreements with Third-Party Regional Carriers

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As of December 31, 2020, American’s minimum obligations under its capacity purchase agreements with third-party regional carriers are as follows (approximately, in millions):

2025 and Thereafter

2021 2022 2023 2024 2025 2026 and Thereafter Total

Minimum obligations under capacity purchase agreements with third-party regional carriers (1)

$ 1,120 $ 1,666 $ 1,685 $ 1,663 $ 1,511 $ 3,646 $ 11,291

(1) Represents minimum payments under capacity purchase agreements with third-party regional carriers, which are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and American’s actual payments could differ materially.

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Los Angeles International Airport (LAX)

From time to time, airports where we have operations engage in construction projects, often substantial, that result in new or improved facilities that are ultimately funded through increases in the rent and other occupancy costs payable by airlines using the airport.

Unlike this construction and funding model, we are managing a project at LAX where we have legal title to the assets during construction.

In 2018, we executed a lease agreement with Los Angeles World Airports (LAWA), which owns and operates LAX, in connection with a $ 1.6 billion modernization project related to LAX Terminals 4 and 5.

Construction will occur in a phased approach, which started in October 2018 and is expected to be completed in 2028.

The modernization project will include a unified departure hall to combine the entranceway of Terminals 4 and 5, reconfigured ticket counter and check-in areas with seamless access to security screening areas, 16 security screening lanes with automated technology and upgraded amenities at gate areas.

Construction, which started in October 2018 and is expected to be completed in 2028, will occur in a phased approach.

The modernization project will include a unified departure hall to the entranceway of Terminals 4 and 5, reconfigured ticket counter and check-in areas with seamless access to security screening areas, 10 new security screening lanes with automated technology in addition to the existing Terminal 5 lanes, and a new Terminal 4 South concourse with more open and upgraded amenities at gate areas.

The project will also include renovated break rooms, multi-use meeting rooms and team gathering spaces throughout the terminals to support our team members at LAX.

We are managing this project and have legal title to the assets during their construction.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

As each phase is completed, the assets will be sold and transferred to LAWA, including the site improvements and non-proprietary improvements.

As we control the assets during construction, they are recognized on our balance sheet until legal title has transferred.

For 2019 , we incurred approximately $ 98 million in costs relating to the LAX modernization project, which are included within operating property and equipment on our consolidated balance sheet as of December 31, 2019 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

As of December 31, 2020, we have incurred approximately $ 223 million in costs relating to the LAX modernization project, of which $ 114 million were incurred during 2020, and have been included within operating property and equipment on our consolidated balance sheet.

As of December 31, 2020, we have sold and transferred $ 111 million of non-proprietary improvements to LAWA, all of which occurred during 2020.

(d) Off-Balance Sheet Arrangements

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In the case of aircraft EETCs, rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allow American to raise the financing for a number of aircraft at one time and, if applicable, place such funds in escrow pending a future purchase, delivery or refinancing of the relevant aircraft.

Similarly, in the case of the spare engine EETCs, the trust allows American to use its existing pool of spare engines to raise financing under a single facility.

Similarly, in the case of the spare engine EETCs, the trusts allow American to use its existing pool of spare engines to raise financing under a single facility.

The trusts have also been structured to provide for certain credit enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to American.

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We provide financial assurance, such as letters of credit, surety bonds or restricted cash and investments, primarily to support projected workers’ compensation obligations and airport commitments.

As of December 31, 2019 , we had $ 572 million of letters of credit and surety bonds securing various obligations.

As of December 31, 2020, we had $ 476 million of letters of credit and surety bonds securing various obligations, of which $ 110 million is collateralized with our restricted cash.

The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2024.

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On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims.

The shares of AAG common stock issued to the Disputed Claims Reserve were originally issued on December 13, 2013 and have at all times since been included in the number of shares issued and outstanding as reported from time to time in our quarterly and annual reports, including for purposes of calculating earnings per common share.

As disputed claims are resolved, the claimants receive distributions of shares from the Disputed Claims Reserve.

However, we are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution in the Disputed Claims Reserve are not sufficient to fully pay any additional allowed unsecured claims.

To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders and former convertible noteholders treated as stockholders

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

under the Plan.

As of December 31, 2019 , the Disputed Claims Reserve held approximately 7 million shares of AAG common stock.

We are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution in the Disputed Claims Reserve are not sufficient to fully pay any additional allowed unsecured claims.

If any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders and former convertible noteholders treated as stockholders under the Plan.

In February 2020, 2.2 million shares of AAG common stock were distributed from the Disputed Claims Reserve.

After giving effect to this distribution, as of December 31, 2020, the Disputed Claims Reserve held approximately 4.8 million shares of AAG common stock.

Private Party Antitrust Action Related to Passenger Capacity.

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On June 15, 2018, we reached a settlement agreement with the plaintiffs in the amount of $ 45 million to resolve all class claims in the U.S.

That settlement was approved by the DC Court on May 13, 2019.

Three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia.

That settlement was approved by the DC Court on May 13, 2019, however three parties who objected to the settlement have appealed that decision to the United States Court of Appeals for the District of Columbia.

We believe these appeals are without merit and intend to vigorously defend against them.

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On August 29, 2018, the Bankruptcy Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross-motion for summary judgment.

The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019.

The parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019, and we are awaiting the Bankruptcy Court's decision.

We believe this lawsuit is without merit and intend to vigorously defend against the allegations.

Pension Benefits Action.

On December 11, 2018, a lawsuit captioned Torres, et al.

American Airlines, Inc., The Employee Benefits Committee and John/Jane Does 1-5, was filed in the United States District Court for the Northern District of Texas.

The plaintiffs in this lawsuit purport to represent a class consisting of all participants in and beneficiaries under any of the four American defined benefit pension plans who elected to receive an optional form of benefit other than a lump sum distribution of a participant’s vested benefit.

Under ERISA, participants covered by defined benefit plans accrue retirement benefits in the form of a single life annuity payable upon retirement on a monthly basis until the employee’s death, and may elect certain alternative forms of benefit payments.

Plaintiffs contend that the mortality tables used by American for purposes of calculations related to these alternative forms of benefits are outdated and that more recent mortality tables would have provided more generous benefits and should have been used to make those calculations.

The court has denied our motion to dismiss the complaint.

We believe this lawsuit is without merit and intend to vigorously defend against the allegations.

The parties' evidentiary cases were presented before the Bankruptcy Court in a bench trial in March 2019 and the parties submitted proposed findings of fact and conclusions of law and made closing arguments in April 2019.

On January 29, 2021, the Bankruptcy Court published its decision finding in our favor.

We expect the plaintiffs to appeal this ruling.

We believe this lawsuit is without merit and intend to continue to vigorously defend against the allegations, including in respect of any appeal of the January 29, 2021 ruling.

In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time.

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As of December 31, 2020, the remaining lease payments through 2035 guaranteeing the principal and interest on these bonds are $ 572 million and the current carrying amount of the associated operating lease liability in the accompanying consolidated balance sheet is $ 321 million.

(g) Credit Card Processing Agreements

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(h) Labor Negotiations

As of December 31, 2019 , we employed approximately 133,700 active full-time equivalent employees, of which 29,500 were employed by our regional operations.

Approximately 85 % of employees are covered by collective bargaining agreements (CBAs) with various labor unions and approximately 22 % of employees are covered by CBAs that will become amendable within one year.

Agreements in principle were reached on January 30, 2020 for joint collective bargaining agreements (JCBAs) covering our mainline maintenance, fleet service, stock clerks, maintenance control technicians and maintenance training instructors.

Those agreements are subject to membership ratification vote.

Additionally, the post-Merger JCBAs covering our pilots and flight attendants became amendable in January 2020 and December 2019, respectively.

Negotiations continue for new agreements for these workgroups as well as for CBAs covering certain employee groups at our wholly-owned regional subsidiaries.

As of December 31, 2020, we employed approximately 102,700 active full-time equivalent (FTE) employees, of which 24,400 were employed by our wholly-owned regional subsidiaries.

Of the total active FTE employees, 84 % are covered by collective bargaining agreements (CBAs) with various labor unions and 43 % are covered by CBAs that are currently amendable or that will become amendable within one year.

Joint collective bargaining agreements (JCBAs) have been reached with post-Merger employee groups, including a new five-year JCBA ratified with the TWU-IAM Association, which represents our mainline mechanics and related, fleet service, stock clerks, maintenance control technicians and maintenance training instructors.

