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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-17 · 224 added, 289 removed, 356 unchanged (59% of the section changed)

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2021 Financial Overview

Impact of Coronavirus (COVID-19)

Impact of 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, we expect our results of operations for 2021 to be 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) and Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law).

Ongoing global vaccination efforts and the corresponding lifting of government restrictions in and between many markets resulted in a partial recovery in demand for air travel in 2021, which improved our revenues as compared to 2020.

However, the return of demand was weaker than previous expectations and the speed and strength of this recovery remain uncertain, primarily due to the global rise in COVID-19 cases associated with the delta and omicron variants and the potential for continuation or reimposition of restrictions on global travel.

The continued impact of the COVID-19 pandemic, including any increases in infection rates, new variants and renewed governmental action to slow the spread of COVID-19 cannot be estimated.

We have taken aggressive actions since the beginning of the COVID-19 pandemic to mitigate its effects on our business, including capacity reductions, structural changes to our fleet, cost reductions including implementing voluntary leave and early retirement programs, and steps to preserve cash and improve our overall liquidity position, consistent with the terms of the financial assistance we have received from the U.S.

Government under the CARES Act, the PSP Extension Law and the ARP.

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.

We also reset our international capacity and network for 2021 in response to the severe decline in demand.

We have exited 19 international routes from six hubs.

These changes will allow us to operate more efficiently when demand returns.

We currently expect our first quarter 2021 system capacity to decrease by 45% as compared to the first quarter of 2019.

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) to AAG’s Consolidated Financial Statements in Part II, Item 8A 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.

Our capacity (as measured by available seat miles) continues to be reduced compared to pre-COVID-19 pandemic levels, with total capacity in 2021 down 24.7% as compared to 2019.

Domestic capacity in 2021 was down 14.5% while international capacity was down 44.9% as compared to 2019.

We currently expect our first quarter of 2022 system capacity to be down 8% to 10% as compared to the first quarter of 2019.

While demand for domestic and short-haul international markets has largely recovered to 2019 levels, uncertainty remains regarding the timing of a full recovery.

We will continue to match our forward capacity with observed booking trends for future travel and make further adjustments to our capacity as needed.

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 covered by the PSP2 financial assistance effective December 1, 2020 (see Note 18 to AAG’s Consolidated Financial Statements in Part II, Item 8A for further information).

On February 5, 2021, we informed approximately 13,000 U.S.-based team members of the possibility of a workforce reduction at their work location.

We expect that any workforce reductions will take effect on or after April 1, 2021.

In connection with this notification, we announced the reopening of the voluntary early out and long-term leave of absence programs for team members of certain represented workgroups.

Eligible team members must opt in by February 26, 2021 for the early out program and March 12, 2021 for the voluntary leave program.

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.

In aggregate, we have reduced our 2021 operating expenditures by approximately $1.3 billion, which are permanent non-volume cost reductions and other efficiency measures.

These reductions include approximately $600 million in labor productivity enhancements, $500 million in management salaries and benefits and $200 million in other permanent cost reductions.

Also, during the first quarter of 2021, approximately 1,600 represented team members opted into a voluntary early retirement program.

As of December 31, 2021, we had $15.8 billion in total available liquidity, consisting of $12.4 billion in unrestricted cash and short-term investments, $2.8 billion in undrawn capacity under revolving credit facilities and a total of $568 million in undrawn short-term revolving and other facilities.

During 2021, we completed the following financing transactions (see Note 4 to AAG’s Consolidated Financial Statements in Part II, Item 8A 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) (the Treasury Loan Agreement), of which we borrowed $550 million;

• 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 to AAG’s Consolidated Financial Statements in Part II, Item 8A 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;

• 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 PSP1 established under the CARES Act, all of which was received by the end of September 2020.

• issued $3.5 billion in aggregate principal amount of 5.50% Senior Secured Notes due 2026 and $3.0 billion in aggregate principal amount of 5.75% Senior Secured Notes due 2029 and entered into the $3.5 billion AAdvantage Term Loan Facility of which the full amount of term loans was drawn at closing;

• repaid in full $750 million under the 2013 Revolving Facility, $1.6 billion under the 2014 Revolving Facility and $450 million under the April 2016 Revolving Facility, all of which was borrowed in the second quarter of 2020 in response to the COVID-19 pandemic;

• repaid the $550 million of outstanding loans under, and terminated, the $7.5 billion secured term loan facility with Treasury (the Treasury Loan Agreement);

• issued 24.2 million shares of AAG common stock at an average price of $19.26 per share pursuant to an at-the-market offering for net proceeds of $460 million (approximately $650 million of at-the-market authorization remains available at December 31, 2021);

• issued approximately $150 million in special facility revenue bonds related to JFK, of which $62 million was used to fund the redemption of other bonds related to JFK;

• repaid in full $950 million of the outstanding balance under, and terminated, the April 2016 Spare Parts Term Loan Facility;

• received approximately $94 million in proceeds from enhanced equipment trust certificates (EETCs) and other aircraft and flight equipment financing, all of which was used to repay existing indebtedness;

• received approximately $193 million of cash proceeds from the sale of property and equipment primarily related to aircraft fleets retired in 2020 and raised $181 million principally from aircraft sale-leaseback transactions.

In addition to the foregoing financings, during 2021, we received an aggregate of approximately $3.5 billion in financial assistance through the payroll support program (PSP2) established under the PSP Extension Law.

In connection with our receipt of this financial assistance, AAG issued a promissory note (the PSP2 Promissory Note) to Treasury for $1.0 billion in aggregate principal amount and warrants to purchase up to an aggregate of approximately 6.6 million shares (the PSP2 Warrant Shares) of AAG common stock.

See Note 1(b) to AAG’s Consolidated Financial Statements in Part II, Item 8A 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 established under the PSP Extension Law.

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 to AAG’s Consolidated Financial Statements in Part II, Item 8A 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.

Also in 2021, we received an aggregate of approximately $3.3 billion in financial assistance through the payroll support program (PSP3) established under the ARP.

In connection with our receipt of this financial assistance, AAG issued a promissory note (the PSP3 Promissory Note) to Treasury for $946 million in aggregate principal amount and warrants to purchase up to an aggregate of approximately 4.4 million shares (the PSP3 Warrant Shares) of AAG common stock.

See Note 1(b) to AAG’s Consolidated Financial Statements in Part II, Item 8A for further discussion on PSP2 and PSP3.

See Note 4 to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information on our debt obligations.

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The selected financial data presented below is derived from AAG’s audited consolidated financial statements included in Part II, Item 8A of this report and should be read in conjunction with those financial statements and the related notes thereto.

Beginning in the first quarter of 2021, aircraft fuel and related taxes as well as certain salaries, wages and benefits, other rent and landing fees, selling and other expenses are no longer allocated to regional expenses on our statements of operations.

The 2020 consolidated statement of operations has been recast to conform to the 2021 presentation within this Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

This statement of operations presentation change has no impact on total operating expenses or net loss.