Additionally, the post-Merger JCBAs covering our pilots and flight attendants are now amendable.

The JCBA covering our passenger service employees and CBAs covering certain employee groups at our wholly-owned regional subsidiaries are also amendable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Supplemental Cash Flow Information

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Year Ended December 31,

2020 2019 2018

Non-cash investing and financing activities:

Settlement of bankruptcy obligations $ 56 $ 7 $ —

Equity Investment

Supplemental information:

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Income taxes paid 6 8 18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Operating Segments and Related Disclosures

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Financial information and annual operational plans and forecasts are prepared and reviewed by the chief operating decision maker at the consolidated level.

When making operational decisions, the chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but is indifferent to the results of the individual wholly-owned regional carriers.

The objective in making operational decisions is to maximize consolidated financial results, not the individual results of American or American Eagle.

See Note 1(k) for our passenger revenue by geographic region.

See Note 1(l) for our passenger revenue by geographic region.

Our tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated.

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Any shares underlying awards granted under the 2013 Plan that are forfeited, terminate or are settled in cash (in whole or in part) without the delivery of shares will again be available for grant.

Our salaries, wages and benefits expense for the years ended December 31, 2019 , 2018 and 2017 included $ 95 million , $ 88 million and $ 90 million , respectively, of share-based compensation costs.

For the years ended December 31, 2020, 2019 and 2018, we recorded $ 91 million, $ 95 million and $ 88 million, respectively, of share-based compensation costs principally in salaries, wages and benefits expense on our consolidated statements of operations.

During 2020, 2019 and 2018, we withheld approximately 0.7 million, 0.8 million and 0.8 million shares of AAG common stock, respectively, and paid approximately $ 15 million, $ 25 million and $ 37 million, respectively, in satisfaction of certain tax withholding obligations associated with employee equity awards.

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RSUs are classified as equity awards as the vesting results in the issuance of shares of AAG common stock.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

RSU award activity for all plans for the years ended December 31, 2020, 2019 and 2018 is as follows:

Number of Shares

Weighted Average Grant Date Fair Value

Number of Shares Weighted Average Grant Date Fair Value

(In thousands)

Outstanding at December 31, 2017 4,324 $ 46.94

Granted 2,194 47.65

Vested and released ( 1,999 ) 44.99

Forfeited ( 199 ) 45.72

Outstanding at December 31, 2018 4,320 $ 44.29

Granted 3,206 34.00

Vested and released ( 2,002 ) 44.90

Forfeited ( 337 ) 42.55

Outstanding at December 31, 2019 5,187 $ 37.01

Granted 5,883 22.07

Vested and released ( 2,268 ) 39.46

Forfeited ( 920 ) 29.78

Outstanding at December 31, 2020 7,882 $ 23.66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

As of December 31, 2020, there was $ 107 million of unrecognized compensation cost related to RSUs.

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Valuation and Qualifying Accounts (in millions)

Balance at Beginning of Year

Additions Charged to Statement of Operations Accounts

Balance at Beginning of Year Additions Charged to Statement of Operations Accounts Deductions Balance at

Allowance for obsolescence of spare parts

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Year ended December 31, 2018 769 70 ( 25 ) 814

Allowance for uncollectible accounts

Allowance for credit losses on accounts receivable

Year ended December 31, 2020 $ 31 $ 27 $ ( 22 ) $ 36

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Year ended December 31, 2018 24 42 ( 37 ) 29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Quarterly Financial Data (Unaudited)

Unaudited summarized financial data by quarter for 2020 and 2019 (in millions, except share and per share amounts):

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

First Quarter Second Quarter Third Quarter Fourth Quarter

Operating revenues $ 8,515 $ 1,622 $ 3,173 $ 4,027

Operating expenses 11,064 4,108 6,044 6,542

Operating income

Earnings per share:

Operating loss ( 2,549 ) ( 2,486 ) ( 2,871 ) ( 2,515 )

Net loss ( 2,241 ) ( 2,067 ) ( 2,399 ) ( 2,178 )

Loss per share:

Basic and diluted $ ( 5.26 ) $ ( 4.82 ) $ ( 4.71 ) $ ( 3.81 )

Shares used for computation (in thousands):

Basic and diluted 425,713 428,807 509,049 571,984

Operating revenues $ 10,584 $ 11,960 $ 11,911 $ 11,313

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Operating income 375 1,153 808 729

Net income 185 662 425 414

Earnings per share:

Basic $ 0.41 $ 1.49 $ 0.96 $ 0.95

Diluted $ 0.41 $ 1.49 $ 0.96 $ 0.95

Shares used for computation (in thousands):

Our fourth quarter 2019 results include $ 108 million of total pre-tax net special items that principally included $ 85 million of merger integration expenses and $ 39 million of fleet restructuring expenses, offset in part by $ 42 million of mark-to-market net unrealized gains associated with certain equity and other investments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

Our fourth quarter 2018 results include $ 195 million of total pre-tax net special items that principally included $ 94 million of fleet restructuring expenses, $ 81 million of merger integration expenses, $ 37 million of severance costs associated with reductions of management and support staff team members, $ 22 million of mark-to-market net unrealized losses associated with certain equity investments, offset in part by a $ 37 million net credit resulting from mark-to-market adjustments on bankruptcy obligations.

Basic 451,951 445,008 441,915 434,578

Diluted 453,429 445,587 442,401 435,659

Our fourth quarter 2020 results included $ 36 million of total pre-tax net special items driven principally by mark-to-market net unrealized gains and losses associated with certain equity investments and treasury rate lock derivative instruments.

Our fourth quarter 2019 results included $ 108 million of total pre-tax net special items that principally included $ 85 million of merger integration expenses and $ 39 million of fleet restructuring expenses, offset in part by $ 42 million of mark-to-market net unrealized gains associated with certain equity investments and treasury rate lock derivative instruments.

Subsequent Events

Dividend Declaration

In January 2020 , we announced that our Board of Directors declared a $ 0.10 per share cash dividend for stockholders of record on February 5, 2020 , and payable on February 19, 2020 .

Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors.

We are not obligated to continue a dividend for any fixed period, and the payment of dividends may be suspended or discontinued at any time at our discretion and without prior notice.

2014 Credit Facilities Refinancing

In January 2020, American and AAG entered into the Eighth Amendment (the Eighth Amendment) to Amended and Restated Credit and Guaranty Agreement, amending the 2014 Credit Agreement, pursuant to which American refinanced the 2014 Term Loan Facility, increasing the total aggregate principal outstanding to $ 1.22 billion , reducing LIBOR margin from 2.00 % to 1.75 % , with a LIBOR floor of 0 % , and reducing the base rate margin from 1.00 % to 0.75 % .

In addition, the maturity date for the 2014 Term Loan Facility was extended to January 2027 from October 2021.

The 2014 Revolving Facility remains unchanged and, as of January 29, 2020, the effective date of the Eighth Amendment, there were no borrowings or letters of credit outstanding thereunder.

On January 15, 2021 (the PSP2 Closing Date), the Subsidiaries entered into a Payroll Support Program Extension Agreement (the PSP2 Agreement) with Treasury, with respect to PSP2 provided pursuant to the PSP Extension Law.

In connection with our entry into the PSP2 Agreement, on the PSP2 Closing Date, AAG also entered into a warrant agreement (the PSP2 Warrant Agreement) with Treasury and issued the PSP2 Promissory Note to Treasury, with the Subsidiaries as guarantors.

PSP2 Agreement

In connection with PSP2, we are required to comply with the relevant provisions of the PSP Extension Law, which are substantially similar as the restrictions contained in the PSP1 Agreement, but are in effect for a longer time period.

These provisions include the requirement that funds provided pursuant to the PSP2 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the requirement against involuntary furloughs and reductions in employee pay rates and benefits through March 31, 2021, the provisions that prohibit the repurchase of AAG common stock, and the payment of common stock dividends through at least March 31, 2022, the provisions that restrict the payment of certain executive compensation until October 1, 2022, as well as a requirement to recall employees involuntarily terminated or furloughed after September 30, 2020.

As was the case with PSP1, the PSP2 Agreement also imposes substantial reporting obligations on us.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

Pursuant to the PSP2 Agreement, Treasury is to provide us financial assistance to be paid in installments (each, an Installment) expected to total at least $ 3.0 billion in the aggregate, of which $ 1.5 billion was received on January 15, 2021.

As partial compensation to the U.S.

Government for the provision of financial assistance under PSP2, and assuming a total principal sum of approximately $ 3.0 billion, we expect AAG to issue a PSP2 Promissory Note in the aggregate principal amount of approximately $ 896 million and issue warrants (each a PSP2 Warrant and, collectively, the PSP2 Warrants) to Treasury to purchase up to an aggregate of approximately 5.7 million shares of AAG common stock.

PSP2 Promissory Note

As partial compensation to the U.S.

Government for the provision of financial assistance under the PSP2 Agreement, AAG issued the PSP2 Promissory Note to Treasury, which provides for our unconditional promise to pay to Treasury the initial principal sum of approximately $ 433 million, subject to an increase equal to 30 % of the amount of each additional Installment disbursed under the PSP2 Agreement after the PSP2 Closing Date, and the guarantee of the Company’s obligations by the Subsidiaries.

Assuming the total Installments to be paid pursuant to the PSP2 Agreement aggregate approximately $ 3.0 billion, the PSP2 Promissory Note will have a total principal sum of approximately $ 896 million.

The PSP2 Promissory Note bears interest on the outstanding principal amount at a rate equal to 1.00 % per annum until the fifth anniversary of the PSP2 Closing Date and 2.00 % plus an interest rate based on the secured overnight financing rate per annum or other benchmark replacement rate consistent with customary market conventions (but not to be less than 0.00 %) thereafter until the tenth anniversary of the PSP2 Closing Date (the PSP2 Maturity Date), and interest accrued thereon will be payable in arrears on the last business day of March and September of each year, beginning on March 31, 2021.

The aggregate principal amount outstanding under the PSP2 Promissory Note, together with all accrued and unpaid interest thereon and all other amounts payable under the PSP2 Promissory Note, will be due and payable on the PSP2 Maturity Date.

We may, at any time and from time to time, voluntarily prepay amounts outstanding under the PSP2 Promissory Note, in whole or in part, without penalty or premium.

Within 30 days of the occurrence of certain change of control triggering events, we are required to prepay the aggregate outstanding principal amount of the PSP2 Promissory Note at such time, together with any accrued interest or other amounts owing under the PSP2 Promissory Note at such time.

The PSP2 Promissory Note is our senior unsecured obligation and each guarantee of the PSP2 Promissory Note is the senior unsecured obligation of each of the Subsidiaries, respectively.

The PSP2 Promissory Note contains events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness.

Upon the occurrence of an event of default and subject to certain grace periods, the outstanding obligations under the PSP2 Promissory Note may, and in certain circumstances will automatically, be accelerated and become due and payable immediately.

PSP2 Warrant Agreement and PSP2 Warrants

As partial compensation to the U.S.

Government for the provision of financial assistance under the PSP2 Agreement, and pursuant to the PSP2 Warrant Agreement, AAG agreed to issue warrants to Treasury to purchase PSP2 Warrant Shares.

The exercise price of the PSP2 Warrant Shares is $ 15.66 per share (which was the closing price of the AAG common stock on The Nasdaq Global Select Market on December 24, 2020), subject to certain anti-dilution provisions provided for in the PSP2 Warrants.

Pursuant to the PSP2 Warrant Agreement, (a) on the PSP2 Closing Date, AAG issued to Treasury a PSP2 Warrant to purchase up to an aggregate of approximately 2.8 million shares of Common Stock based on the terms described herein and (b) on the date of each increase of the principal amount of the PSP2 Promissory Note in connection with the disbursement of an additional Installment under the PSP2 Agreement, AAG will issue to Treasury an additional PSP2 Warrant for a number of shares of AAG common stock equal to 10 % of such increase of the principal amount of the PSP2 Promissory Note, divided by $ 15.66 , the exercise price of such shares.

Assuming the total Installments to be paid pursuant to the PSP2 Agreement aggregate approximately $ 3.0 billion, the total number of PSP2 Warrant Shares issuable is approximately 5.7 million, subject to certain anti-dilution provisions, provided for in the PSP2 Warrants.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC .

The PSP2 Warrants do not have any voting rights and are freely transferrable, with registration rights.

Each PSP2 Warrant expires on the fifth anniversary of the date of issuance of such PSP2 Warrant.

The PSP2 Warrants will be exercisable either through net share settlement or cash, at our option.

The PSP2 Warrants were and will be issued solely as compensation to the U.S.

Government related to entry into the PSP2 Agreement.

No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP2 Warrants or will be received upon exercise thereof.

At the Market Offering

On October 22, 2020, AAG entered into an Equity Distribution Agreement (Prior ATM) relating to the issuance and sale of shares of AAG common stock pursuant to an at-the-market offering up to an aggregate value of $ 1.0 billion.

Since the inception of the Prior ATM through January 28, 2021, we issued 68.6 million shares of AAG common stock at an average price of $ 12.87 per share for net proceeds of $ 869 million.

We provided notice to terminate the Prior ATM effective as of January 28, 2021 with $ 118 million of shares of AAG common stock available for issuance.

On January 29, 2021, AAG entered into a new Equity Distribution Agreement (ATM Offering) relating to the issuance and sale of shares of AAG common stock pursuant to an at-the-market offering up to an aggregate value of $ 1.1 billion.

The net proceeds from the sale of shares of AAG common stock related to the ATM Offering will be used for general corporate purposes and to enhance our liquidity position.

Since the inception of the ATM Offering through February 16, 2021, we have issued 18.2 million shares of AAG common stock at an average price of $ 17.59 per share for proceeds of $ 320 million.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES, INC.

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We have audited the accompanying consolidated balance sheets of American Airlines, Inc.

and subsidiaries (American) as of December 31, 2019 and 2018 , the related consolidated statements of operations, comprehensive income, cash flows, and stockholder’s equity for each of the years in the three-year period ended December 31, 2019 , and the related notes (collectively, the consolidated financial statements).

and subsidiaries (American) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholder’s equity for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of American as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S.

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), American’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 17, 2021 expressed an unqualified opinion on the effectiveness of American’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, American has changed its method of accounting for leases as of January 1, 2018 due to the modified retrospective adoption of Accounting Standards Update 2016-02, Leases (Topic 842) , as amended.

Basis for Opinion

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Evaluation of estimated passenger travel revenue

As discussed in Note 1(k) to the consolidated financial statements, American recorded passenger travel revenue of $38.8 billion for the year ended December 31, 2019.

Passenger travel revenue includes an estimate for the amount of revenue recognized for tickets that will expire unused in whole or in part.

The percentage of passenger tickets that are expected to expire unused is estimated based on an analysis of American’s historical data.

We identified the evaluation of estimated passenger travel revenue as a critical audit matter.

A high degree of auditor judgment was required to assess the underlying assumption made by American to develop this estimate.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over American’s passenger revenue recognition process, including controls related to the estimation of the percentage of passenger tickets that are expected to expire unused.

We assessed American’s estimate of the percentage of passenger tickets expected to expire unused by comparing previous years’ estimates to the actual percentage of passenger tickets expired unused for the year.

We compared our independent expectation to that of American.

Assessment of the estimated selling price for mileage credits earned through travel

As discussed in Note 1(k) to the consolidated financial statements, American applies a relative selling price approach whereby the total amount collected from each applicable passenger ticket sale is allocated between the air transportation and the mileage credits earned.

The mileage credits earned are deferred and recognized in passenger revenue at the time mileage credits are redeemed and transportation is provided.

American estimates the selling price of mileage credits earned through travel using an approach based on inputs and assumptions derived from historical data.

Additionally, an adjustment is made to the estimated selling price of mileage credits earned to account for the estimate of mileage credits not expected to be redeemed.

Estimate of mileage credits not expected to be redeemed

As discussed in Note 1(l) to the consolidated financial statements, American’s loyalty program awards mileage credits to passengers for flights on American, flights on partner airlines, or for using the services of other program participants.

American accounts for such mileage credits earned using the deferred revenue method, which includes an estimate for mileage credits not expected to be redeemed.

American’s loyalty program liability was $9.2 billion as of December 31, 2020 and the associated passenger revenue for mileage credits redeemed for travel was $1.1 billion for the year ended December 31, 2020.

A high degree of auditor judgment was required to evaluate the historical data used to develop the estimate.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over American’s loyalty program accounting process, including controls related to the estimation of the selling price for mileage credits earned through travel.