December 31, Increase

(Decrease) Percent

(Decrease) (2)

(In millions, except percentage changes)

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Total operating revenues 29,882 17,337 12,545 72.4

Mainline and regional aircraft fuel and related taxes 3,402 9,395 (5,993) (63.8)

Aircraft fuel and related taxes 6,792 3,402 3,390 99.6

Salaries, wages and benefits 11,817 11,229 588 5.2

Total operating expenses 30,941 27,758 3,183 11.5

Operating income (loss) (10,421) 3,065 (13,486) nm (2)

Pre-tax income (loss) (11,453) 2,256 (13,709) nm

Income tax provision (benefit) (2,568) 570 (3,138) nm

Net income (loss) (8,885) 1,686 (10,571) nm

Pre-tax income (loss) – GAAP $ (11,453) $ 2,256 $ (13,709) nm

Operating loss (1,059) (10,421) (9,362) (89.8)

Pre-tax loss (2,548) (11,453) (8,905) (77.7)

Income tax benefit (555) (2,568) (2,013) (78.4)

Net loss (1,993) (8,885) (6,892) (77.6)

Pre-tax loss – GAAP $ (2,548) $ (11,453) $ (8,905) (77.7)

Adjusted for:

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(4,395) (796) 3,599 nm (3)

Pre-tax income (loss) excluding net special items $ (12,249) $ 2,900 $ (15,149) nm

Pre-tax loss excluding net special items $ (6,943) $ (12,249) $ (5,306) (43.3)

(1) See Part II, Item 6.

Selected Consolidated Financial Data – “Reconciliation of GAAP to Non-GAAP Financial Measures” and Note 2 to AAG’s Consolidated Financial Statements in Part II, Item 8A for details on the components of net special items.

(2) Fluctuations may not be meaningful due to the volatility caused by the COVID-19 pandemic.

(3) Not meaningful or greater than 100% change.

Pre-Tax Income (Loss) and Net Income (Loss)

Pre-Tax Loss and Net Loss

Pre-tax loss and net loss were $2.5 billion and $2.0 billion, respectively, in 2021.

This compares to 2019 pre-tax income and net income of $2.3 billion and $1.7 billion, respectively.

The year-over-year decrease in our pre-tax income was principally driven by lower revenues as a result of a severe decline in passenger demand and government travel restrictions related to the outbreak and spread of COVID-19.

This decline in revenues was offset in part by a decrease in expenses due to our reduced schedule and cost reduction actions described above.

Additionally, we recognized $796 million of net special credits in 2020 driven principally by the PSP1 financial assistance (the PSP1 Financial Assistance), offset in part by severance expenses and fleet impairment charges.

See Notes 1 and 2 to AAG’s Consolidated Financial Statements in Part II, Item 8A for further information on the PSP1 Financial Assistance and net special items, respectively.

Excluding the effects of pre-tax net special items, pre-tax loss was $12.2 billion in 2020 and pre-tax income was $2.9 billion in 2019.

The year-over-year decrease in our pre-tax income excluding pre-tax net special items was principally driven by lower revenues and decreased expenses due to our reduced schedule and cost reduction actions as described above.

In 2020, we reported total operating revenues of $17.3 billion, a decrease of $28.4 billion, or 62.1%, as compared to 2019.

Passenger revenue was $14.5 billion, a decrease of $27.5 billion, or 65.4%, as compared to 2019.

The decrease in passenger revenue in 2020 was due to a severe decline in passenger demand and government travel restrictions related to the COVID-19 pandemic, resulting in a 61.9% decrease in revenue passenger miles (RPMs) and a 20.5 point decrease in passenger load factor.

In 2020, cargo revenue was $769 million, a decrease of $94 million, or 10.8%, as compared to 2019, primarily due to a 44.4% decrease in cargo ton miles reflecting declines in freight volumes, principally as a result of international schedule reductions, which was offset in part by a 60.5% increase in yield as a result of rate increases.

Other operating revenue decreased $845 million, or 29.2%, in 2020 as compared to 2019, driven primarily by lower revenue associated with our loyalty program and airport clubs.

Our total revenue per available seat mile (TRASM) was 12.11 cents in 2020, a 24.6% decrease as compared to 16.05 cents in 2019.

Our mainline and regional fuel expense totaled $3.4 billion in 2020, which was $6.0 billion, or 63.8%, lower compared to 2019.

This decrease was primarily driven by a 49.4% decrease in gallons of fuel consumed as a result of lower capacity and a 28.5% decrease in the average price per gallon of aircraft fuel including related taxes to $1.48 in 2020 from $2.07 in 2019.

This compares to 2020 pre-tax loss and net loss of $11.5 billion and $8.9 billion, respectively.

Excluding the effects of pre-tax net special items, pre-tax loss was $6.9 billion and $12.2 billion in 2021 and 2020, respectively.

The year-over-year improvement in our pre-tax loss, on both a GAAP basis and excluding pre-tax net special items, was principally due to higher revenues driven by domestic and short-haul international leisure demand, offset in part by an increase in our operating expenses due to a 49.8% increase in our capacity as compared to 2020 as demand returned from the trough of the COVID-19 pandemic.

In 2021, we reported total operating revenues of $29.9 billion, an increase of $12.5 billion, or 72.4%, as compared to 2020.

Passenger revenue was $26.1 billion, an increase of $11.5 billion, or 79.5%, as compared to 2020.

The increase in passenger revenue in 2021 was due to a 75.9% increase in revenue passenger miles (RPMs) and an 11.2 point increase in passenger load factor.

These increases were principally driven by a significant recovery in domestic and short-haul international leisure demand as compared to 2020.

In 2021, cargo revenue was $1.3 billion, an increase of $545 million, or 70.8%, as compared to 2020, primarily due to a 50.5% increase in cargo ton miles reflecting higher freight volumes as a result of adding international widebody capacity and the continuation of cargo-only flights, as well as a 13.4% increase in cargo yield as a result of higher rates.

Other operating revenue increased $455 million, or 22.2%, in 2021 as compared to 2020, driven primarily by higher revenue associated with our loyalty program.

Our total revenue per available seat mile (TRASM) was 13.93 cents in 2021, a 15.0% increase as compared to 12.11 cents in 2020.

In 2021, aircraft fuel expense totaled $6.8 billion, an increase of $3.4 billion, or 99.6%, as compared to 2020.

This increase was primarily driven by a 44.7% increase in fuel consumption as a result of increased capacity and a 37.9% increase in the average price per gallon of aircraft fuel including related taxes to $2.04 in 2021 from $1.48 in 2020.

As of December 31, 2021, 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.

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general economic conditions and the price of fuel.

In particular, the COVID-19 pandemic has resulted in a very rapid deterioration in general economic conditions, particularly as applicable to the travel industry.

Our 2020 total cost per available seat mile (CASM) was 19.39 cents, an increase of 29.4%, from 14.98 cents in 2019.

Lower than planned capacity in 2020 due to decreased passenger demand and government travel restrictions related to the COVID-19 pandemic drove the increase in our CASM, offset in part by the PSP1 Financial Assistance recognized in 2020.

Our 2020 CASM excluding net special items and fuel was 17.69 cents, an increase of 54.4%, from 11.46 cents in 2019.

The increase was primarily driven by lower capacity in 2020 as described above.

In particular, the onset of the COVID-19 pandemic resulted in a very rapid deterioration in general economic conditions.

Our 2021 CASM was 14.42 cents, a decrease of 25.6%, from 19.39 cents in 2020.

This decrease in CASM was primarily driven by higher capacity due to increased passenger demand and cost reduction and efficiency initiatives discussed above, offset in part by an increase in fuel price.

Our 2021 CASM excluding net special items and fuel was 13.33 cents, a decrease of 24.6%, from 17.69 cents in 2020.

This decrease in CASM excluding net special items and fuel was primarily driven by higher capacity due to increased passenger demand and cost reduction and efficiency initiatives as previously discussed.

For a reconciliation of total operating CASM to total operating CASM excluding net special items and fuel, see Part II, Item 6.

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AAG’s Results of Operations

As discussed above, our results of operations for 2020 were significantly impacted by the COVID-19 pandemic.

As a result, the comparison of our 2020 operating statistics and financial results to 2019 are largely not meaningful.