We evaluated that American’s methodology used to develop the estimated selling price of mileage credits earned through travel, including estimated mileage credits not expected to be redeemed, was consistent with that of historical periods.

We performed sensitivity analyses over the estimated selling price of mileage credits earned through travel, including estimated mileage credits not expected to be redeemed.

We assessed the results of the sensitivity analyses to American’s recorded amount of loyalty program liability and the associated passenger revenue.

We compared American’s estimate of mileage credits not expected to be redeemed to that of other airlines within the industry.

We identified the assessment of the estimated number of mileage credits not expected to be redeemed as a critical audit matter.

A high degree of auditor judgment was required to evaluate the applicability of historical data used to develop the estimate.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls over American’s loyalty program accounting process, including controls related to the estimation of mileage credits not expected to be redeemed.

We assessed American’s methodology used to evaluate this estimate and determined it was consistent with historical periods.

We developed an independent expectation of mileage credits not expected to be redeemed, which included consideration of industry and historical information.

We compared the results of our independent expectation to American’s recorded amount of loyalty program liability and the associated passenger revenue.

Sufficiency of audit evidence over realizability of operating loss carryforwards

As discussed in Notes 1(i) and 5 to the consolidated financial statements, American had $3.9 billion of operating loss carryforwards, which are recorded as deferred tax assets at December 31, 2020.

Deferred tax assets are recognized related to operating loss carryforwards that will reduce future taxable income.

American provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all the deferred tax assets, will not be realized.

We identified the evaluation of the sufficiency of audit evidence over the realizability of operating loss carryforwards as a critical audit matter.

The following are the primary procedures we performed to address this critical audit matter.

We performed risk assessment procedures and applied auditor judgment to determine the nature and extent of procedures to be performed over the income tax accounts and disclosures.

We evaluated the design and tested the operating effectiveness of certain internal controls over American’s deferred tax asset valuation allowance process, including controls related to the realizability of operating loss carryforwards.

We evaluated the reasonableness of management’s future projections of profitability considering (i) historical profitability of American, (ii) consistency with industry data and economic trends, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

We involved tax professionals who assisted in the evaluation of the nature, frequency and severity of current and cumulative taxable income or losses.

Further, we assessed the sufficiency of audit evidence obtained over the realizability of the operating loss carryforwards by evaluating the cumulative results of the audit procedures, qualitative aspects of American’s accounting practices, and potential bias in the accounting estimate.

We have served as American’s auditor since 2014.

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Year Ended December 31,

2020 2019 2018

Operating revenues:

Passenger $ 14,518 $ 42,010 $ 40,676

Cargo 769 863 1,013

Other 2,048 2,888 2,841

Total operating revenues 17,335 45,761 44,530

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Special items, net ( 657 ) 635 787

Other 2,991 5,090 5,090

Total operating expenses 27,559 42,714 41,807

Operating income

Operating income (loss) ( 10,224 ) 3,047 2,723

Nonoperating income (expense):

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Total nonoperating expense, net ( 679 ) ( 442 ) ( 531 )

Income before income taxes

Income tax provision

Income (loss) before income taxes ( 10,903 ) 2,605 2,192

Income tax provision (benefit) ( 2,453 ) 633 534

Net income (loss) $ ( 8,450 ) $ 1,972 $ 1,658

See accompanying notes to consolidated financial statements.

AMERICAN AIRLINES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

Year Ended December 31,

2020 2019 2018

Net income (loss) $ ( 8,450 ) $ 1,972 $ 1,658

Other comprehensive income (loss), net of tax:

Pension, retiree medical and other postretirement benefits ( 771 ) ( 434 ) ( 116 )

Investments — 3 ( 3 )

Total other comprehensive loss, net of tax ( 771 ) ( 431 ) ( 119 )

Total comprehensive income

Total comprehensive income (loss) $ ( 9,221 ) $ 1,541 $ 1,539

See accompanying notes to consolidated financial statements.

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Current assets

Cash $ 231 $ 267

Short-term investments 6,617 3,543

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Operating lease right-of-use assets 7,994 8,694

Goodwill 4,091 4,091

Intangibles, net of accumulated amortization of $ 745 and $ 704 , respectively

Deferred tax asset 3,235 689

Other assets 1,671 1,164

Total other assets 11,026 8,028

Total assets $ 69,215 $ 71,890

LIABILITIES AND STOCKHOLDER’S EQUITY

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Accumulated other comprehensive loss ( 7,194 ) ( 6,423 )

Retained earnings

Retained earnings (deficit) ( 5,508 ) 2,942

Total stockholder’s equity 4,348 13,422

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Year Ended December 31,

2020 2019 2018

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Net income (loss) $ ( 8,450 ) $ 1,972 $ 1,658

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization 2,313 2,267 2,108

Net loss (gains) from sale of property and equipment and sale-leaseback transactions

Net gains from sale of property and equipment and sale-leaseback transactions ( 98 ) ( 109 ) ( 57 )

Special items, net non-cash 1,588 384 458

Pension and postretirement ( 319 ) ( 178 ) ( 302 )

Deferred income tax provision

Deferred income tax provision (benefit) ( 2,453 ) 623 503

Share-based compensation 91 94 86

Other, net 14 ( 56 ) ( 102 )

Changes in operating assets and liabilities:

Decrease (increase) in accounts receivable

Increase in other assets

Decrease in accounts receivable 595 130 232

Decrease (increase) in other assets 42 ( 321 ) ( 354 )

Increase (decrease) in accounts payable and accrued liabilities ( 619 ) 273 ( 171 )

Increase in air traffic liability

Increase in receivables from related parties, net

Increase (decrease) in air traffic liability ( 51 ) 469 297

Decrease (increase) in receivables from related parties, net 4,134 ( 1,772 ) ( 1,849 )

Increase (decrease) in loyalty program liability 580 76 ( 283 )

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Increase (decrease) in other liabilities 1,210 ( 199 ) 191

Net cash provided by operating activities

Net cash provided by (used in) operating activities ( 1,429 ) 2,429 1,943

Cash flows from investing activities:

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Proceeds from sale of investments 41 — 207

Purchase of equity investment

Other investing activities ( 154 ) ( 96 ) ( 7 )

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Deferred financing costs ( 85 ) ( 52 ) ( 59 )

Other financing activities

Net cash provided by (used in) financing activities 5,845 ( 282 ) ( 147 )

Net increase (decrea se) in cash and restricted cash

Net increase (decrease) in cash and restricted cash 108 1 ( 114 )

Cash and restricted cash at beginning of year 277 276 390

Cash and restricted cash at end of year (a)

$ 385 $ 277 $ 276

(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the consolidated balance sheets:

Cash $ 231 $ 267 $ 265

Restricted cash included in restricted cash and short-term investments 154 10 11

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(In millions)

Stock Additional

Capital Accumulated

Comprehensive

Loss Retained

(Deficit) Total

Balance at December 31, 2017 $ — $ 16,716 $ ( 5,873 ) $ ( 955 ) $ 9,888

Net income — — — 1,658 1,658

Other comprehensive loss, net — — ( 119 ) — ( 119 )

Share-based compensation expense — 86 — — 86

Intercompany equity transfer

Impact of adoption of Accounting Standards Update (ASU)

2018-02 related to comprehensive income (See Note 1(b))

Impact of adoption of Accounting Standards Update (ASU) 2016-01 related to financial instruments — — — 60 60

Impact of adoption of ASU 2016-02 related to leases — — — 197 197

Balance at December 31, 2018 — 16,802 ( 5,992 ) 960 11,770

Net income — — — 1,972 1,972

Other comprehensive loss, net — — ( 431 ) — ( 431 )

Share-based compensation expense — 94 — — 94

Impact of adoption of ASU 2016-01 related to financial

Impact of adoption of ASU 2016-02 related to leases

Intercompany equity transfer — 7 — 10 17

Balance at December 31, 2019 — 16,903 ( 6,423 ) 2,942 13,422

Net loss — — — ( 8,450 ) ( 8,450 )

Other comprehensive loss, net — — ( 771 ) — ( 771 )

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American Airlines, Inc.

(American) is a Delaware corporation whose primary business activity is the operation of a major network air carrier.

(American) is a Delaware corporation whose primary business activity is the operation of a major network air carrier, providing scheduled air transportation for passengers and cargo.

American is the principal wholly-owned subsidiary of American Airlines Group Inc.

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(b) Recent Accounting Pronouncements

Leases (Topic 842) (the New Lease Standard)

The New Lease Standard requires lessees to recognize a lease liability and a right-of-use (ROU) asset on the balance sheet for operating leases.

Accounting for finance leases is substantially unchanged.

The New Lease Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Early adoption is permitted.

In the fourth quarter of 2018, American elected to early adopt the New Lease Standard as of January 1, 2018 using a modified retrospective transition, with the cumulative-effect adjustment to the opening balance of retained earnings as of the effective date (the effective date method).

Under the effective date method, financial results reported in periods prior to 2018 are unchanged.

American also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

The adoption of the New Lease Standard had a significant impact on American’s consolidated balance sheet due to the recognition of approximately $ 10 billion of lease liabilities with corresponding right-of-use assets for operating leases.

Additionally, American recognized a $ 197 million cumulative effect adjustment credit, net of tax, to retained earnings.

The adjustment to retained earnings was driven principally by sale-leaseback transactions including the recognition of unamortized deferred aircraft sale-leaseback gains.

Prior to the adoption of the New Lease Standard, gains on sale-leaseback transactions were generally deferred and recognized in the income statement over the lease term.

Under the New Lease Standard, gains on sale-leaseback transactions (subject to adjustment for off-market terms) are recognized immediately.

Income Statement – Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This ASU provides the option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings due to the U.S.

federal corporate income tax rate change as a result of H.R.

1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act).

The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previous U.S.

federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations.

This standard is effective for interim and annual reporting periods beginning after December 15, 2018.

In the first quarter of 2019, American adopted this standard retrospectively as of December 22, 2017, the date the 2017 Tax Act was enacted, which resulted in the recast of prior reporting periods.

As a result of the adoption, American reclassified $ 622 million of stranded tax effects principally related to its pension plans from accumulated other comprehensive loss to retained earnings.

(b) Impact of Coronavirus (COVID-19)

COVID-19 has been declared a global health pandemic by the World Health Organization.

As a result, American has experienced an unprecedented decline in the demand for air travel, which has resulted in a material deterioration in its revenues.

While American's business performed largely as expected in January and February of 2020, a severe reduction in air travel starting in March 2020 resulted in its total operating revenues decreasing approximately 62 % in 2020 as compared to 2019.

While the length and severity of the reduction in demand due to the COVID-19 pandemic is uncertain, American's business, operations and financial condition in 2020 were severely impacted.

American has taken aggressive actions to mitigate the effects of the COVID-19 pandemic on its business including deep capacity reductions, structural changes to its fleet, cost reductions, and steps to preserve cash and improve its overall liquidity position.

American remains extremely focused on taking all self-help measures available to manage its business during this unprecedented time, consistent with the terms of the financial assistance it has received from the U.S.

Government under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Capacity Reductions

American has significantly reduced its capacity (as measured by available seat miles), with 2020 flying decreasing by 50 % year-over-year.

Domestic capacity in 2020 was down 41 % year-over-year while international capacity was down 68 % year-over-year.

The demand environment continues to be uncertain as COVID-19 cases have continued to fluctuate in jurisdictions to which American flies and travel restrictions have generally remained in place.

Due to this uncertainty, American will continue to adjust its future capacity to match observed booking trends for future travel and make further adjustments to its capacity as needed.

To better align American’s network with lower passenger demand, American accelerated the retirement of Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft.

These retirements remove complexity from American’s operation and bring forward cost savings and efficiencies associated with operating fewer aircraft types.

See Note 1(g) below for further information on the accounting for American's fleet retirements.

Due to the inherent uncertainties of the current operating environment, American will continue to evaluate its current fleet and may decide to permanently retire additional aircraft.

In addition, American has placed a number of Boeing 737-800 and certain regional aircraft into temporary storage.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

Financial Instruments – Credit Losses (Topic 326)

Cost Reductions

American moved quickly to better align its costs with its reduced schedule.

In aggregate, American estimates that it has reduced its 2020 operating and capital expenditures by more than $ 17 billion.

These savings were achieved primarily through capacity reductions.

In addition, American implemented a series of actions, including the accelerated fleet retirements discussed above as well as reductions in maintenance expense and $ 700 million in non-aircraft capital expenditures through less fleet modification work, the elimination of ground service equipment purchases and pausing non-critical facility investments and information technology projects.

American also suspended all non-essential hiring, paused non-contractual pay rate increases, reduced executive and board of director compensation, implemented voluntary leave and early retirement programs and decreased its management and support staff team, including officers, by approximately 30 %.

In total, more than 20,000 team members have opted for an early retirement or long-term partially paid leave.

Additionally, American has made reductions in marketing, contractor, event and training expenses as well as consolidated space at airport facilities.

Due to the effects of the COVID-19 pandemic, American involuntarily furloughed certain team members starting October 1, 2020, and subsequently recalled the team members effective December 1, 2020 covered by the financial assistance provided pursuant to the payroll support program (PSP2) established under Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) (see Note 17 for further information).

As of December 31, 2020, American had $ 14.3 billion in total available liquidity, consisting of $ 6.9 billion in unrestricted cash and short-term investments, $ 7.0 billion in an undrawn term loan facility under the CARES Act and a total of $ 446 million in undrawn short-term revolving and other facilities.

During 2020, American completed the following financing transactions (see Note 3 for further information):

• refinanced the $ 1.2 billion 2014 Term Loan Facility at a lower interest rate and extended the maturity from 2021 to 2027;

• raised $ 1.0 billion from the senior secured delayed draw term loan credit facility (Delayed Draw Term Loan Credit Facility);

• borrowed $ 750 million under the 2013 Revolving Facility, $ 1.6 billion under the 2014 Revolving Facility and $ 450 million under the April 2016 Revolving Facility;

• issued approximately $ 360 million in special facility revenue bonds, of which $ 47 million was used to fund the redemption of certain outstanding bonds;

• entered into a $ 7.5 billion secured term loan facility with the U.S.

Department of Treasury (Treasury), of which American borrowed $ 550 million (see below for additional information on the Treasury Loan Agreement);

• issued $ 1.2 billion in aggregate principal amount of two series of 10.75 % senior secured notes due 2026 secured by various collateral;

• raised $ 665 million principally from aircraft sale-leaseback transactions as well as $ 351 million from asset sales primarily related to previously parked aircraft;

In addition to the foregoing financings, AAG and the Subsidiaries (as defined below) received an aggregate of $ 6.0 billion in financial assistance through the payroll support program (PSP1) established under the CARES Act, all of which was received by the end of September 2020.

In connection with the receipt by AAG and the Subsidiaries of this financial assistance, AAG issued a promissory note (the PSP1 Promissory Note) to Treasury for $ 1.8 billion in aggregate principal amount and warrants to purchase up to an aggregate of approximately 14.1 million shares (the PSP1 Warrant Shares) of AAG common stock.

See below for further discussion on PSP1.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

In January 2021, AAG and the Subsidiaries received $ 1.5 billion (of an expected total of at least $ 3.0 billion) in financial assistance through PSP2.

In connection with the receipt by AAG and the Subsidiaries of this financial assistance, AAG issued a promissory note (the PSP2 Promissory Note) to Treasury for an initial principal sum of approximately $ 433 million and warrants to purchase up to an aggregate of approximately 2.8 million shares (the PSP2 Warrant Shares) of AAG common stock.

See Note 17 for further discussion on PSP2.

Also, American is permitted to, and has, deferred payment of the employer portion of Social Security taxes through the end of 2020 (with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022).

This deferral provided approximately $ 325 million in additional liquidity during 2020.

Additionally, AAG has suspended its capital return program, including share repurchases and the payment of future dividends for at least the period that the restrictions imposed by the CARES Act and the PSP Extension Law are applicable.

American continues to evaluate future financing opportunities and work with third-party appraisers on valuations of its remaining unencumbered assets.

A significant portion of American’s debt financing agreements contain covenants requiring it to maintain an aggregate of at least $ 2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and/or contain loan to value, collateral coverage and/or debt service coverage ratio covenants.

Given the above actions and American’s current assumptions about the future impact of the COVID-19 pandemic on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, American expects to meet its cash obligations as well as remain in compliance with the debt covenants in its existing financing agreements for the next 12 months based on its current level of unrestricted cash and short-term investments, its anticipated access to liquidity (including via proceeds from financings and funds from government assistance obtained pursuant to the CARES Act and the PSP Extension Law) and projected cash flows from operations.