Refer to the "2020 Financial Overview" above for discussion of our 2020 financial results and the impact of the COVID-19 pandemic on our business.

For a comparison of the 2020 to 2019 reporting periods, see Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – “ AAG’s Results of Operations – 2019 Compared to 2018” of our 2019 Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – “ AAG’s Results of Operations” of our 2020 Form 10-K.

Operating Statistics

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13.93 12.11 15.0%

Aircraft at end of period (g)

1,399 1,547 (9.6)%

Fuel consumption (gallons in millions) 3,324 2,297 44.7%

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2.04 1.48 37.9%

Full-time equivalent employees at end of period 102,700 133,700 (23.2)%

Operating cost per available seat mile (cents) (h)

Total operating cost per available seat mile (cents) (g)

14.42 19.39 (25.6)%

Aircraft at end of period (h)

1,432 1,399 2.4%

Full-time equivalent employees at end of period 123,400 102,700 20.2%

(a) Revenue passenger mile (RPM) – A basic measure of sales volume.

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(f) Total revenue per available seat mile (TRASM) – Total revenues divided by ASMs.

(g) Includes aircraft owned and leased by American as well as aircraft operated by third-party regional carriers under capacity purchase agreements.

Excludes 22 mainline and 27 regional aircraft that are in temporary storage as follows:

22 Boeing 737-800, 18 Embraer 140, seven Embraer 175 and two Embraer 145.

(h) Operating cost per available seat mile (CASM) – Operating expenses divided by ASMs.

(g) Total operating cost per available seat mile (CASM) – Total operating expenses divided by ASMs.

(h) Includes aircraft owned and leased by American as well as aircraft operated by third-party regional carriers under capacity purchase agreements.

Excludes 36 mainline and 10 regional aircraft that are in temporary storage at December 31, 2021 as follows:

36 Boeing 737-800, eight Embraer 145 and two Embraer 170.

Operating Revenues

Year Ended December 31,

Decrease Percent

Year Ended December 31, Increase Percent

(In millions, except percentage changes)

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Passenger revenue $ 26,063 79.5% 75.9% 49.8% 11.2pts 2.0% 19.8%

Total operating revenues in 2020 decreased $28.4 billion, or 62.1%, from 2019, primarily due to a severe decline in passenger demand and government travel restrictions related to the COVID-19 pandemic.

Passenger revenue increased $11.5 billion, or 79.5%, in 2021 from 2020 primarily due to a 75.9% increase in RPMs driven by a significant recovery in domestic and short-haul international leisure demand, resulting in a 75.3% load factor in 2021.

Cargo revenue increased $545 million, or 70.8%, in 2021 from 2020 primarily due to a 50.5% increase in cargo ton miles reflecting higher freight volumes as a result of adding international widebody capacity and the continuation of cargo-only flights, as well as a 13.4% increase in cargo yield as a result of higher rates.

Other operating revenue increased $455 million, or 22.2%, in 2021 from 2020 driven primarily by higher revenue associated with our loyalty program.

Total operating revenues in 2021 increased $12.5 billion, or 72.4%, from 2020 driven principally by the increase in passenger revenue as described above.

Our TRASM increased 15.0% to 13.93 cents in 2021 from 12.11 cents in 2020.

Operating Expenses

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Salaries, wages and benefits 11,817 11,229 588 5.2

Regional expenses 3,204 2,962 242 8.2

Maintenance, materials and repairs 1,979 1,585 394 24.8

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Other 3,994 3,186 808 25.4

Regional expenses:

Aircraft fuel and related taxes 821 1,869 (1,048) (56.1)

Other 4,071 5,632 (1,561) (27.7)

Total operating expenses $ 30,941 $ 27,758 $ 3,183 11.5

Total operating expenses decreased $14.9 billion, or 35.0%, in 2020 from 2019 due to our reduced schedule and cost reduction actions as described in the "2020 Financial Overview" above.

Depreciation and amortization increased $58 million, or 3.0%, in 2020 from 2019 due in part to accelerated depreciation for certain aircraft and related equipment expected to be retired earlier than planned.

Depreciation associated with facility improvements also contributed to the increase.

Total operating expenses increased $3.2 billion, or 11.5%, in 2021 from 2020 primarily due to increases in aircraft fuel and related taxes and other costs due to our increased capacity, offset in part by a $3.5 billion increase in net operating special credits and cost reduction actions as described above.

See further discussion of operating special items, net below.

Aircraft fuel and related taxes increased $3.4 billion, or 99.6%, in 2021 from 2020 primarily due to a 44.7% increase in fuel consumption as a result of increased capacity and a 37.9% increase in the average price per gallon of aircraft fuel including related taxes to $2.04 in 2021 from $1.48 in 2020.

Other rent and landing fees increased $615 million, or 30.7%, in 2021 from 2020 primarily due to an increase in landing fees and variable rent as a result of our increased capacity.

Aircraft rent increased $84 million, or 6.2%, in 2021 from 2020 primarily due to the delivery of 25 new leased mainline aircraft in 2021.

Selling expenses increased $432 million, or 65.0%, in 2021 from 2020 due to higher credit card fees and higher commission expense driven by the overall increase in revenues.

Depreciation and amortization decreased $21 million, or 1.1%, in 2021 from 2020 primarily due to the early retirement of aircraft as a result of the COVID-19 pandemic, offset in part by a write down of excess spare parts inventory.

Operating Special Items, Net

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$ (4,162) $ (3,710)

Fleet impairment (2)

Severance expenses (2)

Labor contract expenses (4)

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

Fleet restructuring expenses (6)

Merger integration expenses (7)

Litigation reserve adjustments (19) —

Mark-to-market adjustments on bankruptcy obligations, net (3)

Fleet impairment (4)

Labor contract expenses (5)

Other operating special items, net 10 (18)

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PSP Financial Assistance (1)

Regional pilot retention program (6)

Fleet impairment (4)

Severance expenses (2)

Other operating special items, net — 6

Regional operating special items, net (449) (309)

Operating special items, net $ (4,455) $ (966)

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

(1) The 2021 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP2 and PSP3 Agreements.

See Note 1(b) to AAG’s Consolidated Financial Statements in Part II, Item 8A 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 right-of-use (ROU) assets and lease return costs.

The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.

(2) Severance expenses include salary and medical costs primarily associated with certain team members who opted into voluntary early retirement programs offered as a result of reductions to our operation due to the COVID-19 pandemic.

Cash payments primarily associated with our voluntary early retirement programs were approximately $520 million and $365 million in 2021 and 2020, respectively.

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

(4) Fleet impairment charges resulted from the retirement of certain aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic.

In 2021, we retired our remaining Embraer 140 fleet resulting in a non-cash write-down of these regional aircraft.

See Note 1(g) to AAG’s Consolidated Financial Statements in Part II, Item 8A 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 severance expenses primarily included costs associated with reductions of management and support staff team members.

(4) Labor contract expenses primarily related to one-time charges resulting from the ratification of a new contract with the 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.

In 2020, we retired our entire Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain Embraer 140 and Bombardier CRJ200 aircraft resulting in a $1.5 billion non-cash write-down of mainline and regional aircraft and associated spare parts and $109 million in cash charges primarily for impairment of ROU assets and lease return costs.

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

(6) Our regional pilot retention program provides for, among other things, a cash retention bonus paid in the fourth quarter of 2021 to eligible captains at our wholly-owned regional airlines included on the pilot seniority list as of September 1, 2021.

Nonoperating Results

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Interest income decreased in 2021 compared to 2020 primarily as a result of lower returns on our short-term investments.

Interest expense, net increased in 2020 compared to 2019 primarily due to the issuance of debt and lower capitalized interest offset in part by lower interest expense on our variable-rate debt.

Interest expense, net increased in 2021 compared to 2020 primarily due to the issuance of debt, including $10.0 billion associated with the AAdvantage Financing, to improve our liquidity position in response to the COVID-19 pandemic.

See Note 4 to AAG’s Consolidated Financial Statements in Part II, Item 8A for further information on the AAdvantage Financing.

In 2021, other nonoperating income, net included $337 million of non-service related pension and other postretirement benefit plan income, offset in part by $60 million of net special charges principally for mark-to-market net unrealized losses associated with our equity investments in China Southern Airlines and Vertical and certain treasury rate lock derivative instruments and non-cash charges associated with debt refinancings and extinguishments.

In 2020, other nonoperating income, net included $329 million of non-service related pension and other postretirement benefit plan income.

This income was offset in part by $170 million of net special charges principally for mark-to-market unrealized losses associated with our equity investment in China Southern Airlines and certain treasury rate lock derivative instruments and $24 million of net foreign currency losses, primarily associated with losses from Latin American currencies.

In 2019, other nonoperating income, net principally included $183 million of non-service related pension and other postretirement benefit plan income.

This income was offset in part by $32 million of net foreign currency losses, primarily associated with losses from Latin American currencies.

The increase in non-service related pension and other postretirement benefit plan income in 2020 as compared to 2019 is principally due to an increase in the expected return on pension plan assets.

In 2020, we recorded an income tax benefit of $2.6 billion at an effective rate of approximately 22%.

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

At December 31, 2020, we had approximately $16.5 billion of federal 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.

In 2021, we recorded an income tax benefit of $555 million at an effective rate of approximately 22%, which was substantially non-cash.

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

At December 31, 2021, we had approximately $17.2 billion of gross federal NOLs and $3.0 billion of other carryforwards available to reduce future federal taxable income, of which $6.9 billion will expire beginning in 2024 if unused and $13.3 billion can be carried forward indefinitely.

We also had approximately $6.0 billion of NOL carryforwards to reduce future state taxable income at December 31, 2021, which will expire in taxable years 2021 through 2041 if unused.

In 2019, we recorded an income tax provision of $570 million at an effective rate of approximately 25%, which was substantially non-cash.

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

See Note 6 to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information on income taxes.

American’s Results of Operations

As discussed above, American’s results of operations for 2020 were significantly impacted by the COVID-19 pandemic.

As a result, the comparison of American’s 2020 financial results to 2019 are largely not meaningful.

Refer to the "2020 Financial Overview" above for discussion of American’s 2020 financial results and the impact of the COVID-19 pandemic on American’s business.

For a comparison of the 2020 to 2019 reporting periods, see Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – “ American’s Results of Operations – 2019 Compared to 2018” of American’s 2019 Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – “ American’s Results of Operations” of American’s 2020 Form 10-K.

Operating Revenues

Year Ended December 31, Decrease Percent

Year Ended December 31, Increase Percent

(In millions, except percentage changes)

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Total operating revenues $ 29,880 $ 17,335 $ 12,545 72.4

Passenger revenue increased $11.5 billion, or 79.5%, in 2021 from 2020 primarily due to an increase in RPMs driven by a significant recovery in domestic and short-haul international leisure demand.

Cargo revenue increased $545 million, or 70.8%, in 2021 from 2020 primarily due to an increase in cargo ton miles reflecting higher freight volumes as a result of adding international widebody capacity and the continuation of cargo-only flights, as well as an increase in cargo yield as a result of higher rates.

Other operating revenue increased $455 million, or 22.2%, in 2021 from 2020 driven primarily by higher revenue associated with American’s loyalty program.

Total operating revenues in 2021 increased $12.5 billion, or 72.4%, from 2020 driven principally by the increase in passenger revenue as described above.

Operating Expenses

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Salaries, wages and benefits 11,811 11,224 587 5.2

Regional expenses 3,111 2,746 365 13.3

Maintenance, materials and repairs 1,979 1,585 394 24.8

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Other 3,993 3,208 785 24.5

Regional expenses:

Aircraft fuel and related taxes 821 1,869 (1,048) (56.1)

Other 3,855 5,649 (1,794) (31.8)

Total operating expenses $ 30,841 $ 27,559 $ 3,282 11.9

Total operating expenses decreased $15.2 billion, or 35.5%, in 2020 from 2019 due to American's reduced schedule and cost reduction actions as described in the "2020 Financial Overview" above.

Depreciation associated with facility improvements also contributed to the increase.

Total operating expenses increased $3.3 billion, or 11.9%, in 2021 from 2020 primarily due to increases in aircraft fuel and related taxes and other costs due to American’s increased capacity, offset in part by a $3.5 billion increase in net operating special credits and cost reduction actions as described above.

See further discussion of operating special items, net below.

Other rent and landing fees increased $615 million, or 30.7%, in 2021 from 2020 primarily due to an increase in landing fees and variable rent as a result of American’s increased capacity.

Aircraft rent increased $84 million, or 6.2%, in 2021 from 2020 primarily due to the delivery of 25 new leased mainline aircraft in 2021.

Selling expenses increased $432 million, or 65.0%, in 2021 from 2020 due to higher credit card fees and higher commission expense driven by the overall increase in revenues.

Operating Special Items, Net

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$ (4,162) $ (3,710)

Fleet impairment (2)

Severance expenses (2)

Labor contract expenses (4)

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

Fleet restructuring expenses (6)

Merger integration expenses (7)

Litigation reserve adjustments (19) —

Mark-to-market adjustments on bankruptcy obligations, net (3)

Fleet impairment (4)

Labor contract expenses (5)

Other operating special items, net 10 (18)

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Operating special items, net $ (4,518) $ (995)

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

(1) The 2021 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP2 and PSP3 Agreements.

See Note 1(b) to American’s Consolidated Financial Statements in Part II, Item 8B 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) to American’s Consolidated Financial Statements in Part II, Item 8B 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 severance expenses primarily included costs associated with reductions of management and support staff team members.

(4) Labor contract expenses primarily related to one-time charges resulting from the ratification of a new contract with the 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.

The 2020 PSP Financial Assistance represents recognition of a portion of the financial assistance received from Treasury pursuant to the PSP1 Agreement.

Cash payments primarily associated with American's voluntary early retirement programs were approximately $520 million and $365 million in 2021 and 2020, respectively.

(3) 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.

(4) Fleet impairment charges resulted from the retirement of certain aircraft earlier than planned driven by the severe decline in air travel due to the COVID-19 pandemic.

In 2021, American retired its remaining Embraer 140 fleet resulting in a non-cash write-down of these regional aircraft.

See Note 1(g) to American’s Consolidated Financial Statements in Part II, Item 8B for further information related to these charges.

In 2020, American retired its entire Airbus A330-200, Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain Embraer 140 and Bombardier CRJ200 aircraft resulting in a $1.5 billion non-cash write-down of mainline and regional aircraft and associated spare parts and $109 million in cash charges primarily for impairment of ROU assets and lease return costs.

(5) The 2020 labor contract expenses primarily related to one-time charges due to the ratification of a new contract with the 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.

Nonoperating Results

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Total nonoperating expense, net $ (1,316) $ (679) $ (637) 94.0

Interest income decreased in 2020 compared to 2019 primarily as a result of lower returns on American's short-term investments and lower interest-bearing related party receivables from American's parent company, AAG.

Interest expense, net increased in 2020 compared to 2019 primarily due to the issuance of debt and lower capitalized interest offset in part by lower interest expense on American's variable-rate debt .