On April 20, 2020 (the PSP1 Closing Date), American, Envoy Air Inc.

(Envoy), Piedmont Airlines, Inc.

(Piedmont) and PSA Airlines, Inc.

In connection with the Subsidiaries' entry into the PSP1 Agreement, on the PSP1 Closing Date, AAG also entered into a warrant agreement (the PSP1 Warrant Agreement) with Treasury and issued the PSP1 Promissory Note to Treasury, with the Subsidiaries as guarantors.

PSP1 Agreement

In connection with PSP1, AAG and the Subsidiaries are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the PSP1 Agreement be used exclusively for the continuation of payment of eligible employee wages, salaries and benefits, the requirement against involuntary furloughs and reductions in employee pay rates and benefits, which expired on September 30, 2020, the requirement that certain levels of commercial air service be maintained and the provisions that prohibit the repurchase of AAG common stock, and the payment of common stock dividends through at least September 30, 2021, as well as those that restrict the payment of certain executive compensation until March 24, 2022.

The PSP1 Agreement also imposes substantial reporting obligations on AAG and the Subsidiaries.

These provisions were subsequently extended upon the entry of AAG and its Subsidiaries into PSP2.

See Note 17 for further discussion on PSP2.

In addition, AAG and the Subsidiaries have entered into the Treasury Loan Agreement (as defined below) and, as a result, the stock repurchase, dividend and executive compensation restrictions imposed by the Treasury Loan Agreement will remain in place through the date that is one year after the secured loan provided under the Treasury Loan Agreement is fully repaid.

See below for additional information on the Treasury Loan Agreement.

Pursuant to the PSP1 Agreement, Treasury provided to AAG and the Subsidiaries financial assistance in an aggregate of approximately $ 6.0 billion.

As partial compensation to the U.S.

See below for more information on the PSP1 Warrant Agreement and the PSP1 Warrants.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

For accounting purposes, the $ 6.0 billion of aggregate financial assistance AAG and the Subsidiaries received pursuant to the PSP1 Agreement is allocated to the PSP1 Promissory Note, the PSP1 Warrants and other PSP1 financial assistance (the PSP1 Financial Assistance).

PSP1 Warrant Agreement and PSP1 Warrants

As partial compensation to the U.S.

The PSP1 Warrants do not have any voting rights and are freely transferrable, with registration rights.

Each PSP1 Warrant expires on the fifth anniversary of the date of issuance of such PSP1 Warrant.

The PSP1 Warrants will be exercisable either through net share settlement or cash, at AAG's option.

The PSP1 Warrants were issued solely as compensation to the U.S.

Government related to entry into the PSP1 Agreement.

No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP1 Warrants or will be received upon exercise thereof.

Treasury Loan Agreement

Subsequently, on October 21, 2020, AAG and American entered into an amendment to the Treasury Loan Agreement, which increased the borrowing amount to up to $ 7.5 billion.

See Note 3 for further information on the Treasury Loan Agreement and below for more information on the Treasury Loan Warrant Agreement and Treasury Loan Warrants.

Treasury Loan Warrant Agreement and Warrants

In connection with the Treasury Loan Agreement, AAG also entered into a warrant agreement (the Treasury Loan Warrant Agreement) with Treasury.

The exercise price of the Treasury Loan Warrant Shares is $ 12.51 per share subject to certain anti-dilution provisions provided for in the Treasury Loan Warrant Agreement.

For accounting purposes, the fair value for the Treasury Loan Warrant Shares is estimated using a Black-Scholes option pricing model and recorded in stockholders' equity in AAG's consolidated balance sheet with an offsetting debt discount to the Treasury Term Loan Facility in American’s consolidated balance sheet.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

The Treasury Loan Warrants do not have any voting rights and are freely transferrable, with registration rights.

Each Treasury Loan Warrant expires on the fifth anniversary of the date of issuance of such Treasury Loan Warrant.

The Treasury Loan Warrants will be exercisable either through net share settlement or cash, at AAG's option.

The Treasury Loan Warrants were issued solely as compensation to the U.S.

Government related to entry into the Treasury Loan Agreement.

No separate proceeds were received upon issuance of the Treasury Loan Warrants or will be received upon exercise thereof.

Measurement of Credit Losses on Financial Instruments

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For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset.

This standard is effective for interim and annual reporting periods beginning after December 15, 2019.

While American has not completed its evaluation of the impact of adoption of this standard, American does not expect it to have a material impact on its consolidated financial statements.

American adopted this accounting standard prospectively as of January 1, 2020, and it did not have a material impact on American's consolidated financial statements.

(d) Short-term Investments

Short-term investments are classified as available-for-sale and stated at fair value.

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Unrealized gains and losses are recorded in accumulated other comprehensive loss on American’s consolidated balance sheets.

(d) Restricted Cash and Short-term Investments

American has restricted cash and short-term investments related primarily to collateral held to support workers’ compensation obligations.

(e) Aircraft Fuel, Spare Parts and Supplies, Net

For investments in an unrealized loss position, American determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions.

There have been no credit losses.

(e) Restricted Cash and Short-term Investments

American has restricted cash and short-term investments related primarily to money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at JFK and collateral held to support workers’ compensation obligations.

(f) Aircraft Fuel, Spare Parts and Supplies, Net

Aircraft fuel is recorded on a first-in, first-out basis.

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These items are expensed when used.

(f) Operating Property and Equipment

(g) Operating Property and Equipment

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The estimated useful lives for the principal property and equipment classifications are as follows:

Principal Property and Equipment Classification

Estimated Useful Life

Aircraft, engines and related rotable parts

20 – 30 years

Buildings and improvements

Furniture, fixtures and other equipment

Capitalized software

American assesses impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell.

Principal Property and Equipment Classification Estimated Useful Life

Aircraft, engines and related rotable parts 20 – 30 years

Buildings and improvements 5 – 30 years

Furniture, fixtures and other equipment 3 – 10 years

Capitalized software 5 – 10 years

Total depreciation and amortization expense was $ 2.3 billion, $ 2.5 billion and $ 2.4 billion for the years ended December 31, 2020, 2019 and 2018, respectively.

American assesses impairment of operating property and equipment when events and circumstances indicate that the assets may be impaired.

American groups assets principally by fleet-type when estimating future cash flows, which is generally the lowest level for

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

which identifiable cash flows exist.

Estimates of future cash flows are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions, including American’s current fleet plan.

If such assets are impaired, the impairment charge recognized is the amount by which the carrying value of the assets exceed their fair value.

Fair value reflects management’s best estimate including inputs from published pricing guides and bids from third parties as well as contracted sales agreements when applicable.

In 2020, American’s operations, liquidity and stock price were significantly impacted by decreased passenger demand and government travel restrictions due to the COVID-19 pandemic.

Additionally, American decided to retire certain mainline aircraft earlier than planned, including Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 aircraft as well as certain regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft.

As a result of these events and circumstances, American performed impairment tests for its long-lived assets in the first three quarters of 2020.

As a result of the impairment tests performed, American determined the sum of the estimated undiscounted future cash flows exceeded the carrying value except for the aircraft being retired earlier than planned as discussed above.

For those aircraft and certain related spare parts, American recorded $ 1.5 billion in non-cash special impairment charges reflecting the difference between the carrying values of these assets and their fair values for the year ended December 31, 2020.

Due to the inherent uncertainties of the current operating environment, American will continue to evaluate its current fleet (including aircraft in temporary storage) and may decide to permanently retire additional aircraft.

American determines if an arrangement is a lease at inception.

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ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

American uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date , in determining the present value of lease payments.

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For real estate, American accounts for the lease and non-lease components as a single lease component.

(h) Income Taxes

(i) Income Taxes

Income taxes are accounted for under the asset and liability method.

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Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

American provides a valuation allowance for its deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized.

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Many factors are considered that impact American’s assessment of future profitability, including conditions which are beyond American’s control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand.

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and liabilities assumed.

Goodwill is not amortized but assessed for impairment annually on October 1 or more frequently if events or circumstances indicate that goodwill may be impaired.

American has one consolidated reporting unit.

Goodwill is assessed for impairment by initially performing a qualitative assessment and, if necessary, then comparing the fair value of the reporting unit to its carrying value, including goodwill.

If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill.

If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded.

Based upon American’s annual assessment, there was no goodwill impairment in 2019 .

The carrying value of the goodwill on American’s consolidated balance sheets was $ 4.1 billion as of December 31, 2019 and 2018 .