Interest income decreased in 2021 compared to 2020 primarily as a result of lower interest-bearing related party receivables from American's parent company, AAG and lower returns on American's short-term investments.

Interest expense, net increased in 2021 compared to 2020 primarily due to the issuance of debt, including $10.0 billion associated with the AAdvantage Financing, to improve American’s liquidity position in response to the COVID-19 pandemic.

See Note 3 to American’s Consolidated Financial Statements in Part II, Item 8B for further information on the AAdvantage Financing.

In 2021, other nonoperating income, net included $335 million of non-service related pension and other postretirement benefit plan income, offset in part by $60 million of net special charges principally for mark-to-market net unrealized losses associated with American’s equity investments in China Southern Airlines and Vertical and certain treasury rate lock derivative instruments and non-cash charges associated with debt refinancings and extinguishments.

In 2020, other nonoperating income, net included $329 million of non-service related pension and other postretirement benefit plan income.

This income was offset in part by $170 million of net special charges principally for mark-to-market unrealized losses associated with American’s equity investment in China Southern Airlines and certain treasury rate lock derivative instruments and $24 million of net foreign currency losses, primarily associated with losses from Latin American currencies.

In 2019, other nonoperating income, net principally included $183 million of non-service related pension and other postretirement benefit plan income.

This income was offset in part by $32 million of net foreign currency losses, primarily associated with losses from Latin American currencies.

The increase in non-service related pension and other postretirement benefit plan income in 2020 as compared to 2019 is principally due to an increase in the expected return on pension plan assets.

American is a member of AAG’s consolidated federal and certain state income tax returns.

In 2020, American recorded an income tax benefit of $2.5 billion at an effective rate of approximately 22%.

Substantially all of American’s income or loss before income taxes is attributable to the United States.

At December 31, 2020, American had approximately $16.5 billion of federal NOLs available to reduce future federal taxable income, of which $8.9 billion will expire beginning in 2023 if unused and $7.6 billion can be carried forward indefinitely.

In 2021, American recorded an income tax benefit of $500 million at an effective rate of approximately 22%, which was substantially non-cash.

Substantially all of American’s loss before income taxes is attributable to the United States.

At December 31, 2021, American had approximately $17.1 billion of gross federal NOLs and $2.4 billion of other carryforwards available to reduce future federal taxable income, of which $7.3 billion will expire beginning in 2024 if unused and $12.2 billion can be carried forward indefinitely.

American also had approximately $6.0 billion of NOL carryforwards to reduce future state taxable income at December 31, 2021, which will expire in taxable years 2021 through 2041 if unused.

In 2019, American recorded an income tax provision of $633 million at an effective rate of approximately 24%, which was substantially non-cash.

In 2020, American recorded an income tax benefit of $2.5 billion at an effective rate of approximately 22%, which was substantially non-cash.

See Note 5 to American’s Consolidated Financial Statements in Part II, Item 8B for additional information on income taxes.

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Total available liquidity $ 15,842 $ 14,260 $ 15,831 $ 14,244

Given the actions we have taken in response to the COVID-19 pandemic and our assumptions about its future impact on travel demand, which could be materially different due to the current 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.

Share Repurchase Programs and Cash Dividends

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 January 2020, our Board of Directors declared a cash dividend of $0.10 per share for stockholders of record as of February 5, 2020 and paid on February 19, 2020, totaling $43 million.

We have suspended our capital return program, including share repurchases and the payment of future dividends.

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.

Given the actions we have taken in response to the COVID-19 pandemic and our assumptions about its future impact 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 projected cash flows from operations.

In the ordinary course of our business, we or our affiliates may, at any time and from time to time, seek to prepay, retire or repurchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise.

Such repurchases, prepayments, retirements or exchanges, if any, will be conducted on such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

The amounts involved may be material.

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.

As of the most recent applicable measurement dates, we were in compliance with each of the foregoing collateral coverage tests.

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.

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

Pursuant to such agreements, if the applicable LTV, collateral coverage or peak debt service coverage ratio exceeds or falls below a specified threshold, as the case may be, we will be required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash or investment securities), withhold additional cash in certain accounts, or to pay down such financing, in whole or in part, or the interest rate for the relevant financing will be increased.

As of the most recent applicable measurement dates, we were in compliance with each of the foregoing LTV, collateral coverage and peak debt service coverage tests.

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 AAdvantage Financing contains a peak debt service coverage ratio, pursuant to which failure to comply with a certain threshold may result in early repayment, in whole or in part, of the AAdvantage Financing.

For further information regarding our debt covenants, see Note 4 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 3 to American’s Consolidated Financial Statements in Part II, Item 8B.

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Operating Activities

Our net cash used in operating activities was $6.5 billion in 2020 as compared to net cash provided by operating activities of $3.8 billion in 2019.

The $10.4 billion year-over-year decrease in operating cash flows was primarily due to a net loss in 2020.

The net loss was driven by lower revenues as a result of a severe decline in passenger demand and government travel restrictions related to the outbreak and spread of COVID-19, offset in part by a decrease in expenses due to our reduced schedule and cost reduction actions.

Additionally, we received cash proceeds of $4.2 billion in 2020 associated with the PSP1 Financial Assistance.

In 2020, we also recorded a $1.4 billion special charge for salary and medical costs primarily associated with certain team members who opted in to voluntary early retirement programs.

Approximately $365 million of this charge has been paid to team members in 2020.

We expect cash payments under these programs of approximately $600 million in 2021 with the remaining payments in 2022 and beyond.

Our net cash provided by operating activities was $704 million in 2021 as compared to net cash used in operating activities of $6.5 billion in 2020, a $7.2 billion year-over-year increase.

In 2021 and 2020, we received cash proceeds of approximately $4.7 billion and $4.2 billion associated with the PSP Financial Assistance, respectively.

Excluding the PSP Financial Assistance, our operating cash flows increased $6.7 billion compared to 2020 driven by a decrease in our pre-tax loss as well as working capital increases principally in our air traffic liability as demand for travel returned.

In addition, during 2021, we made $247 million in contributions to our pension plans and approximately $520 million in cash payments associated with our voluntary early retirement programs.

Excluding the enhanced healthcare benefits provided to eligible team members, we estimate cash payments under these programs to be approximately $170 million in 2022 and approximately $20 million in 2023 and beyond.

Investing Activities

Our net cash used in investing activities was $6.0 billion and $4.3 billion in 2021 and 2020, respectively.

Our principal investing activities in 2020 included $3.1 billion in net purchases of short-term investments, expenditures of $2.0 billion for property and equipment, including 16 Airbus A321neo aircraft, eight Embraer 175 aircraft, three Bombardier CRJ900 aircraft and the harmonization of interior configurations across the mainline fleet as well as a $308 million increase in restricted short-term investments primarily related to cash proceeds from special facility revenue bonds.

Our principal investing activities in 2021 included $5.5 billion in net purchases of short-term investments as well as a $401 million increase in restricted short-term investments primarily related to collateral associated with the AAdvantage Financing and collateral held to support workers’ compensation obligations.

We had capital expenditures of $208 million, net of aircraft purchase deposit returns of $996 million, which expenditures principally related to the harmonization of interior configurations across the mainline fleet and the purchase of two Airbus A321neo aircraft.

Additionally, we incurred $204 million related to airport construction projects, net of reimbursements, principally in connection with the renovation and expansion of Terminal 8 at JFK and the modernization of Terminals 4 and 5 at LAX.

These cash outflows were offset in part by $193 million of proceeds from the sale of property and equipment principally related to our retired aircraft fleet and $181 million of proceeds primarily from aircraft sale-leaseback transactions.

Our principal investing activities in 2020 included $3.1 billion in net purchases of short-term investments, capital expenditures of $2.0 billion for property and equipment, including 16 Airbus A321neo aircraft, eight Embraer 175 aircraft, three Bombardier CRJ900 aircraft and the harmonization of interior configurations across the mainline fleet as well as a $308 million increase in restricted short-term investments primarily related to cash proceeds from special facility revenue bonds related to JFK.

These cash outflows were offset in part by $665 million of proceeds primarily from aircraft sale-leaseback transactions, $351 million of proceeds from the sale of property and equipment and $90 million of proceeds from a vendor.

Our principal investing activities in 2019 included expenditures of $4.3 billion for property and equipment, including 21 Embraer 175 aircraft, 12 Bombardier CRJ900 aircraft, 12 Airbus A321neo aircraft, four Boeing 737 MAX Family aircraft and two Boeing 787 Family aircraft.

These cash outflows were offset in part by $960 million in net sales of short-term investments, $850 million of proceeds primarily from aircraft sale-leaseback transactions and $250 million in proceeds from a vendor.

Financing Activities

Our net cash provided by financing activities was $11.0 billion in 2020 as compared to net cash used in financing activities of $1.6 billion in 2019.

Our net cash provided by financing activities was $5.3 billion and $11.0 billion in 2021 and 2020, respectively.

Our principal financing activities in 2021 included $12.2 billion in proceeds from the issuance of debt, including approximately $10.0 billion associated with the AAdvantage Financing, $1.0 billion in aggregate principal amount under the PSP2 Promissory Note, $946 million in aggregate principal amount under the PSP3 Promissory Note and the $150 million issuance of special facility revenue bonds related to JFK.

We also received $460 million in net proceeds from the issuance of equity pursuant to an at-the-market offering.

These cash inflows were offset in part by $7.3 billion in debt repayments, including prepayments totaling $2.8 billion for our revolving credit facilities, $950 million for the April 2016 Spare Parts Term Loan Facility and $550 million of outstanding loans under the Treasury Loan Agreement and $2.9 billion in scheduled debt repayments.

In addition, we had $209 million of deferred financing cost cash outflows.

Our principal financing activities in 2020 included $11.8 billion in proceeds from the issuance of debt and $3.0 billion in proceeds from the issuance of equity.

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These cash inflows were offset in part by $3.5 billion in debt repayments, consisting of approximately $2.5 billion in scheduled debt repayments, including repayment of $500 million of 4.625% senior notes, and the prepayment of the $1.0 billion Delayed Draw Term Loan Credit Facility, as well as $216 million in share repurchases and dividend payments (which occurred in the first quarter of 2020).

Our principal financing activities in 2019 included $4.2 billion in debt repayments, consisting of $2.9 billion in scheduled debt repayments and the prepayment of $1.3 billion of secured loans.

We also had $1.1 billion in share repurchases and $178 million in dividend payments.

These cash outflows were offset in part by $4.0 billion in proceeds from the issuance of debt, consisting of $3.2 billion in connection with the issuance of equipment notes related to EETCs and the financing of certain aircraft and other flight equipment, as well as the issuance of $750 million aggregate principal amount of 5.000% senior notes.

Operating Activities

American’s net cash used in operating activities was $1.4 billion in 2020 as compared to net cash provided by operating activities of $2.4 billion in 2019.

The $3.9 billion year-over-year decrease in operating cash flows was primarily due to a net loss in 2020, offset in part by intercompany cash receipts from AAG's financing transactions.

Additionally, American received cash proceeds of $3.7 billion in 2020 associated with the PSP1 Financial Assistance.

In 2020, American also recorded a $1.4 billion special charge for salary and medical costs primarily associated with certain team members who opted in to voluntary early retirement programs.

Approximately $365 million of this charge has been paid to team members in 2020.

American expects cash payments under these programs of approximately $600 million in 2021 with the remaining payments in 2022 and beyond.

American’s net cash provided by operating activities was $3.2 billion in 2021 as compared to net cash used in operating activities of $1.4 billion in 2020, a $4.6 billion year-over-year increase.

In 2021 and 2020, American received cash proceeds of approximately $4.2 billion and $3.7 billion associated with the PSP Financial Assistance, respectively.

American also had a $2.3 billion net decrease in intercompany cash receipts principally from AAG's financing transactions.

Excluding the PSP Financial Assistance and decrease in AAG's financing transactions, American's operating cash flows increased $6.4 billion compared to 2020 driven by a decrease in its pre-tax loss as well as working capital increases principally in American's air traffic liability as demand for travel returned.

In addition, during 2021, American made $247 million in contributions to its pension plans and approximately $520 million in cash payments associated with American's voluntary early retirement programs.

Excluding the enhanced healthcare benefits provided to eligible team members, American estimates cash payments under these programs to be approximately $170 million in 2022 and approximately $20 million in 2023 and beyond.

Investing Activities

American’s net cash used in investing activities was $5.9 billion and $4.3 billion in 2021 and 2020, respectively.

American’s principal investing activities in 2020 included $3.1 billion in net purchases of short-term investments, expenditures of $1.9 billion for property and equipment, including 16 Airbus A321neo aircraft, eight Embraer 175 aircraft, three Bombardier CRJ900 aircraft and the harmonization of interior configurations across the mainline fleet as well as a $308 million increase in restricted short-term investments primarily related to cash proceeds from special facility revenue bonds.

American’s principal investing activities in 2021 included $5.5 billion in net purchases of short-term investments as well as a $401 million increase in restricted short-term investments primarily related to collateral associated with the AAdvantage Financing and collateral held to support workers’ compensation obligations.

American had capital expenditures of $169 million, net of aircraft purchase deposit returns of $996 million, which expenditures principally related to the harmonization of interior configurations across the mainline fleet and the purchase of two Airbus A321neo aircraft.

Additionally, American incurred $204 million related to airport construction projects, net of reimbursements, principally in connection with the renovation and expansion of Terminal 8 at JFK and the modernization of Terminals 4 and 5 at LAX.

These cash outflows were offset in part by $192 million of proceeds from the sale of property and equipment principally related to American's retired aircraft fleet and $181 million of proceeds primarily from aircraft sale-leaseback transactions.

American’s principal investing activities in 2020 included $3.1 billion in net purchases of short-term investments, capital expenditures of $1.9 billion for property and equipment, including 16 Airbus A321neo aircraft, eight Embraer 175 aircraft, three Bombardier CRJ900 aircraft and the harmonization of interior configurations across the mainline fleet as well as a $308 million increase in restricted short-term investments primarily related to cash proceeds from special facility revenue bonds related to JFK.

American’s principal investing activities in 2019 included expenditures of $4.2 billion for property and equipment, including 21 Embraer 175 aircraft, 12 Bombardier CRJ900 aircraft, 12 Airbus A321neo aircraft, four Boeing 737 MAX Family aircraft and two Boeing 787 Family aircraft.

Financing Activities

American’s net cash provided by financing activities was $5.8 billion in 2020 as compared to net cash used in financing activities of $282 million in 2019.

American’s net cash provided by financing activities was $2.8 billion and $5.8 billion in 2021 and 2020, respectively.

American’s principal financing activities in 2021 included $10.2 billion in proceeds from the issuance of debt, including approximately $10.0 billion associated with the AAdvantage Financing and the $150 million issuance of special facility revenue bonds related to JFK.

These cash inflows were offset in part by $7.3 billion in debt repayments, including prepayments totaling $2.8 billion for American’s revolving credit facilities, $950 million for the April 2016 Spare Parts Term Loan Facility and $550 million of outstanding loans under the Treasury Loan Agreement and $2.9 billion in scheduled debt repayments.