(j) Other Intangibles, Net

Intangible assets consist primarily of domestic airport slots, customer relationships, marketing agreements, international slots and route authorities, airport gate leasehold rights and tradenames.

Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the merger with US Airways Group.

American has one reporting unit.

American assesses goodwill for impairment annually or more frequently if events or circumstances indicate that the fair value of goodwill may be lower than the carrying value.

American’s annual assessment date is October 1.

Goodwill is assessed for impairment by initially performing a qualitative assessment.

If American determines that it is more likely than not that its goodwill may be impaired, it uses a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any.

In addition to American’s annual impairment assessment, it performed interim impairment tests in 2020 on its goodwill as a result of the events and circumstances previously discussed due to the impact of the COVID-19 pandemic on American’s business.

American performed a quantitative analysis by using a market approach.

Under the market approach, the fair value of the reporting unit was determined based on quoted market prices for equity and the fair value of debt as described in Note 7.

The fair value exceeded the carrying value of the reporting unit, and American’s goodwill was not impaired.

The carrying value of American’s goodwill on its consolidated balance sheets was $ 4.1 billion as of December 31, 2020 and 2019.

As discussed above, due to the inherent uncertainties of the current operating environment, American will continue to evaluate its goodwill for events and circumstances that indicate that the fair value of the reporting unit may be lower than the carrying value.

(k) Other Intangibles, Net

Definite-Lived Intangible Assets

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

The following table provides information relating to American’s amortizable intangible assets as of December 31, 2020 and 2019 (in millions):

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Marketing agreements 105 105

Tradenames 35 35

Airport gate leasehold rights 137 137

Accumulated amortization ( 745 ) ( 704 )

Total $ 197 $ 238

Certain domestic airport slots and airport gate leasehold rights are amortized on a straight-line basis over 25 years.

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Tradenames are fully amortized.

American recorded amortization expense related to these intangible assets of $ 41 million for both years ended December 31, 2019 and 2018 and $ 44 million for 2017 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

American recorded amortization expense related to these intangible assets of $ 41 million for each of the years ended December 31, 2020, 2019 and 2018.

American expects to record annual amortization expense for these intangible assets as follows (in millions):

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Indefinite-lived intangible assets include certain domestic airport slots and international slots and route authorities.

As of December 31, 2019 and 2018 , American had $ 1.8 billion and $ 1.9 billion , respectively, of indefinite-lived intangible assets on its consolidated balance sheets.

Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment to determine whether American believes it is more likely than not that an asset has been impaired.

If American believes impairment has occurred, American then evaluates for impairment by comparing the estimated fair value of assets to the carrying value.

An impairment charge is recognized if the asset’s estimated fair value is less than its carrying value.

Based upon American’s annual assessment, there were no material indefinite-lived intangible asset impairments in 2019 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(k) Revenue Recognition

American assesses indefinite-lived intangible assets for impairment annually or more frequently if events or circumstances indicate that the fair values of indefinite-lived intangible assets may be lower than their carrying values.

American’s annual assessment date is October 1.

Indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment.

If American determines that it is more likely than not that its indefinite-lived intangible assets may be impaired, American uses a quantitative approach to assess the asset’s fair value and the amount of the impairment, if any.

In addition to its annual impairment assessment, American performed interim impairment tests in 2020 on its indefinite-lived intangible assets as a result of the events and circumstances previously discussed due to the impact of the COVID-19 pandemic on American’s business.

American performed qualitative impairment tests on its indefinite-lived intangible assets and determined there was no material impairment.

American had $ 1.8 billion of indefinite-lived intangible assets on its consolidated balance sheets at each of December 31, 2020 and 2019.

As discussed above, due to the inherent uncertainties of the current operating environment, American will continue to evaluate its indefinite-lived intangible assets for events and circumstances that indicate that their fair values may be lower than the carrying values.

(l) Revenue Recognition

The following are the significant categories comprising American’s reported operating revenues (in millions):

Year Ended December 31,

2020 2019 2018

Passenger revenue:

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Loyalty revenue - travel (1)

1,062 3,179 3,219

Total passenger revenue 14,518 42,010 40,676

Cargo 769 863 1,013

Loyalty revenue - marketing services 1,825 2,361 2,352

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Total operating revenues $ 17,335 $ 45,761 $ 44,530

Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions earned through travel or from co-branded credit card and other partners.

(1) Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions, which were earned from travel or co-branded credit card and other partners.

See “ Loyalty Revenue” below for further discussion on these mileage credits.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

The following is American’s total passenger revenue by geographic region (in millions):

Year Ended December 31,

2020 2019 2018

Domestic $ 11,765 $ 30,881 $ 29,573

Latin America 1,852 5,047 5,125

654 4,624 4,376

Pacific 247 1,458 1,602

Total passenger revenue $ 14,518 $ 42,010 $ 40,676

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Passenger Revenue

American recognizes all revenues generated from transportation on American and its regional flights operated under the brand name American Eagle, including associated baggage fees, ticketing change fees and other inflight services, as passenger revenue when transportation is provided.

American recognizes all revenues generated from transportation on American and its regional flights operated under the brand name American Eagle, including associated baggage fees and other inflight services, as passenger revenue when transportation is provided.

Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on American’s consolidated balance sheets.

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Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

Various taxes and fees assessed on the sale of tickets to end customers are collected by American as an agent and remitted to taxing authorities.

These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.

The CARES Act provided for a temporary tax holiday from collecting and remitting certain government ticket taxes for tickets purchased between March 28, 2020 and December 31, 2020.

Loyalty Revenue

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For mileage credits earned by AAdvantage loyalty program members, American applies the deferred revenue method.

In response to the COVID-19 pandemic, American suspended the expiration of mileage credits through June 30, 2021 and eliminated mileage reinstatement fees for canceled award tickets.

Mileage credits earned through travel

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The estimated selling price of miles is adjusted for an estimate of miles that will not be redeemed based on historical redemption patterns.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

Given the inherent uncertainty of the current operating environment due to the COVID-19 pandemic, American will continue to monitor redemption patterns and may adjust its estimates in the future.

Mileage credits sold to co-branded credit cards and other partners

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American allocates the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered.

American’s most significant partner agreements are its co-branded credit card agreements with Citi and Barclaycard US that American entered into in 2016.

American’s most significant partner agreements are its co-branded credit card agreements with Citi and Barclaycard US.

American identified the following revenue elements in these co-branded credit card agreements:

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For the portion of American’s outstanding mileage credits that it estimates will not be redeemed, American recognizes the associated value proportionally as the remaining mileage credits are redeemed.

American’s estimates are based on analysis of historical redemptions.

American’s estimates use statistical models based on historical redemption patterns to develop an estimate of the likelihood of future redemption.

Cargo Revenue

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Other revenue includes revenue associated with American’s loyalty program, which is comprised principally of the marketing component of mileage sales to co-branded credit card and other partners and other marketing related payments.

Loyalty revenue included in other revenue was $ 2.4 billion for both years ended December 31, 2019 and 2018 and $ 2.1 billion for 2017 .

Loyalty revenue included in other revenue was $ 1.8 billion for the year ended December 31, 2020 and $ 2.4 billion for both 2019 and 2018.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

Contract Balances

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Air traffic liability 4,757 4,808

Total $ 13,952 $ 13,423

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

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As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as miles that were issued during the period.

Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months .

As of December 31, 2019 , American’s current loyalty program liability was $ 3.2 billion and represents American’s current estimate of revenue expected to be recognized in the next 12 months based on historical trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.

(2) Mileage credits can be redeemed at any time and generally do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months.

As previously discussed, in response to the COVID-19 pandemic, American suspended the expiration of mileage credits through June 30, 2021 and eliminated mileage reinstatement fees for canceled award tickets.

As of December 31, 2020, American’s current loyalty program liability was $ 2.0 billion and represents American’s current estimate of revenue expected to be recognized in the next 12 months based on historical as well as projected trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.

Given the inherent uncertainty of the current operating environment due to the COVID-19 pandemic, American will continue to monitor redemption patterns and may adjust its estimates in the future.

The air traffic liability principally represents tickets sold for future travel on American and partner airlines, as well as estimated future refunds and exchanges of tickets sold for past travel.

The balance in American’s air traffic liability also fluctuates with seasonal travel patterns.

The contract duration of passenger tickets is one year .

The contract duration of passenger tickets is generally one year .

Accordingly, any revenue associated with tickets sold for future travel will be recognized within 12 months.

For 2020, $ 2.8 billion of revenue was recognized in passenger revenue that was included in American’s air traffic liability at December 31, 2019.

In response to the COVID-19 pandemic, American extended the contract duration for certain tickets to December 31, 2021, principally those with travel scheduled from March 1, 2020 through December 31, 2020.

Additionally, American has eliminated change fees for most domestic and international tickets.

As of December 31, 2020, the air traffic liability included approximately $ 2.6 billion of travel credits related to these unused tickets for travel prior to December 31, 2020.

Accordingly, any revenue associated with these tickets will be recognized within the next 12 months.

Given this change in contract duration and uncertainty surrounding the future demand for air travel, American's estimates of revenue that will be recognized from the air traffic liability for future flown or unused tickets as well as American's estimates of refunds may be subject to variability and differ from historical experience.

American’s ticket contract receivables relate to ticket sales to individual passengers primarily through the use of major credit cards and are reflected as accounts receivable, net on the accompanying consolidated balance sheets.

These receivables are short-term, mostly settled within seven days after sale.

Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.

(l) Maintenance, Materials and Repairs

All accounts receivable are reported net of an allowance for credit losses, which have been minimal in the past.

American considers past and future financial and qualitative factors when establishing the allowance for credit losses.

(m) Maintenance, Materials and Repairs

(m) Selling Expenses

(n) Selling Expenses

Selling expenses include credit card fees, commissions, computerized reservations systems fees and advertising.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(n) Share-based Compensation

(o) Share-based Compensation

American accounts for its share-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the vesting period of the stock award.

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See Note 13 for further discussion of share-based compensation.

(o) Foreign Currency Gains and Losses

(p) Foreign Currency Gains and Losses

Foreign currency gains and losses are recorded as part of other income, net within total nonoperating expense, net in American’s consolidated statements of operations.

For the years ended December 31, 2020 , 2019 and 2018, respectively, foreign currency losses were $ 24 million, $ 32 million and $ 54 million.

(p) Other Operating Expenses

(q) Regional Expenses

(q) Other Operating Expenses

(r) Regional Expenses

Expenses associated with American Eagle operations are classified as regional expenses on American’s consolidated statements of operations.

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Year Ended December 31,

2020 2019 2018

Aircraft fuel and related taxes $ 821 $ 1,869 $ 1,843

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Capacity purchases from third-party regional carriers (1)

2,750 3,562 3,267

Maintenance, materials and repairs 3 30 8

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Special items, net ( 338 ) — —

Other 258 394 362

Total regional expenses $ 4,676 $ 7,518 $ 7,064

In 2019 , 2018 , and 2017 , American recognized $ 590 million , $ 565 million and $ 544 million , respectively, of expense under its capacity purchase agreement with Republic Airline Inc.

(1) In 2020, 2019, and 2018, American recognized $ 438 million, $ 590 million and $ 565 million, respectively, of expense under its capacity purchase agreement with Republic Airways Inc.

American holds a 25 % equity interest in Republic Airways Holdings Inc.

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Year Ended December 31,

Fleet restructuring expenses (1)

2020 2019 2018

PSP1 Financial Assistance (1)

$ ( 3,710 ) $ — $ —

Fleet impairment (2)

Severance expenses (3)

Labor contract expenses (4)

Mark-to-market adjustments on bankruptcy obligations, net (5)

( 49 ) ( 11 ) ( 76 )

Fleet restructuring expenses (6)

Merger integration expenses (7)

Litigation reserve adjustments — ( 53 ) 45

Mark-to-market adjustments on bankruptcy obligations, net (4)

Severance expenses (5)

Intangible asset impairment (8)

Labor contract expenses

Employee 2017 Tax Act bonus expense (7)

Other operating charges, net

Other operating special items, net ( 18 ) 13 31

Mainline operating special items, net ( 657 ) 635 787

PSP1 Financial Assistance (1)

Fleet impairment (2)

Regional operating special items, net ( 338 ) — —

Operating special items, net ( 995 ) 635 787

Debt refinancing and extinguishment charges

Mark-to-market adjustments on equity and other investments, net (9)

Other nonoperating income, net

135 ( 5 ) 104

Debt refinancing, extinguishment and other, net 35 16 9

Nonoperating special items, net 170 11 113

Income tax special items (10)

Impact of the 2017 Tax Act (10)

Income tax special items, net

Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment grounded or expected to be grounded earlier than planned.

Fleet impairment principally includes a non-cash write-down of aircraft related to the planned retirement of American’s Embraer E190 fleet.

Merger integration expenses included costs associated with integration projects, principally American's technical operations, flight attendant, human resources and payroll systems.

Bankruptcy obligations that will be settled in shares of AAG common stock are marked-to-market based on AAG’s stock price.

Severance expenses primarily included costs associated with reductions of management and support staff team members.

Intangible asset impairment includes a non-cash charge to write-off American’s Brazil route authority as a result of the U.S.-Brazil open skies agreement.

Employee bonus expense included costs related to the $ 1,000 cash bonus and associated payroll taxes granted to mainline employees in recognition of the 2017 Tax Act.

Mark-to-market adjustments on equity and other investments, net primarily relates to net unrealized gains and losses associated with American’s equity investment in China Southern Airlines Company Limited (China Southern Airlines).

Income tax special items for 2018 included an $ 18 million charge related to an international income tax matter.

(1) PSP1 Financial Assistance represents recognition of financial assistance received from Treasury pursuant to the PSP1 Agreement.

See Note 1(b) for further information.

(2) The 2020 fleet impairment resulted from American's decision to retire certain aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic.

Aircraft retired include Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300, Embraer 190, certain Embraer 140 and Bombardier CRJ200 aircraft.

This included a $ 1.5 billion non-cash write-down of mainline and regional aircraft and spare parts and $ 109 million in cash charges primarily for impairment of ROU assets and lease return costs.

See Note 1(g) for further information related to these charges.

The 2019 fleet impairment principally included a non-cash write-down of aircraft related to the retirement of American’s Embraer 190 fleet.

Cash payments related to these charges for the year ended December 31, 2020 were approximately $ 365 million.

The 2019 and 2018 severance expenses primarily included costs associated with reductions of management and support staff team members.

(4) The 2020 labor contract expenses primarily related to one-time charges resulting from the ratification of a new contract with the Transport Workers Union and International Association of Machinists & Aerospace Workers (TWU-IAM Association) for American's maintenance and fleet service team members, including signing bonuses and adjustments to vacation accruals resulting from pay rate increases.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

Impact of the 2017 Tax Act includes a $ 924 million non-cash charge to income tax expense to reflect the impact of lower corporate income tax rates on the Company’s deferred tax asset and liabilities resulting from the 2017 Tax Act, which reduced the federal corporate income tax rate from 35% to 21%.

(5) Bankruptcy obligations that will be settled in shares of AAG common stock are marked-to-market based on AAG’s stock price.

(6) Fleet restructuring expenses principally included accelerated depreciation and rent expense for aircraft and related equipment expected to be retired earlier than planned.

(7) Merger integration expenses included costs associated with integration projects, principally American's technical operations, flight attendant, human resources and payroll systems.

(8) Intangible asset impairment included a non-cash charge to write-off American’s Brazil route authority as a result of the U.S.-Brazil open skies agreement.

(9) Mark-to-market adjustments on equity and other investments, net primarily related to net unrealized gains and losses associated with American’s equity investment in China Southern Airlines Company Limited (China Southern Airlines) and certain treasury rate lock derivative instruments.

(10) Income tax special items included an $ 18 million charge related to an international income tax matter.

Long-term debt included on American’s consolidated balance sheets consisted of (in millions):

2013 Credit Facilities, variable interest rate of 3.54%, installments through 2025 (a)

2014 Credit Facilities, variable interest rate of 3.72%, installments through 2021 (a)

April 2016 Credit Facilities, variable interest rate of 3.80%, installments through 2023 (a)

December 2016 Credit Facilities, variable interest rate of 3.74%, installments through 2023 (a)

Enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 8.39%, averaging 4.05%, maturing from 2020 to 2032 (b)

Equipment loans and other notes payable, fixed and variable interest rates ranging from 2.99% to 7.31%, averaging 3.45%, maturing from 2020 to 2031 (c)

Special facility revenue bonds, fixed interest rates of 5.00%, maturing from 2020 to 2031