In addition, American had $207 million of deferred financing cost cash outflows.

American’s principal financing activities in 2020 included $9.0 billion in proceeds from the issuance of debt, including $2.8 billion borrowed under the 2014 Revolving Facility, the 2013 Revolving Facility and the April 2016 Revolving Facility, $2.5 billion in aggregate principal amount of 11.75% senior secured notes, $1.2 billion in aggregate principal amount of two series of 10.75% senior secured notes due 2026, $1.0 billion under the Delayed Draw Term Loan Credit Facility, $600 million in connection with the issuance of equipment notes related to EETCs and the financing of certain aircraft, $550 million under the Treasury Term Loan Facility and the $360 million issuance of special facility revenue bonds.

These cash inflows were offset in part by $3.0 billion in debt repayments, consisting of approximately $2.0 billion in scheduled debt repayments and the prepayment of the $1.0 billion Delayed Draw Term Loan Credit Facility.

American’s principal financing activities in 2019 included $3.4 billion in debt repayments, consisting of $2.1 billion in scheduled debt repayments and the prepayment of $1.3 billion of secured loans.

These cash outflows were offset in part by $3.2 billion in proceeds from the issuance of debt for equipment notes related to EETCs and the financing of certain aircraft and other flight equipment.

For further information regarding our commitments, see the Notes to AAG’s Consolidated Financial Statements in Part II, Item 8A and the Notes to American’s Consolidated Financial Statements in Part II, Item 8B at the referenced footnotes below.

Long-term debt and debt covenants Note 5 Note 3

Leases Note 6 Note 4

Employee benefit plans Note 10 Note 8

Commitments, contingencies and guarantees Note 12 Note 10

Long-term debt and debt covenants Note 4

Leases Note 5

Employee benefit plans Note 9

Commitments, contingencies and guarantees Note 11

Off-Balance Sheet Arrangements

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Pass-Through Trusts

American currently operates 350 owned aircraft and 24 leased aircraft, and owns 62 spare aircraft engines, which in each case were financed with EETCs issued by pass-through trusts.

American currently has 344 owned aircraft, 11 leased aircraft and 60 owned spare aircraft engines, which in each case were financed with EETCs issued by pass-through trusts.

These trusts are off-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment or to permit issuance of debt backed by existing flight equipment.

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Each trust covers a set number of aircraft or spare engines scheduled to be delivered, financed or refinanced upon the issuance of the EETC or within a specific period of time thereafter.

At the time of each covered aircraft or spare engine financing, the relevant trust used the proceeds of the issuance of the EETC (which may have been available at the time of issuance thereof or held in escrow until financing of the applicable aircraft following its delivery) to purchase equipment notes relating to the financed aircraft or engines.

notes relating to the financed aircraft or engines.

The equipment notes are issued, at American’s election, in connection with a mortgage financing of the aircraft or spare engines or, in certain cases, by a separate owner trust in connection with a leveraged lease financing of the aircraft.

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Contractual Obligations

The following table provides details of our future cash contractual obligations as of December 31, 2020 (in millions).

The following table provides details of our material cash requirements from known contractual obligations as of December 31, 2021 (in millions).

Except to the extent set forth in the applicable accompanying footnotes, the table does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time.

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Finance lease obligations (See Note 4)

215 183 180 113 87 77 855

Aircraft and engine purchase commitments (e) (See Note 10(a))

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Operating lease commitments (See Note 5)

16 14 12 7 5 14 68

Minimum pension obligations (g) (See Note 9)

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(e) See Part I, Item 2.

Properties – “Aircraft and Engine Purchase Commitments” for additional information about the firm commitment aircraft delivery schedule, in particular the footnotes to the table thereunder as to potential changes to such delivery schedule.

Due to uncertainty surrounding the timing of delivery of certain aircraft, the amounts in the

table represent our current best estimate;

Properties – “Aircraft and Engine Purchase Commitments” for additional information about the firm commitment aircraft delivery schedule, in particular the footnote to the table thereunder as to potential changes to such delivery schedule.

Due to uncertainty surrounding the timing of delivery of certain aircraft, the amounts in the table represent our most current estimate;

however, the actual delivery schedule may differ from the table above, potentially materially.

Additionally, the amounts in the table exclude 19 Boeing 787-8 aircraft to be delivered in 2021 for which we have obtained committed lease financing.

Additionally, the amounts in the table exclude 10 and three Boeing 787-8 aircraft scheduled to be delivered in 2022 and 2023, respectively, as well as four and one Boeing 787-9 aircraft scheduled to be delivered in 2023 and 2024, respectively, in each case, for which we have obtained committed lease financing.

This financing is reflected in the operating lease commitments line above.

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Rental payments under operating leases for certain aircraft flown under these capacity purchase agreements are reflected in the operating lease commitments line above.

(g) Includes minimum pension contributions based on actuarially determined estimates as of December 31, 2020 and is based on estimated payments through 2030.

Pursuant to the CARES Act passed in March 2020, minimum required pension 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.

In January 2021, we made $241 million of required pension contributions, including the $130 million minimum contributions required for 2020.

(g) Represents minimum pension contributions based on actuarially determined estimates as of December 31, 2021 and is based on estimated payments through 2031.

On March 11, 2021, the ARP was enacted, which included funding relief provisions benefiting single employer qualified retirement benefit pension plans such as those sponsored by American.

(h) Includes purchase commitments for aircraft fuel, flight equipment maintenance, construction projects and information technology support.

Capital Raising Activity and Other Possible Actions

In light of the cash needs imposed by the current operating losses due to reduced demand in response to the COVID-19 pandemic as well as our significant financial commitments related to, among other things, new flight equipment, the servicing and amortization of existing debt and equipment leasing arrangements, and pension funding obligations, we and our subsidiaries will regularly consider, and enter into negotiations related to, capital raising and liability management activity, which may include the entry into leasing transactions and future issuances of, and transactions designed to manage the timing and amount of, secured or unsecured debt obligations or additional equity securities in public or private offerings or otherwise.

In light of the cash needs imposed by the current operating losses due to reduced demand in response to the COVID-19 pandemic as well as our significant financial commitments related to, among other things, the servicing and amortization of existing debt and equipment leasing arrangements, new flight equipment and pension funding obligations, we and our subsidiaries will regularly consider, and enter into negotiations related to, capital raising and liability management activity, which may include the entry into leasing transactions and future issuances of, and transactions designed to manage the timing and amount of, secured or unsecured debt obligations or additional equity securities in public or private offerings or otherwise.

The cash available from operations (if any) and these sources, however, may not be sufficient to cover our cash obligations because economic factors may reduce the amount of cash generated by operations or increase costs.

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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.

While the contract duration of passenger tickets is generally one year, 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.

While the contract duration of passenger tickets is generally one year, in response to the COVID-19 pandemic, we extended the contract duration for certain tickets to March 31, 2022, principally those tickets which were scheduled to expire from March 1, 2020 through March 31, 2021.

Additionally, tickets to certain international destinations have extended contract duration to December 31, 2022.

We also have eliminated change fees for most domestic and international tickets providing more flexibility for customers to change travel plans.

Given these changes and the 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.

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 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

We currently operate the loyalty program, AAdvantage.

This program awards mileage credits to passengers who fly on American, any one world airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclaycard US co-branded credit cards, and certain hotels and car rental companies.

This program awards mileage credits to passengers who fly on American, any one world airline or other partner airlines, or by using the services of other program participants, such as our co-branded credit cards, and certain hotels and car rental companies.

Mileage credits can be redeemed for travel on American and other participating partner airlines, as well as other non-air travel awards such as hotels and rental cars.

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.

In response to the COVID-19 pandemic, we suspended the expiration of mileage credits through March 31, 2022 and eliminated mileage reinstatement fees for canceled award tickets.

Mileage credits earned through travel

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The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided.

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 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.

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 mileage credits that will not be redeemed using a statistical model 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.

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

We sell mileage credits to participating airline partners and non-airline business partners, including our co-branded credit card partners, under contracts with terms extending generally for one to seven years.

Consideration received from the sale of mileage credits is variable and payment terms typically are within 30 days subsequent to the month of mileage sale.

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

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

For the year ended December 31, 2021, a hypothetical 10% increase in our estimate of miles not expected to be redeemed would have increased revenues by approximately $70 million.

Long-lived Assets

Long-lived assets consist of owned flight and ground equipment, ROU assets and definite-lived intangible assets such as certain domestic airport slots and gate leasehold rights, customer relationships and marketing agreements.

In addition to the original cost, the recorded value of our fixed assets is impacted by a number of estimates made, including estimated useful lives, salvage values and our determination as to whether aircraft are temporarily or permanently grounded.

The majority of our aircraft fleet types are depreciated over 25-30 years.

It is possible that the ultimate useful lives of our aircraft will be significantly different than the current estimate due to unforeseen events in the future that impact our fleet plan.

Definite-lived intangible assets are originally recorded at their acquired fair values and are subsequently amortized over their estimated useful lives.

Accounting Standards Codification (ASC) 360 – Property, Plant and Equipment (ASC 360) requires long-lived assets to be assessed for impairment when events and circumstances indicate that the assets may be impaired.

An impairment of a long-lived asset or group of long-lived 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 exceeds 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 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 on our long-lived assets, we determined the sum of the estimated undiscounted future cash flows exceeded the carrying value for our long-lived assets except for the aircraft being retired earlier than planned as discussed above.

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

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.

Goodwill and Indefinite-lived Assets

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.

Indefinite-lived intangible assets other than goodwill consist of certain domestic airport slots and international slots and route authorities.

ASC 350 – Intangibles – Goodwill and Other (ASC 350) requires goodwill and indefinite-lived intangible assets to be assessed for impairment annually or more frequently if events or circumstances indicate that the fair values of goodwill and indefinite-lived intangible assets may be lower than their carrying values.

Our annual assessment date is October 1.

Goodwill and indefinite-lived intangible assets are assessed for impairment by initially performing a qualitative assessment.

Under the qualitative approach, we analyze the following factors, among others, to determine if events or circumstances have affected the fair value of goodwill and indefinite-lived intangible assets:

(1) negative trends in our market capitalization, (2) an increase in fuel prices, (3) declining per mile passenger yields, (4) lower passenger demand as a result of a weakened U.S.

and global economy and (5) changes to the regulatory environment.

If we determine that it is more likely than not that our goodwill or 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 goodwill and 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.

For goodwill, 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 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 7 to American’s Consolidated Financial Statements in Part II, Item 8B.

The fair value exceeded the carrying value of the reporting unit, and our $4.1 billion of goodwill was not impaired.

We performed qualitative impairment tests on our $1.8 billion of indefinite-lived intangible assets and determined there was no material impairment.

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

Pensions and Retiree Medical and Other Postretirement Benefits

We recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our pension and retiree medical and other postretirement benefits plans in the consolidated balance sheets with a corresponding adjustment to accumulated other comprehensive income (loss).

We recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our pension and retiree medical and other postretirement benefits plans on the consolidated balance sheets with a corresponding adjustment to accumulated other comprehensive income (loss).

Our pension and retiree medical and other postretirement benefits costs and liabilities are calculated using various actuarial assumptions and methodologies.

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(1) When establishing our discount rate to measure our obligations, we match high quality corporate bonds available in the marketplace whose cash flows approximate our projected benefit disbursements.

Lowering the discount rate by 50 basis points as of December 31, 2020 would increase our pension and retiree medical and other postretirement benefits obligations by approximately $1.4 billion and $45 million, respectively, decrease estimated 2021 pension expense by approximately $15 million and increase estimated 2021 retiree medical and other postretirement benefits expense by less than $1 million.

Lowering the discount rate by 50 basis points as of December 31, 2021 would increase our pension and retiree medical and other postretirement benefits obligations by approximately $1.2 billion and $40 million, respectively, and decrease estimated 2022 pension and retiree medical and other postretirement benefits expense by approximately $10 million and $1 million, respectively.

(2) The expected rate of return on plan assets is based upon an evaluation of our historical trends and experience, taking into account current and expected market conditions and our target asset allocation of 30% fixed income securities, 24% U.S.

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During 2021, we reviewed and revised certain economic and demographic assumptions including the pension and retiree medical and other postretirement benefits discount rates and health care cost trend rates.

The net effect of changing these assumptions for the pension plans resulted in an increase of $1.7 billion in the projected benefit obligation at December 31, 2020.

The net effect of changing these assumptions for retiree medical and other postretirement benefits plans resulted in an increase of $80 million in the accumulated postretirement benefit obligation at December 31, 2020.

The net effect of changing these assumptions for the pension plans resulted in a decrease of $720 million in the projected benefit obligation at December 31, 2021.

The net effect of changing these assumptions for retiree medical and other postretirement benefits plans resulted in a decrease of $32 million in the accumulated postretirement benefit obligation at December 31, 2021.

We also revised our mortality assumptions to incorporate the new improvement scale issued by the Society of Actuaries.

This resulted in a decrease in our pension and retiree medical and other postretirement benefit obligations by $140 million and $1 million, respectively.

This resulted in an increase in our pension and retiree medical and other postretirement benefit obligations by $57 million and less than $1 million, respectively.

See Note 9 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 8 to American’s Consolidated Financial Statements in Part II, Item 8B for additional information regarding our employee benefit plans.

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Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes.

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

Our ability to use our NOLs and other carryforwards depends on the amount of taxable income generated in future periods.

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

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Recent Accounting Pronouncements

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.

For trade receivables, loans and held-to - maturity debt securities, an estimate of lifetime expected credit losses is required.

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.

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 Standards Update (ASU) 2020-06:

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

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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) to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information on our 6.50% convertible senior notes.

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

We early adopted the New Convertible Debt Standard as of January 1, 2021 using the modified retrospective method to recognize the Convertible 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 Convertible Notes from our consolidated 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 Convertible Notes.

See Note 4(h) to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information on the Convertible Notes.

Simplifying the Accounting for Income Taxes (Topic 740)

This standard simplifies the accounting and disclosure requirements for income taxes by clarifying the existing guidance to improve consistency in the application of Accounting Standards Codification 740.

This standard also removed the requirement to calculate income tax expense for the stand-alone financial statements of wholly-owned subsidiaries that are not subject to income tax.

We adopted this standard effective January 1, 2021, and it did not have a material impact on our consolidated financial statements.

Disclosures by Business Entities about Government Assistance (Topic 832)

This standard provides guidance on the disclosure requirements for business entities receiving government assistance.

Specifically, entities are required to disclose information about the nature of the assistance received, including the related accounting, the affected line items on the financial statements and amounts, and the significant terms and conditions, including any commitments and contingencies.

This standard is effective for annual periods beginning after December 15, 2021, and early adoption is permitted.

We adopted this standard as of December 31, 2021.

See Note 1(b) in each of AAG’s and American’s Consolidated Financial Statements in Part II, Items 8A and 8B, respectively, for disclosure related to the financial assistance we have received from Treasury.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis